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CASE STUDY ANALYSIS ON SCIENTIFIC GLASS

INVENTORY MANAGEMENT
Problem Statement

Faced with inventory challenges, senior management has to take important decisions!
What are the merits and risks of implementing the proposed policy changes, of reverting back of fewer
warehouses and of centralizing and outsourcing the inventory to Global Logistics?
Other creative options to consider?
Company Background
• Scientific Glass, Inc. (SG) established in 1992 was a privately held company that provided specialized glassware for
laboratory and research facilities.
• SG is a fast growing organization with annual sales of $86 million for the year ending 2009.
• Twin goals of continuous sales growth and customer satisfaction.
• Manufactures more than 3000 different standardized products, with few products that are representatives of the
type of products sold by SG.
• The market regions include North America, Europe, Asia Pacific and Rest of the World.
• Building a dedicated domestic salesforce: The company established its direct sales force along geographical lines
with eight territories in US and Canada.
• There are several competitors for the company ranging from large providers to small scale ones.
• Increasing customer service levels : Initiated this effort in 2008, using a combination of forecasting demand more
accurately improving customer service levels
• Adding warehouses : SG also attempted to improve customer response time by adding regional warehouses. The
largest warehouse was next to its manufacturing plant in Waltham, Massachusetts. Prior to 2008, its only
warehouse was located outside of Phoenix, Arizona. By the end of 2008, the company brought online six other
leased warehouses strategically situated in Toronto, Seattle, Denver, Dallas, Atlanta, and Chicago.
• Expansion Plans : SG committed to increasing its international footprint in 2010 by securing a distributor in Latin
America and adding a second distributor in Europe and Asia Pacific.
Major Issues faced by the company

• Need for a more effective way to manage its inventory


• Increased entry of low-end competitors
• Relative saturation in NA and Europe regions
• Increase in number of industrial quality control laboratories
• In 2008, the company’s compensation program that provided strong incentives to achieve 99% customer
service level was a high target to the warehouse managers. The industry average level was 92%. This made
them to order more inventory to assure that they would exceed the target service level for the region.
• Since the need for inventory were increasing, all the fund/capital for growth of operations where moved to
inventory.
• This resulted in increase in debt to capital ratio to 40%.
• Also, company policies regarding target inventory level were regularly violated.
• Inventory Challenges : The record inaccuracies caused by damaged, lost, and stolen goods, human errors led to
the mismatch between computer records and the actual inventory.
• Even though SG attempted to gain tally of inventory balances by taking physical counts of inventory at all
warehouses and with salespeople, the sales people regularly asked warehouse managers to perform
manual inventory checks, 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.
• Shipping costs and inventory holding costs were steadily rising, Beane found that company incurred costs
as high as 10% of gross margin for products that were ordered by customer but went oos.
• There were products which were left unsold during demand period– underage costs.
• Large count of backordered and cancelled orders
SG’s strategy of overcoming the issues

1. Inventory Challenges
the inventory issues can be handled by changing warehousing functions and the recommendations provided are:
• Separate warehouses in each region(8 warehouses):Added warehouses such that customer demand in each sales
region realized separately and was fulfilled entirely by warehouse in that region. Each warehouse responded to
demand in its region independent of all other warehouses and handled 1/8th of SG’s customer orders.
• 2 warehouses : Demand in the east could be pooled and demand in the west could be pooled.
• Centralizing the warehouse: Single warehouse- All the demands are pooled.
• Outsourcing to GL logistics

2. Eliminate trunk stock

3. Proposed Policy Changes


• Greater enforcement by the warehouse managers of maintaining only sufficient inventories in the warehouses to
meet the company’s target fill rate of 99%.
• Discontinuation of the practice of allowing sales people to maintain trunk stock.
• Creation of daily reports and weekly summaries on inventory movements for every warehouse
• Periodic physical audits and control procedures for all warehouse stocks.
Analyzing change in warehouse functions & Outsourcing
Beane took charge in 2010 (which has 20% increase in sales w.r.t 2009 values calculated with data given in exhibit 3
and the formulas given in the case. It is said to follow normal distribution.)
• Total overstock is more when number of warehouses are high.
• The lesser the number of warehouses, the more efficient is the inventory management is.
• outsourcing can also be a good idea as it has zero overstock
• Hence, very less inventory cost
• SG need not manage any Inventory if in case of outsourcing.
• Since SG has a free shipping policy for orders above $200 and most of the orders cross that amount, SG
has to bear the shipping charges. It would be a great loss if the transportation is from a warehouse
situated at a far distance and shipping costs would be relatively high.
Inventory Management – Rising shipping costs and inventory holding costs

Based on Exhibit 5,
Ordering Cost = order cost per unit * weekly demand
14% Holding cost = 14/100 * Unit cost

Flask-
Griffin Beaker Erlenmeyer

8 2 1 8 2 1

Annual Demand 11268 11268 11268 3389 3389 3389

Weekly Demand(biweekly/2) 27.1 108.35 216.7 8.15 32.6 65.2

Unit cost $3.96 $3.96 $3.96 $4.56 $4.56 $4.56

14% Holding Cost $0.55 $0.55 $0.55 $0.64 $0.64 $0.64

Ordering cost $1.36 $5.42 10.84 $0.82 $3.26 $6.52


EOQ

EOQ = sqt(2DS/H)
=sqrt(2*Annual Qty Demanded*Ordering Cost/(14% Holding cost))
Griffin Erienmeyer
8WH 2WH 1WH 8WH 2WH 1WH
EOQ 234.7 469.3 663.7 93.0 186.0 263.1
Average 117.3 234.6 331.8 46.5 93.0 131.6
Inventory
Annual 65.06 130.08 183.96 29.69 59.38 83.98
Inventory
Holding Cost
($)
No. Of orders 48 24 17 36.4 18.2 12.9
per year
Annual 65.06 130.08 183.96 29.69 59.38 83.98
Ordering
Cost($)
Total Annual 130.11 260.17 367.93 59.38 118.77 167.97
Cost($)
Multiplying by 8,2 for 8 warehouses and 2 warehouses respectively.

Griffin Erienmeyer
8WH 2WH 1WH 8WH 2WH 1WH
Annual 624.39 312.19 220.75 35.62 71.25 100.76
Inventory
Holding Cost
($)

Annual 624.39 312.19 220.75 35.62 71.25 100.76


Ordering
Cost($)
Total Annual 1248.77 624.39 441.51 569.98 284.99 201.52
Cost ($)
ROP/SAFETY STOCK

ROP = d*LT + Z( sigma d) sqrt(LT)


d = Avg biweekly demand
Sigma d – Standard deviation
LT- Lead time
Z- Z score

Safety Stock
Z × σLT × D avg.
Z is the desired service level, σLT is the standard deviation of lead time, and D avg is demand average.
Griffin Erienmeyer
8WH 2WH 1WH 8WH 2WH 1WH
Avg. Biweekly demand(Given) 54.2 216.7 433.4 16.3 65.2 130.3
Biweekly Standard Deviation(given) 21.4 38.3 51 10.9 19.5 26
Desired service level(given) 99% 99% 99% 99% 99% 99%
Reorder Cycle Weekly Weekly Weekly Weekly Weekly Weekly
Lead Time 5 days 5 days 5 days 5 days 5 days 5 days
Working days per year (Assumed) 365 days 365 days 365 days 365 days 365 days 365 days
ROP 19.4 77.4 154.8 5.8 23.3 46.5
99% (z value) service level 2.33 2.33 2.33 2.33 2.33 2.33
Demand during 5 days lead time 19.4 77.4 154.8 5.8 23.3 46.5
S.D during 5 days lead time 7.6 13.7 18.2 3.9 7.0 9.3
Safety stock 17.8 31.9 42.4 9.1 16.2 21.6
ROP with safety stock 37.2 109.3 197.2 14.9 39.5 68.2
Multiplying by 8,2 for 8 warehouses and 2 warehouses respectively.

Griffin Erlenmeyer

8WH 2WH 1WH 8WH 2WH 1WH

Demand during lead time of 5 days 1238.9 309.6 154.8 372.6 93.1 46.5

Standard deviation during lead time 61.1 27.4 18.2 31.1 13.9 9.3

Safety Stock 142.5 63.7 42.4 72.6 32.5 21.6

ROP with Safety stock 297.3 218.5 197.2 119.1 79.0 68.2
Merits & Risks of proposed policy changes
Greater enforcement by the warehouse managers of maintaining only sufficient inventories in the warehouses to
meet the company’s target fill rate of 99%.
Merits:
Improve customer response time and thus decrease the underage and overage costs.
Be a market leader by exceeding the market standard of 92% .
Risks:
Targeting(99%) is very high in this case. Hence the chance of overstock.
Solution: Increase target level slowly. First to say 95 or 96% and then once stable, increase it.

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


Merits:
Error margin for inventory count would decrease
Hence, results in efficient inventory management.
Risks:
The sales managers worry that they will have less influence on sale territories and would by undermining their
ability to maintain hard-won customer accounts.
Solution: As used by other ecommerce clients like Amazon(scanners), using an inventory tracking system would
help in knowing the availability and approx. delivery time and manage the inventory effectively.
Creation of daily reports and weekly summaries on inventory movements for every warehouse

Merits:
Reduce time and cost of transfer to other warehouses.
Risks:
Maintaining physical records is time consuming.
Solution: As mentioned in the above point, use of IT systems could reduce the time and effort of warehouse
managers.
Periodic physical audits and control procedures for all warehouse stocks.
Merits:
Any mismatch of inventory/overstock/understock could be avoided
Risks:
As mentioned above, its an additional responsibility for warehouse managers unless machines are used.
Other Creative Options
• Centralize the inventory system – The system should let them know the available inventory and also if gone out of
stock
• Reduce the number of warehouses/outsource
• Warehouse managers to create weekly report on movement of inventory
• All the data w.r.t should be shared across all warehouses including Beane.
• Do physical audits intermittently
• Instead of warehouse to warehouse movement of inventory in case of out of stock in a warehouse, SG can think of
directly delivering the product to customer from available warehouse. This would reduce the transportation cost as
well.
• Pool its inventory to reduce SD of demand
• This would reduce the safety stock that they have to hold.