REI Rentals (pdf abstract)

Purchase the full report on (Case study #1-429-202) – published on 01/2013, 20 pages.
Developed by:  Mary Fritz and Rich Grousset under the supervision of Damian Beil and Wallace Hopp

Description:  Kirk Myers, REI’s Manager of Corporate Social Responsibility (CSR), twirled his pen around his thumb and forefinger. Staring out the window toward misty Mt. Rainier, Myers thought hard, recalling a conference call with his boss, CSR Director Kevin Hagen, and Retail Operations Manager Teresa Mueller several weeks before. At the end of the conversation, Myers was tasked with an assignment outside his usual realm of responsibility—find a way to optimize the rental program across REI retail locations to maximize financial benefits while minimizing environmental impacts. Myers had collected data from a few representative stores, and found that the managers were not exaggerating: rental availability was at times a major problem. Now he just had to figure out what to do about it. Myers had formed a team to develop a plan, including Retail Operations Associate Steve Taylor, Logistics Associate David Martin, and CSR associate Emily Walsh.

Teaching Points:

  • Model a queuing system (particularly one in which servers move to customers instead of the other way around), using the variability, utilization, and process time (VUT) equation to quantitatively evaluate the impact of resource capacity on responsiveness.
  • Appreciate the power of pooling, by seeing explicitly how satisfying two sources of demand from a common stock reduces the amount of inventory required to achieve a target service level.
  • Model a rental process as a series of single period inventory problems, computing appropriate underage and overage costs for a rental system, using the Newsvendor model to set appropriate stock levels.
  • Assess the environmental benefits of a rental business model and determine how rentals can be more cost effective to the customer, more profitable to the retailer, and more resource efficient. The effectiveness of a rental model can be further enhanced by pooling rental inventory.