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GLASS, INC.:
INVENTORY MANAGEMENT
Candas Demir
Onur Yilmaz
Burcu Yüzüak
January 2010, Ankara
I. INTRODUCTION
In this case study, production and operations management (POM) issues of a mid-s
ize company,
named as Scientific Glass Inc., in a highly growing market are studied. Using th
e background
information on past actions of the company to correct inventory management and t
heir results, and
considering the market leadership opportunity, how inventory management approach
can be made
better is explained by evaluating different alternatives from different aspects.
In the first part, critical
POM issues are mentioned, following that these problems are analyzed. In the thi
rd part, alternative
options are listed and then they are evaluated. Finally, considering the trade-o
ffs of these evaluations, a
conclusion is made. And it must be mentioned that, throughout the case, related
points are referenced to
the case text and lecture notes with corresponding page and paragraph numbers.
II. CRITICAL POM ISSUES
As mentioned in the text, there is an identified increasing trend in the balance
s of inventory
levels. (Page 1, para. 2) For a growing company in a growing market, this high i
nventory level, in other
words tied up money in the inventory, creates an obstacle for this company to us
e this extra capital on
other areas, such as expansion to international markets. Also, as mentioned, deb
t to capital ratio
exceeded the target level of 40% and with the same approach this increase of thi
s ratio also jeopardizes
the company s funding expansion plans to international markets. Although, there ar
e many other POM
issues are found in the text, these mentioned two were the most critical ones an
d it is thought that if
they are solved the other problems will be solved spontaneously.
III. ANALYSIS OF THE CRITICAL POM ISSUES
In the last part, it is mentioned that average inventory level is high enough to
jeopardize
company s future plans. Therefore, main reasons behind this problem should be anal
yzed. First of all,
company has a policy related to 99% fill rate, which is also open to discussion
considering the market
average of 92%, and warehouse managers are usually exceed even this limit and th
ey are keeping more
inventory than necessary (Page 4, para. 5). Secondly, company has a policy to no
t to exceed 60 day s
supply, which is also open to discussion, and most warehouse managers are exceed
ing this upper limit
(Page 5, para. 6). Considering all these aspects, it is found that inventory lev
els and transshipment costs
should be decreased and at the same time responsiveness to customer should be in
creased in order to be
a market leader. By doing these, simultaneously, approach of the warehouse manag
ement could be
changed to a better position by changing policies related to them as it is tried
in the past with different
ways and failed (Page 6, para. 6). In addition, when this inventory level kept u
nder control, debt to
capital ratio will be saddled since extra capital tied up in the inventory will
be available to be used.
IV. ALTERNATIVE OPTIONS FOR PROBLEMS
In order to solve the analyzed problems in the previous part, there are actually
two main aspects
to consider: firstly, number of warehouses and their structure can be changed; s
econdly, related policies
can be changed and of course appropriate ones can be done simultaneously.
For changing the number of warehouses, in other words, centralizing or decentral
izing warehousing
functions, available options are considered as:
.
Continuing with 8 warehouses: This option makes no change on the network of the
warehouses and all regions will be supplied its warehouse if there is no stock-o
ut occurs.
.
One central warehouse: In this option, one central warehouse near to manufacturi
ng facility at
Waltham will send all customer orders from one location.
.
Two centralized warehouses: In this option, addition to the main warehouse at Wa
ltham, there
will be an additional warehouse at the west, at Phoenix, and it will be supplied
from Waltham.
Demand of east region will be met from Waltham, demand of west region will be me
t from
Phoenix and demand of central region will be met from both warehouses, assuming
to have
equal shares on the central region.
.
Outsourcing the warehousing functions: In this option, all warehousing actions w
ill be
outsourced to Global Logistics (GL) and distribution will start from main wareho
use at
Waltham and then GL will be responsible from rest of the operations.
In addition to these options, there are some policy change proposals which try t
o make POM
approach better, like periodic audits and increasing reporting activity levels,
stopping trunk stock
activities etc. Since these policy changes can be applied at different warehousi
ng functions these
proposals will be analyzed one by one and their possible effects will be conside
red.
V. EVALUATION OF ALTERNATIVE OPTIONS
Evaluation of mentioned alternatives will be conducted from mainly five aspects:
transportation
costs, average inventory levels, time responsiveness, fill rates and finally add
itional costs and benefits.
1-) Transportation Costs: Transportation costs for alternatives are calculated f
or the two products,
namely Griffin and Erlenmeyer, since they are mentioned as the best representati
ve for a total of nearly
3000 products of Scientific Glass (Page 2, para. 3). In addition, for each optio
n, demand for the next
year calculated considering the 20% increase in sales (Page 8, para. 3). When wa
rehouse to customer
shipments are considered average shipment weight of 19,5 pound is used and to ha
ve an average
transportation cost value, these two products costs are averaged according to the
ir relative proportion
in sales (Page 8, para. 3). It also be mentioned that, inter-warehouse transship
ments occur only when
stock-out occurs and as the number of warehouses are decreasing, effect of this
costs will be
diminished; therefore, it is only considered in the option where there are 8 war
ehouses.
For the first option, having 8 warehouses and making no change, from Waltham to
all other 7
warehouses all items are sent by bulk shipment. Inter-warehouse transshipments a
re calculated by bulk
shipment rates and they are considered only when a stock-out occurs, therefore f
ill rate is included in
these calculations. Finally, for every warehouse, customer shipment costs are ca
lculated as all tabulated
in Appendix Table 1 and average total cost found as $2701,41.
For the second option, when there is only one warehouse, all customer shipments
are calculated
for rates of Winged Fleet and results are given in Appendix -Table 2. In this op
tion, average total cost
is calculated as $12210,16.
For the third option, when two centralized warehouses considered, it is assumed
that Waltham
will supply east region, Phoenix will supply will west region and they will equa
lly supply the central
region. With this approach, transportation costs are calculated in Appendix Tabl
e 3 and average total
cost is found as $2332,07.
For the last option, when warehousing functions are outsourced, assuming the 5 r
egions of
Global Logistics (GL) will have equal amount of demand, as tabulated in Appendix
Table 4, total
average cost is calculated as $2276,83.
To conclude, as it is expected, when number of warehouses are decreased transpor
tation costs
are increased as can be seen from the Table 1 below. From the aspect of transpor
tation costs, GL option
has the smallest cost amount.
8 Warehouses 1 Warehouse 2 Warehouses Outsourcing
2701,41 12210,16 2332,07 2276,83
Table 1: Average Total Annual Transportation Costs
Gathered from Appendix Table 1-2-3-4
2-) Average Inventory Levels: First of all, it must be decided which inventory p
olicy that the
company should apply. Begin with the review type; although firm monitors all the
inventory transfers
from Waltham warehouse to other warehouses; they think taking physical counts of
inventory at all
warehouses (Page 6, para. 6). Therefore, it is concluded that company uses perio
dic inventory review
policy. Secondly, company did not mention any due date, therefore the inventory
plans should consider
infinite time horizon. And lastly, although there exists a fixed cost for shipme
nts from warehouses to
customers; there is no other fixed cost related to transportation to the warehou
ses, i.e. no fixed ordering
cost. The only order cost is $0.40 per pound bulk shipment cost which is a varia
ble cost with weight.
As a result, all analysis can be conducted considering critical ratios and the r
elated fill rate values,
which is the only option that is left and also it is considered as the most appl
icable to the situation.
Since some of the simultaneous changes can be done, considering ceteris paribus
principle and
when fill rate is maintained exactly as 99% for all warehouses, we can calculate
the average inventory
level that must be kept at warehouses. As shown in the Appendix -Table 5, for ha
ving 1, 2 and 8
warehouses average inventory levels are calculated for two representative produc
ts. When outsourcing
option is used, it will be the same for the company in the sense of kept invento
ry levels for the one-
centralized-warehouse option therefore they are assumed to be equal. Weighted-av
erage biweekly
levels are found as:
8 Warehouses 2 Warehouses 1 Warehouse Outsourcing
988,53 680,34 597,03 597,03
Table 2: Weighted-average biweekly inventory levels
Gathered from Appendix -Table 5
Griffin
95.4%
96.5%
These numbers can be interpreted in two different ways: First, if company is fle
xible about the
determination of fill rate, in other words if it can lower the fill-rates from 9
9% to optimal levels,
outsourcing option pushes the optimal fill rates to higher levels which results
in larger inventories and
more money to tie up. Second, if the company still insists on keeping fill rate
at 99%, the additional
costs that must be paid to maintain 99% fill-rate level is lowered in the outsou
rcing alternative.
Consequently, the better policy related to fill rates depend on the attitude of
the company.
Finally, another policy change about fill-rates can be considered. Rather than u
sing one fill-rate
for over all products of the company, different rates for different products can
help the company in
decreasing inventory costs related to, at least, for some of the products.
VI. CONCLUSION
To conclude, since available options are studied from different aspects, it must
be mentioned
that the company should choose the alternatives and compare the results of evalu
ations according to
their priorities. For instance, evaluation criteria like inventory levels and tr
ansportation costs are
conflicting on interests. Company can see their situation from an exchange curve
like in the below
graph (Graph 1) and make decisions according to priorities. The curve shows the
inventory and
transportation cost levels as the number of warehouses changes.
Total Amount to Carry 260,04 78,18 West's Demand + Half of Central's Demand
Total Cost (Biweekly) (3) 13,002 7,818 Weight x Amount x Bulk Shipment Rate
8 Warehouses
2 Warehouses
1 Warehouse
Weighted Average
988,526 680,337 597,026
Inventory Levels
Table 6: Calculation of fill rates
1-2-8 Warehouse Options Outsourcing
Griffin Erlenmeyer Griffin Erlenmeyer Comment
Unit Cost 3,96 4,56 3,3264 3,8304 Taken from Exhibit 3
Unit Price 8,8 9,5 8,8 9,5 Taken from Exhibit 3
Insurance Cost 0,0396 0,0456 0 0 %1 of the unit cost
Cost of Capital 0,554 0,638 0,465696 0,536 %14 of the unit cost
Warehousing Operations 0,594 0,684 0 0 %15 of the unit cost
Gross Margin 4,84 4,94 5,4736 5,6696
Underage Cost 0,484 0,494 0,54736 0,5667 10% of gross margin
Overage Cost 0,0238 0,0273 0,01995 0,02298 0.6% of unit cost
Fill Rate 0,9532 0,9475 0,9648 0,9610