Rent-A-Dress: Renting Fashion for Cheap
Rent-A-Dress (RAD) rents out designer fashion apparel to customers who would like to wear elegant dresses on special occasions but do not wish to purchase them. For example, a customer can rent a $1000 dress for $25 per day for a 10-day rental period.
To rent a dress, a customer visits the RAD website which displays the available dresses and their rental prices. On average, RAD sees rental demand of 100 dresses per day. The number of webpage views is actually very large, but not everyone rents. Many leave the website, not finding the dresses they want. To ensure that enough customers do find dresses, RAD keeps 5 days’ demand (i.e., 500 dresses) in their “Rental-Ready Inventory”, which includes different styles and sizes. This number must be large due to a variety of dresses RAD keeps as well as the policy that RAD ships two dresses (same style in two different sizes) to satisfy a customer’s request for one dress. When taking a rental order, RAD requires that a customer specify two sizes for each dress she requests—the most likely and second most likely size. This minimizes the customer’s hassle in returning a dress because of fit issues. Once a customer places a rental order, two dresses (one style in two sizes) are sent to customer via UPS next-day delivery (one- day shipping that costs $5, borne by RAD). At the end of rental period, the customer returns the two dresses in a pre-labeled UPS package. Return shipping takes one day, and again costs $5, borne by RAD.
Upon its return, a dress is first inspected and classified as either “good” or “damaged”. RAD incurs $1 in labor, on average, to inspect and classify each dress. On average, 70% of returned dresses are found to be in good condition and require minimal cleaning, which is performed at QuickClean laundry located next door to RAD’s fulfillment center. QuickClean charges $5 for cleaning each dress, and after cleaning the dress is placed back in “Rental-Ready Inventory”. Damaged dresses may require more rigorous cleaning or some repair. These dresses are sent across town to MaxClean laundry. Since MaxClean is farther way, RAD typically batches a number of dresses before sending them to MaxClean. MaxClean charges $10 for cleaning each dress, after which the dress is placed back in the “Rental-Ready Inventory”.
Customers typically want dresses from the current fashion trends (and without any wear and tear). To meet this need, RAD regularly buys new dresses and writes-off old dresses. An average new dress costs RAD $750 (substantially discounted from the average retail price of $1000). A new dress has an average life of 125 rental days. RAD depreciates cost of a new dress over 125 days in a straight-line fashion (this is the same as saying that RAD incurs $750/125 = $6 per day on each dress it owns).
While there is enough demand for its service, Rent-A-Dress continues to bleed money. As a new CEO, your responsibility is to figure out how to show signs of profitability of this business before going for the next round of funding. Various proposals have been put forward to improve profitability. The following two competing proposals are on your table:
(i) Five-day rentals: A survey of customers who visit the website but do not rent suggests that there is demand for a 5-day rental. For example, for a $1000 dress, customers are willing to pay $30 per day for a 5-day rental period. The demand for 5- day rentals is estimated to be 100 per day. One downside of this proposal is that it will eat away some of the 10-day rental demand (around 20 per day). However, the total demand increases to 180 per day, a substantial increase of 80%. Furthermore, satisfying this additional demand would require RAD to buy more dresses.
(ii) Improved return inspection: Currently returned dresses wait for long time at the inspection stage. The main reason for this is higher level of accurate RAD requires in identifying “damaged” dresses (since cleaning damaged dresses at MaxClean is very costly). The wait time for inspection could be reduced by 2 days by hiring additional resources. This will however increase the cost of inspecting each dress by $1.
Which of the two proposals would you pursue? What other changes would you make to RAD’s operations and business model to achieve profitability?
Additional Information: An internal audit conducted by RAD uncovered the following information about internal processing at the fulfillment center.
1- On average there are 800 dresses that have been returned by customers, but are waiting to be inspected or are being inspected.
2- Dresses identified as “good” are quickly sent to QuickClean, which turns them around in a day.
3- Dresses identified as “damaged” typically have to wait for a while before they are sent to MaxClean due to batching. On average there are 120 dresses waiting to be sent to MaxClean.
4- After receiving dresses, MaxClean takes 2 days to turn them around. But after cleaning, the dresses are also picked up in batches. Due to this dresses have to again wait at MaxClean after they are processed. On average there are 120 such dresses at MaxClean.
5- The time to deliver dresses to QuickClean and MaxClean can be assumed to be negligible (zero).
6- While there is variation in the cost as well as rental fee of a dress, you can assume an average dress has retail value of $1000. An average dress is rented out for $25 per day (2.5% of retail value) for 10-day rental period, and for $30 per day (3% of retail value) for 5-day rental period if you adopt proposal (i). RAD’s cost of an average dress is $750, which is depreciated over 125 days in straight line fashion.
ANSWER THE QUESTIONS:
A- Draw a detailed process flow diagram that captures all the places where Rent-A-Dress has inventory of dresses? (arrows for flow, triangles for inventory, boxes for activities)
B- What is average number of dresses at different stage of Rent-A-Dress process? (Using Little’s law)
C- What is the total average number of dresses Rent-A-Dress owns? (Note that this is the number of dresses RAD needs in order to do business) (using Little’s law)
D- Using your answer from Question C, complete the profit and loss statement. What is daily profit earned by Rent-A-Dress (excluding expenses in salaries and rental)?
E- Which of the proposed solution would you choose? Explain your reasoning.