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In January 2010, Beane, the newly hired Manager of Inventory Planning for Scientific Glass (SG), contemplated the critical nature of her first big project with the company. SG needed for more effective way to manage its inventory urgently. Until recently, the company has treated inventory management as largely an afterthought. SG, as a fast-growing organization with annual sales of $86 million, historically emphasized the twin goals of continued sales growth and high customer satisfaction. However, during 2009, executives at the company had identified that the inventory balances were increasing substantially, which tied up extra capital the company needed to fund its growing operation. In recent years the company exceeds its
target debt to total capital ratio of 40%. If this trend persisted, it could jeopardize SG’s ability
to fund a planned expansion into new international markets.
We’re doing this work in order to help Beane to come up with recommendations on how
to make the inventory plan support the company’s sales and customer-service objectives without requiring a large capital investment. Firstly, we will identify the problems that the company is dealing and analyzing them. Secondly, we will mention some alternatives for dealing with the inventory problems and we will evaluate them. Thirdly, by considering the trade-offs of these evaluations we will come out with our recommendations to Beane and consequently to SG. Finally, we will have a brief conclusion to more clearly explain our point of view.
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Scientific Glass is a midsize company, founded in 1992, in an increasingly competitive industry, focusing on providing durable products, innovative designs and superior customer service of glassware. The glassware market estimated annual sales of over $2 billion being distributed for all over the world, being SG present in North America (US and Canada being the major percentages of sales), Europe and Asia Pacific. However, in the light of the recent market trends identified, SG committed to increasing its international footprint in 2010 by securing a distributor in Latin America and adding a second distributor in both Europe and Asia Pacific.
SG had several formidable competitors in the laboratory glassware industry, including large, diversified laboratory equipment providers as well as smaller providers. SG enjoyed above-average growth in the industry because it realized early on that the market would
3
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The sales and finance teams historically set the inventory control policies at SG, and this
continued after the company expanded the warehouse network. SG’s policies regarding target
inventory levels at warehouses were regularly violated. Shipping costs and inventory holding costs were steadily rising at the company.
Executives at SG believed that the central inventory records were at best, an approximation of the actual inventory across all warehouses. In addition to record inaccuracies caused by damaged, lost, and stolen goods, there were opportunities for human error, including inaccurate returns processing, improperly tracking of warehouse transfers, and erroneous order fulfillment. These factors led to a mismatch between computer records and actual inventory.
In order to gain a better tally of the inventory balances by taking physical counts of inventory at all warehouses and of the stock in the hands of salespeople, however there
weren’t any improvements in the warehouse processes and the problems continued and errors gradually crept into the inventory records. Even if the a warehouse manager was able to locate sufficient amounts of the backordered product, the time required to track it down, plus the time and cost of the inter-warehouse transfer, absorbed much of the profit from the sale.
Briefly writing and emphasizing the most critical ones, as we mentioned before the
company’s need for a more effective way to manage its inventory was urgent. There is an identified increasing trend in the balances of inventory levels. For a growing company in a growing market, this high inventory level, in other words tied up money in the inventory, creates an obstacle for this company to use this extra capital on other areas, such as expansion to international markets. The debt to capital ratio exceeded the target level of 40% and with
the same approach this increase of this ratio also jeopardizes the company’s funding
expansion plans to international markets.
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When identifying the problems we mentioned that average inventory level was high
enough to jeopardize SG’s future plans. Consequently, the main reasons behind this problem should be analyzed. First of all, the company has a policy related to 99% fill rate, which is also open to discussion considering the market average of 92% and that warehouse managers are usually exceed even this limit and they keep more inventory than necessary. Secondly, SG has
a policy to not exceed 60 day’s supply, which is also open to discussion, once most warehouse managers are exceeding this upper limit.
Considering all these aspects, it’s found that inventory levels andtransshipment costs should be decreased and at the same time responsiveness to customer should be increased in
could be changed to a better position. By changing policies related to them as it’s tried in the
past with different ways and failed. In addition, when this inventory level kept under control, debt to capital ratio will be saddled since extra capital tied up in the inventory, will be available to be used.
In order to solve the analyzed problems in the previous part, there are two main aspects to consider:
1st: Number of warehouses and their structure can be changed (centralizing or decentralizing warehousing functions);
2nd: Related Policies can be changed and of course appropriate ones can be done simultaneously.
CHANGES IN THE NUMBER OF WAREHOUSES AND TH EIR STRUCTURE:
CONTINUING WITH8WAREHOUSES
Clarification: This is the option that makes no change on the network of the warehouses and all regions will be supplied its warehouse if there is no stock-out.
ONECENTRALWAREHOUSE(CENTRALIZING)
Clarification: One central warehouse near to manufacturing facility at Waltham will send all customer orders from one location.
TWOCENTRALIZEDWAREHOUSES
Clarification: There will be added, to the main warehouse at Waltham, a warehouse at the west (Phoenix) and it will be supplied from Waltham. The demand of east region will be met from Waltham, the demand of the west region will be met from Phoenix and the demand of central region will be met from both warehouses, assuming that they have equal shares on the central region.
OUTSOURCING THEWAREHOUSEFUNCTIONS
Clarification: All warehousing actions will be outsourced to Global Logistics (GL) and distribution will start from main warehouse at Waltham and then GL will be responsible for the rest of the operations.
STOPPING TRUNK STOCK ACTIVITIES
… ( FALTA-ME ACABAR ESTA PARTE, PORQUE TENHO QUE IR AGORA
PARA A FAC TRABALHAR EM FINANÇAS!)
To address the inventory problems, the following alternatives are available to SG: 1) Centralized warehousing in Waltham: This would allow SG to pool its inventory in order to meet demand. However, the customer response times would increase. 2) Decentralized warehousing
