Scientific Glass Case
In the case study of Scientific Glass case, the production, distribution and inventory management systems of the company Scientific Glass case have been discussed. Scientific Glass Inc, is a mid-sized company which was growing at a fast pace. The company is trying to resolve its inventory management issues as it is blocking a lot of working capital hindering the growth and expansion of the organization.
This case study critically analysis the various alternatives for improving the inventory management system. The proposed alternatives have been evaluated and a final conclusion has been drawn. The case analysis has been divided into 3 sections. In the first section the issues that the company is facing have been highlighted. In the second section, the issues have been analysed and finally in the last section the various proposed alternatives have been discussed thus arriving at a conclusion.
The company was facing some serious inventory and financial issues which was hindering the growth and expansion of the company. 1) The executives had identified a disturbing trend. The inventory balances were increasing substantially, which was blocking the capital required for the growth of the company. 2) The company has exceeded its target debt to capital ratio of 40%. 3) The company was focussing on increasing the customer fill rate to 99% and maintain it at the expense of high inventory levels and thus exhausting the financial resources. 4) The rules with respect to maximum inventory levels were violated by the warehouse managers and sales executives, but no strict action was taken in order to prevent it.
Analysis of the issues
In the year 2008, the company initiated an effort to improve the customer fill rates by placing more products closer to large customer concentrations
by increasing the number of warehouses operated by the company. The fill rate of the company at the time was 93% and the company aimed to increase it to 99%. However, as a result, the warehouse managers began ordering more than the requirement in order to ensure fulfilment of the target for their region. This action increased the inventory levels to a large extent thus blocking the capital and increasing the overage costs. The company’s warehouse network had been expanded in order to expedite the delivery time.
Hence, inventory levels had to be maintained in each of these warehouses to meet the company’s fill rate expectation. Although the company’s policy mandated that no warehouse could maintain more than a 60 day supply, the policy was often violated. Moreover, the trunk stock allocated to individual sales representatives counted against this total. In effect, the employees were not working purely in the interest of the organization. Rather the warehouse managers were more concerned how to maintain the high delivery levels of their own warehouse. And the sales executives did not want to bring down their trunk stock levels.
Hence, the bigger picture of efficient inventory management and effective funds utilization while maintaining a high fill rate was being lost. Hence, it was imperative for the company to modify its policies of inventory management and be stricter in order to ensure that they are being adhered to. The company also needs to work upon strategies to reduce the shipment and delivery costs without bringing down its fill rate.
As can be observed, the company never emphasized too much on reducing the inventory costs until it started facing financial crunch inhibiting its expansion plans. Prior to that, it was more concerned with increased sales and customer satisfaction. However, the executives realized they will neither be able to increase sales nor maintain customer fill rate without addressing the inventory issues. Hence, they came up with some new ideas after a lot of brainstorming. The distribution network had to be modified to make the inventory management system more effective. This could be achieved in primarily two ways. Change in the warehouse structure
Change in the existing policies or implementation of new ones Warehouse Structure
In order to change the warehouse structure the options of centralization, outsourcing were considered as opposed to the existing structure of decentralization. Decentralized Structure with 8 warehouses: No changes would be required and the regional warehouses would supply their respective territories except in case of stock outs. Centralization with one warehouse: Centralize the North American warehousing with one warehouse in Waltham by closing down the regional warehouses.
In this way, the inventory requirements could be pooled to meet the demand. Centralization with two warehouses: The demands of the West and the East could be pooled respectively and supplied from warehouses in each of these regions. Outsourcing: Outsourcing the inventory function to Global Logistics who would be responsible for warehousing, inventory management, and order fulfilment (including picking, packing and shipping). This would enable the company employees to focus more on sales and expansion of the company while ensuring that the inventory management is in able hands.
Some policy changes were proposed as an outcome of the brainstorming session: Sufficient inventories only to meet customer fill rate of 99% and avoid surplus inventory Discontinuation of trunk stock maintenance by sales executives Daily reports and weekly summaries of inventory movement for every warehouse Periodic physical audits and control procedures for all warehouse stocks
Evaluation of the Alternative Options
The alternative options proposed can be evaluated on the following grounds: Inventory Levels: The inventory levels to be maintained should be sufficient to abide by the policy of 99% customer fill rate. There is no mention of ordering cost, hence that need not be taken into account while determining the inventory level. Since each of the warehouse managers would prefer to keep an extra buffer, the inventory level increases with the increase in the number of warehouses. Hence, with respect to this parameter, the lesser the number of warehouses, the lower is the cost. Hence, Centralization and Outsourcing can be considered as good options.
Delivery Time: The Company had an efficient delivery system where the products were ready for shipment within 3 days except in the case of stock outs. This was applicable for 1 warehouse, 2 warehouses or 8 warehouses. After that, the Winged Fleet ensured shipment to the client within 3 days at most. However, the new shipment company being considered Global Logistics offered an additional facility of 1 day premium delivery apart from the 3 day regular shipment. This facility could be considered as a differentiating factor and provide and added advantage to the company. This option would also include 2 warehouses one in Waltham and the other in Atlanta, thus ensuring minimum stock outs.
Operating Costs: The operations manager suggested that the company would need to spend around $10M to replace the worn out equipment and produce stock sufficient enough to satisfy the future sales growth. This $10M can be assumed to be distributed across the 8 warehouses. Hence, with the decrease in the number of warehouses, the expected cost would come down. Hence, centralization or outsourcing would be a better option in this respect. Moreover, with outsourcing the sales force also need not be maintained by the company and hence the cost of sales force will be nil. FillRate: The Company has a policy to maintain 99% customer fill rate which is much higher than the industry average of 92%.
SG is trying to achieve this at the cost of blocked working capital, thus inhibiting the growth and expansion. However, SG can work towards bringing down the FillRate without compromising on the customer satisfaction levels. Given the underage and overage cost as 10% of gross margin and .6 % of unit cost respectively he FillRate for the two typical products has been calculated for in house warehousing and outsourcing. From the result it can be concluded that the FillRate on outsourcing inventory management to Global Logistics is higher than in-house inventory management.
These figures indicate two things. Firstly, if the company is ready to lower the fill rate of 99%, the outsourcing fill rate of 96% is higher than the current structure. This would lead to higher inventory levels and thus higher costs. On the other hand, if the company sticks to its 99%, the inventory cost on outsourcing would be lower. Additionally the company can opt for different fill rates for different products and thereby reduce the inventory cost for some of its products.
Shipment cost: The total shipping cost on outsourcing inventory management to Global Logistics turns out to be $26.25. If the company went with the current system of decentralization with 8 warehouses, the cost turns out to be $20.60. If SG centralizes warehousing with one warehouse in Waltham and uses Winged Fleet as its shipment company, the cost turns out to be $23.60. From this perspective, GL seems to be a more expensive option and decentralization seems to be the best option.
Miscellaneous: If the company outsourced its inventory management to Global Logistics, the company’s senior managers would be able to focus more on increasing sales, understanding emerging customer needs, and developing the next generation of the firm’s products. Additionally the company need not be concerned about the warehouse managers’ tendency of maintaining more than 60 day supply, as the warehouse management would be under GL. However, the negative side of outsourcing is that the goods have to be shipped from Waltham to Atlanta before delivery. As far as the policy changes are concerned, the sales executives should be allowed to maintain trunk stock as it might decrease the time responsiveness.
From the above parameters, outsourcing and central warehousing are favourable options in some cases, where as decentralizing is favourable in others. With respect to the inventory levels and operating costs, centralization is a very good alternative. This includes both internal warehousing and outsourcing. However, if we look at the delivery time, outsourcing gives an added advantage with the 1 day premium shipment facility provided by the Global Logistics. The Fill Rate factor favours outsourcing only in case the company sticks to the policy of 99%.
The outsourcing to GL, also provides the advantage in quantitative terms such as additional time for the senior executives to concentrate on growth and expansion rather than be involved in the nitty gritties of inventory management. The shipment cost decreases with the increase in the number of warehouses, i.e. with decentralization compared to outsourcing or centralization. From the above points, it can be observed that most of the parameters are in favour of outsourcing the inventory management to Global Logistics.
In addition to the above discussed alternative of centralization, decentralization and outsourcing, SG can also consider the option of appointing established distributors with good infrastructure at a zonal level. This would relieve the company of managing regional level wareshouses, at the same time reducing the operating costs of warehouse management. The company would be able to dedicate additional funds for expansion. The distributors would not stock additional inventory than required to meet the 99% customer fill rate, as it would block its own capital. Being a regional player, the distributors would have better control and knowledge of the market.