Scientific Glass, Inc
Inventory Management Case
Analysis
created by Rajat Suvra Kodali
EPGP-11-192
Introduction
Scientific Glass, Inc. (SG) built up in 1992 is a fair size player in specific glass sets industry giving particular lab
and research offices. SG is a quickly developing association with yearly offers of $86 million for the year finishing
2009. The organizations existing business sector locales incorporate North America, Europe, Asia Pacific and Rest
of the World. The business that SG works estimates a powerful yearly deals development of 3%-5%. SG faces
imposing huge gear suppliers alongside low-end contenders which act has hindrance to the organization's
development.
SG manufacturers in excess of 3000 diverse institutionalized items running from under $3 to more than $300 and
the organization chose to set up its immediate deals constrain along geological lines with eight regions in US and
Canada. SG likewise endeavoured to improve its fill rate and client reaction time by including distribution
centres separated from their biggest stockroom by its assembling plant in Waltham, Massachusetts and Phoenix,
Arizona. The organization before the finish of 2008, brought online six other rented distribution centres
deliberately arranged in Toronto, Seattle, Denver, Dallas, Atlanta, and Chicago.
Annual Sales: $65 Million in 2008
Net Earning: $4.5 Million in 2008
Annual Sales: $86.3 Million in 2009
Net Earning: $6.5 Million in 2009
Issues faced by the Company
The organization's remuneration program to accomplish 99% client fill rate
made the greater part of the warehouse manager to keep higher stock
dimensions than required. But 92% is the standard one .
Additionally, the organization’s inventory control arrangements to not to
exceed 60 days supply are violated on regular basis . This is affecting the
strategy of international expansion of the company .
A concentrated stock checking and recording framework at Waltham
distribution center was insufficient to catch the mistakes brought about by
harmed, lost, and stolen products, human blunders prompted the bungle
between the PC created record and the real stock.
The warehouse managers try to make manual check of inventory but it affects
the regular sales and labour . In march 2009 SG attempted to gain a better
tally of the inventory at all warehouse processes , however the problems
continued and errors gradually crept into the inventory records .
Resolving ways of the Issues
Restructure the logistics and supply chain by changing the number of
warehouses functions.
Implementing the proposed policy changes.
Restructuring Order-Fulfillment Process
Warehousing Functions
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 8 Warehouses: With this option of 8 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.
Calculations for Centralizing Warehousing Function-
Based on Exhibit 5 & 3
Transportation Costs for One Centralized Warehouse at Waltham
Erlenmeyer Griffin Formula
Exhibit [Link] Bi-Weekly Demand for 1 warehouse*1.2
Total Bi-weekly Demand 156.36 520.08 433.4*1.2
Demand for one warehouse region 19.545 65.01 Total Bi-weekly Demand/8
Demand for east region 78.18 260.04
Demand for central region 39.09 130.02
Demand for west region 39.09 130.02
(Demand for east * weight)*
Total cost within region(A) 27.68373846 46.04041538 ((Fixed Cost i.e 5/Average shipment weight) + Weight Fee)
(Demand for central * weight)*
Total cost across 1 region(B) 17.34994615 28.85443846 ((Fixed Cost i.e 12/Average shipment weight) + Weight Fee)
(Demand for west * weight)*
Total cost across 2 region(C) 19.35456154 32.18828462 ((Fixed Cost i.e 16/Average shipment weight) + Weight Fee)
Total Bi-weekly Cost(A+B+C) 64.38824615 107.0831385
Total Annual Cost 1674.0944 2784.1616 26*Total Bi-weekly Cost
Relative Weight in sales 24.13094504 75.86905496
Average Annual Cost 2516.29
Calculations for 2 centralized Warehousing Functions- Based on Exhibit
5&3
Transportation Costs for Two Warehouses at Waltham & Phoenix
Erlenmeyer Griffin Formula
Exhibit [Link] Bi-Weekly Demand for 2 warehouse*1.2
Total Bi-weekly Demand 78.24 260.04 216.7*1.2
Demand for one warehouse region 19.56 65.01 Total Bi-weekly Demand/4
Demand for east region 78.24 260.04
Demand for central region 39.12 130.02
Demand for west region 39.12 130.02
(Demand in west * weight)*
((Fixed Cost i.e 5/Average shipment weight) + Weight Fee) + (Demand in central * weight *
0.5)*
Phoenix's Delivery Costs(A) 22.5341231 37.44742692 ((Fixed Cost i.e 12/Average shipment weight) + Weight Fee)
(Demand in east * weight)*
((Fixed Cost i.e 5/Average shipment weight) + Weight Fee) + (Demand in central * weight *
0.5)*
Waltham's Delivery Costs(B) 36.3866154 60.46763462 ((Fixed Cost i.e 12/Average shipment weight) + Weight Fee)
From Waltham to Phoenix
Total Inventory to carry 58.68 195.03 West Demand + Central Demand/2
Bi-weekly Costs(C ) 5.868 9.7515 Total Inventory to carry * weight * Bulk Shipment costs
Total Bi-weekly Cost(A+B+C) 64.7887385 107.6665615
Total Annual Cost 1684.5072 2799.3306 26*Total Bi-weekly Cost
Relative Weight in sales 24.1281766 75.87182343
Average Annual Cost 2530.34
Calculations for Outsourcing the Warehousing functions
Based on Exhibit 5 & 3
Cost Calculation for Outsourcing
Erlenmeyer Griffin Formula
Bulk Shipment to Atlanta
Exhibit 3. 2009 Units Sold*1.2
Total Demand 4066.8 13521.6 11268*1.2
Bulk Shipment rate 0.4 0.4
Total Costs(A) 406.68 676.08 Total demand * weight * Bulk Shipment costs
Delivery Costs from Atlanta
Total Demand 4066.8 13521.6
Demand for one region 813.36 2704.32 Total Demand/5
Southeast region costs 174.0381846 289.3275692 (Demand of region * weight)/Average shipping weight*Weight cost
Northeast region costs 197.1876615 327.8121231 (Demand of region * weight)/Average shipping weight*Weight cost
Central region costs 232.0161538 385.7123077 (Demand of region * weight)/Average shipping weight*Weight cost
Southwest region costs 255.2699077 424.3702154 (Demand of region * weight)/Average shipping weight*Weight cost
Northwest region costs 266.8446462 443.6124923 (Demand of region * weight)/Average shipping weight*Weight cost
Total Costs(B) 1125.356554 1870.834708
Total Bi-weekly Cost(A+B) 1532.036554 2546.914708
Relative Weight in sales 24.16385252 75.83614748
Average Annual Cost 2301.68
Calculations of Transportation Cost for 8 Warehouses
functions Based on Exhibit 5 & 3
Transportation Cost for 8 Warehouses
Erlenmeyer Griffin Formula Comments
Exhibit [Link] Bi-Weekly Demand for 8 warehouse*1.2
Total Demand 19.56 65.08 54.2*1.2 2009 Demand increases by 20% in 2010
Un fulfilled Fill Rate 0.01 0.01
Bulk Shipment Rate 0.4 0.4
When Stock out occurs, the inter-warehouse transportation costs
Unit Weight of Erlenmeyer - 3/12 = 0.25
Unfulfilled Fill Rate * Total Demand * Bulk Shipment Rate Unit Weight of Griffin - 0.75/6 = 0.125
* Weight From Exhibit 5, Indicative Weight = Pounds per case/ Units per
Total Bi-weekly cost 0.0196 0.0325 case
Total Bi-weekly cost for 8 warehouses 0.1568 0.26 8*Total Bi-weekly cost
Total Annual Cost(A) 4.0768 6.76 26*Total Bi-weekly cost for 8 warehouses
From Waltham to warehouses
Total inventory to carry 136.92 455.28 Total Demand * 7 Seven other warehouses
Total Bi-weekly cost 13.692 22.764 Total Inventory to carry * Bulk shipment rate * weight
Total Annual Cost(B) 355.992 591.864 26*Total Bi-weekly cost
From warehouses to customer
Total Inventory to carry 156.48 520.32 Total Demand * 8
(Total Inventory to carry * weight)*
Total Bi-weekly cost 55.41 92.123 ((Fixed Cost/Average shipment weight) + Weight Fee)
Total Annual Cost(C) 1440.66 2395.198 26*Total Bi-weekly cost
Total Annual Cost(A+B+C) 1800.7288 2993.822
Related Sales Revenue = (2009 units sold*Unit Price)-Total Annual
Cost
Total Sales Revenue = Related Sales Revenue of Griffin &
Transportation Cost Analysis
Transportation with 8 Warehouses 2706.27
Transportation with 2 Warehouses 2530.34
Transportation with 1 Warehouses 2516.29
Transportation with Outsourcing 2301.68
Overall inventory levels Calculation
Erlenmeyer Griffin Formula
Warehouses 8 2 1 8 2 1
2009
Mean 16.3 65.2 130.4 54.2 216.7 433.4
Standard Deviation 10.9 19.5 26 21.4 38.3 51
2010
Mean 19.56 78.24 156.48 65.04 260.04 520.08
Standard Deviation 13.08 23.4 31.2 25.68 45.96 61.2
CSL* 0.96 0.96 0.96 0.96 0.96 0.96 Cu/(Cu+Co)
Optimal Ordered Quantity(Q* or
O*) 42.45897381 119.2060541 211.1014054 109.9976183 340.5015318 627.2219876 NORMINV(CSL*, Mean, Standard Deviation)
((O*-Mean)*(NORMDIST((O*-Mean)/S.D.,0,1,1)))+
Expected Overstock 23.11016782 41.34387822 55.12517096 45.37225609 81.20361722 108.130143 (S.D.*(NORMDIST((O*-Mean)/S.D.,0,1,0)))
Total Overstock Inventory 184.8813426 82.68775643 55.12517096 362.9780488 162.4072344 108.130143
Total Overstock in 8 Warehouses 547.85
Total Overstock in 2 Warehouses 245.09
Total Overstock in 1 Warehouses 163.25
For Outsourcing No Inventory Managed by SG
Outcome
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, SG’s senior
managers would be able to focus on increasing sales, understanding emerging customer needs,
and developing the next generation of the firm’s products
Implementing the proposed policy changes
1. greater enforcement by the warehouse managers of maintaining only sufficient inventories in the warehouses to meet the company’s target
service level of 99%
Risks:
Maintaining a higher level of inventories will lead to the overage costs during demand fluctuations.
2. discontinuation of the practice of allowing salespeople to maintain trunk stock .
Risks:
Discontinuation of trunk stock will disable the company from short notice deliveries.
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
Risks:
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.
Risks:
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.
Additional responsibility for the warehouse managers.
Restructuring the order fulfillment process
Scientific Glass can consider shipping the inventories to the client straightforwardly from different
warehouses if there should arise an occurrence of deficient stock at the first warehouse and along these
lines the organization can keep away from the exchange cost between the warehouses .
Thank You
