You are on page 1of 9

Scientific Glass, Inc.

:
Inventory Management

Batch: PGCBM-21, 2012


Group No.: 2
Course: Logistics and Supply Chain Management
Professors Name: Dr. T A S Vijayaraghavan
Study Center: Bangalore Cunningham Road

SMS ID Name
110421 Sajith PP
110289 Rajeev Nair
110439 Navin Hegde
110730 Praveen Madipati
110409 Sreedevi Krishnamurthy
110523 Ramakrishnan Parthasarathy
Contents

Introduction.................................................................................................................................................3
Critical Issues faced by the Company..........................................................................................................3
Addressing the Critical Issues.....................................................................................................................3
Changing Warehousing Functions...........................................................................................................4
Evaluating the Options.........................................................................................................................4
Implementing Proposed Policy Changes:................................................................................................5
Recommendations...................................................................................................................................6
Creative Options..........................................................................................................................................7
Restructuring Order-Fulfillment Steps.....................................................................................................7
Redesigning the Transportation Options.................................................................................................8
Plan ahead...............................................................................................................................................8
Economies of Scale..................................................................................................................................9
Appendix.....................................................................................................................................................9
References...................................................................................................................................................9
Introduction
Scientific Glass, Inc. (SG) established in 1992 is a midsize player in specialized glassware
industry providing specialized laboratory and research facilities. SG is a fast growing
organization with annual sales of $86 million for the year ending 2009. The companies existing
market regions include North America, Europe, Asia Pacific and Rest of the World. The industry
that SG operates forecasts a robust annual sales growth of 3%-5%. SG faces formidable large
equipment providers along with low-end competitors which act has impediment to the
companys growth.

SG manufactures more than 3000 different standardized products ranging from less than $3 to
more than $300 and the company decided to establish its direct sales force along geographical
lines with eight territories in US and Canada. SG also attempted to improve its fill rate and
customer response time by adding warehouses apart from their largest warehouse next to its
manufacturing plant in Waltham, Massachussets and Phoenix, Arizona. The company by the end
of 2008, brought online six other leased warehouses strategically situated in Toronto, Seattle,
Denver, Dallas, Atlanta, and Chicago.

Critical Issues faced by the Company


The companys compensation program to achieve 99% customer fill rate made most of
the warehouse managers to keep higher inventory levels than required. The policy of
99% fill rate is a point to be considered while 92% being the industry standard.
Moreover, the companys inventory control policies to not to exceed 60 days supply are
also regularly violated. All these aspects are affecting the companies plan for
international expansions and companys target debt to capital ratios are increased to 40%.

A centralized inventory monitoring and recording system at Waltham warehouse was not
enough to capture the inaccuracies caused by damaged, lost, and stolen goods, human
errors led to the mismatch between the computer generated record and the actual
inventory. Salespeople regularly asked warehouse managers to perform manual inventory
checks but the time required to track it down, and the time and cost of the inter-
warehouse transfer, absorbed much of the profit from the sale.

Addressing the Critical Issues


The above-mentioned issues can be addressed in two major ways. First to restructure the
logistics and supply chain by changing the number of warehouses functions and secondly by
implementing the proposed policy changes.

Changing Warehousing Functions


The inventory issues can be handled by changing warehousing functions and the options given in
the case are:

Centralizing the Warehousing Function: In this option, the company can maintain a
centralized warehouse near the manufacturing site near Waltham and serve the customer
orders from all the regions.
Two centralized Warehouses: With two warehouses option, SG can think of pooling the
order from east and west separately by adding one warehouse in west in addition to the
current warehouse in Waltham, which is located in east. The demands in the central part
can be pooled from these two warehouses independently.
Maintaining the current eight Warehouses: With this option of eight warehouses, each
warehouse will be responding to the demand in its region independent of all the other
warehouses.
Outsourcing the Warehousing functions: In this option, SG can outsource the
distribution function to Global Logistics (GL), who provides delivery services that
included centralized warehousing in Atlanta.

Evaluating the Options


Based on the data provided in Exhibit 3 & 5 the transportation costs, average inventory
levels and the fill rate for the proposed options were as follows:

(The detailed calculations for the above evaluations are available in the embedded excel in
Appendix).

Transportation Costs

Transportation with 8 Warehouses 2706.272408


Transportation with 2 Warehouses 2530.344042
Transportation with 1 Warehouses 2516.291894
Transportation with Outsourcing 2301.681047*

*The outsourcing transportation cost includes shipping from Waltham to Atlanta.

Average Inventory Levels

Total Overstock in 8 Warehouses 547.8593913


Total Overstock in 2 Warehouses 245.0949909
Total Overstock in 1 Warehouses 163.255314
For Outsourcing No SG Managed Inventory

Fill Rate

Owned Warehouse Outsourcing


Erlenmeyer Griffin Erlenmeyer Griffin
0.947521866 0.953206239 0.960290683 0.964165821

Additional Costs and Benefits

$10 Million can be avoided from Warehouse maintenance expenses if the warehousing
operations are outsourced to Global Logistics.

Implementing Proposed Policy Changes:


1. Greater enforcement by the warehouse managers of maintaining only sufficient inventories in
the warehouses to meet the companys target fill rate of 99%.

Merits:

o Targeting 99% fill rate will help the company to avoid 10% underage cost and 0.6%
overage costs.
o Reinforce market leadership by exceeding the market standard of 92% fill rate.
o Improve customer satisfaction by reducing the unfilled orders.

Risks:

o Maintaining a higher level of inventories will lead to the overage costs during
demand fluctuations.

2. Discontinuation of the practice of allowing sales people to maintain trunk stock.

Merits:

o Efficient inventory management.

Risks:

o Discontinuation of trunk stock will disable the company from short notice deliveries.
o Demotivating the sales managers by undermining their ability to maintain hard-won
customer accounts.

3. Creation of daily reports and weekly summaries on inventory movements for every
warehouse

Merits:
o With the usage of latest inventory management IT systems, daily reports and weekly
reports can be easily generated without any manual interventions. This will also help
the company in reducing the backorder.
o Maintaining reports and summaries in every warehouse will reduce the time and cost
of inter-warehouse transfer.

Risks:

o Additional responsibility for the warehouse managers to keep the reports and
summaries, however this can be mitigated by the use of IT systems.

4. Periodic physical audits and control procedures for all warehouse stocks.

Merits:

o Demand and supply of the inventories across the warehouses can be easily monitored
and mismatch between computer records at the centralized warehouse and actual
inventory can be avoided.

Risks:

o Without having efficient warehouse processes like the above steps, the physical audits
alone will not lead to any improvements in the long run, as the error will gradually
creep into the system.
o Additional responsibility for the warehouse managers.

Recommendations
Based on our evaluation of this case the outsourcing seems to be the most efficient options due
the following parameters:

Lowest inventory cost

Negligible warehousing operation expenses.

No SG managed Inventory

Better fill rate at lower cost

Insurance cost borne by the Global Logistics

In addition, by outsourcing warehousing, inventory management and order fulfillment, SGs


senior managers would be able to focus on increasing sales, understanding emerging customer
needs, and developing the next generation of the firms products.
Given the low touch outsourcing model, SG should be able to expand easily in other markets by
replicating the business model.

With all order-fulfillment and inventory-control, Global Logistics personnel would administer
functions, and outsourcing seems to be the cost effective option, SG need not go for the
implemention of the proposed policy changes.

Creative Options
Restructuring Order-Fulfillment Steps
SG can think of shipping the inventories to the customer directly from other warehouses in case
of insufficient inventory at the original warehouse and thereby the company can avoid the
transfer price between the warehouses. As highlighted in the below flowchart.
Redesigning the Transportation Options
In the event SG chooses to run all eight regional warehouses across North America, they can
think of redesigning the transportation option by introducing Milk Run transportation and
Distribution Centers.

Plan ahead
SGs current market of their annual sale is split between North America (40%), Europe (30%),
Asia Pacific region (20%) and Rest of the World (10%) and therefore the focus primarily has
been on North America with existing relationship with distributors in Europe and Asia.

Company should review its strategy in developing markets especially in Asia Pacific and Latin
America given the relative saturation of North American and European markets. SG should
explore the possibility of establishing their own sales offices and increase their dedicated
representation in these developing markets, something which the distributors will not be able to
offer due to their vested interests. Also given the fact that outsourcing their inventory and
distribution management seems a viable option, the company should access this option in the
overseas markets to reduce their costs.

Economies of Scale
SG is experiencing an increase in low-end competition and standardization in quality of
laboratories products, the company by outsourcing its non-core activities can concentrate on its
main functions and focus on understanding the market requirements and needs of its customers.
As the company is striving to achieve 99% fill rate, which will provide the company a
competitive advantage and the cost efficiencies achieved can be reinvested to grow the
economies of scale that acts as barriers for their competitors.

Appendix

SG Calculations.xls

References
Scientific Glass Inc. Case Study

Supply Chain Management- Strategy, Planning and Operation (4th Edition) by Sunil Chopra,
Peter Meindl & D.V Kalra

Course Material and Presentation slides by Dr. T A S Vijayaraghavan