Report Case Study 3

NOVA SCHOOL OF BUSINESS AND ECONOMICS OPERATIONS MANAGEMENT 2011/2012

SCIENTIFIC GLASS INVENTORY MANAGEMENT CASE STUDY

Work done by:

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NOVA SCHOOL OF BUSINESS AND ECONOMICS OPERATIONS MANAGEMENT 2011/2012

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INTRODUCTION

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ALTERNATIVES FOR THE PROBLEMS

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ALTERNATIVES’ EVALUATION

THE COMPANY THE COMPANY’S PROBLEMS

RECOMMENDATIONS CONCLUSION APPENDIX

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NOVA SCHOOL OF BUSINESS AND ECONOMICS OPERATIONS MANAGEMENT 2011/2012

1. INTRODUCTION 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.

2. THE COMPANY 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 demand more-creative product designs and lower lifecycle costs (the firm was an early innovator on new features). However, most competitors now offered the same types of  features that SG had helped to pioneer, and staying ahead of the competition was a constant challenge.

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NOVA SCHOOL OF BUSINESS AND ECONOMICS OPERATIONS MANAGEMENT 2011/2012

3. THE COMPANY’S PROBLEMS 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.

4. ALTERNATIVES FOR THE PROBLEMS 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 and transshipment costs

should be decreased and at the same time responsiveness to customer should be increased in 4

NOVA SCHOOL OF BUSINESS AND ECONOMICS OPERATIONS MANAGEMENT 2011/2012

order to be a market leader. Simultaneously, the approach of the warehouse management 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: st

1 : 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: 

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CONTINUING WITH 8 WAREHOUSES 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 stockout. ONE CENTRAL WAREHOUSE (CENTRALIZING) Clarification: One central warehouse near to manufacturing facility at

Waltham will send all customer orders from one location. 

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TWO CENTRALIZED WAREHOUSES 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 THE WAREHOUSE FUNCTIONS 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.

POLICY CHANGES PROPOSALS: 

PERIODIC AUDITS

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INCREASE IN REPORTING ACTIVITY LEVELS

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NOVA SCHOOL OF BUSINESS AND ECONOMICS OPERATIONS MANAGEMENT 2011/2012

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STOPPING TRUNK STOCK ACTIVITIES

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…

( 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

To conclude, since available options are studied from different aspects, it must be mentionedthat the company should choose the alternatives and compare the results of evaluations according totheir priorities. For instance, evaluation criteria like inventory levels and transportation costs areconflicting on interests. Company can see their situation from an exchange curve like in the belowgraph (Graph 1) and make decisions according to priorities. The curve shows the inventory andtransportation cost levels as the number of warehouses changes. While exchange curves like given above can be used for the pairwise comparisons, weightedscore model can be useful for an overall assesment of options (Lecture 3, Slide 26). A sample weightedscore model with hypotetical weights and scores is provided in the Table 5 below, in order to While assessing the weights for factors, it is considered that average inventory level and thetransportation costs are the most important costs for the company. Then, the fill rate follows them andit is assumed that the first interpretation of fill rates mentioned in the previous part is used by thecompany. Time responsiveness is the next important factor which is followed by additional costs andbenefits with equal weights for each. Changes in warehouse management is considered as options otherthan outsourcing does not provide radical policy changes which could make warehousing managementbetter. These weights and the scores related to our previous investigations yield that the outsourcing thewarehousing function to Global Logistics is the best alternative among all.All of investigations and cost studies conducted in this case study are to find the most costeffective option in order to 6

NOVA SCHOOL OF BUSINESS AND ECONOMICS OPERATIONS MANAGEMENT 2011/2012

getting closer to the target debt to capital ratio of the company and providemore capital to fund expansion into new international markets while maintaining or even improving thehigh customer satisfaction level.

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