Problems facing Scientific Glass in January 2010
Scientific Glass’s fast growth led the company to overlook their inventory management practices. The company started noticing that its inventory was stacking up and its debt to total capital ratio exceeded its target goal, which threatened to tie up the capital much needed by SG to invest in their growing operations. In January 2010, Ava Beane was recently promoted to Manager of Inventory Planning for SG. She was tasked with a critical two-month project in order to figure out a solution for the company’s inventory management processes/systems.
Scientific Glass, which had typically experienced above-average growth due to its innovative product designs, was facing increases in competitive pressures due to evolving market trends and a three-fold problem. First, new entrants in the low-end of the market brought created fierce competition. Second, North American and European market growth was hindered due to relative saturation, while Asian and Latin American markets experienced relative growth. Also, third, an increase in regulations and quality-control laboratories brought on a need for more specialized products that would meet quality assurance standards.
SG is also facing issues in determining the optimal way to ship products across its network structure. Currently, SG is evaluating whether it should down regional warehouses and centralize its operations so that it can pool inventory when processing order fulfillment. Another option is to outsource shipping to Global Logistics, which would handle order fulfillment and inventory control functions, leaving only the customer order processing and billing to SG. The other option is to continue with its regional warehouse operations and ship from differing locations.
How much external funding has to be raised in 2010 in order to finance operations?
SG is coming up with a few different expenses related to expansion and maintenance. First, in response to depreciation, SG is facing a 10 million dollar investment in plant equipment. Exhibit 5 shows a forecast of 1,404,788 lbs to be shipped in 2010. With a cost of .40 for bulk shipping, this would bring shipping expenses to a total of just under 562,000. Regional warehouses’ costs are 15% of annual inventory, as inventory in 2009 totaled 8.72M. Considering only these parameters, SG will need 20.6M to cover its operations. This number does not include COGs, R&D, their liabilities, and equity found on the balance sheet, nor does it include the 14% minimum ROI require on its cost of capital. Given that 2009’s balance sheet showed liabilities and equities at 59.4, it can be estimated that 2010s forecast for total funding need will be slightly above this figure given its expansion prospects and growth in the Asian and Latin markets.
How do Scientific Glass’ problems illustrate the relationship between the number of warehouses and inventory levels?
Scientific Glass has several regional warehouses that allow the firm to keep delivery times low without incurring a burdensome delivery cost. Because the inventory is located in several warehouses, the firm needs to maintain higher inventory levels than if the entire inventory was centralized in one or a few warehouses. By centralizing their inventory, SG could pool their demand variability but at the expense of higher shipping costs for many of their customers. SG has eight warehouses across North America, each servicing a distinct geographical area. As such, each warehouse has a separate demand and risk of stocking out of a particular item. By centralizing the warehousing function, the demand variance will be pooled and decrease, resulting in the ability to carry a smaller overall inventory, but average shipping costs would increase as average shipping distances would also increase. SG would also lose much of the economies of scale in transportation that they enjoy now if they were to centralize their warehouses. At present large orders are shipped from the factory to each warehouse cheaply and then broken into individual orders and shipped a short distance decreasing the last mile cost. These savings would be lost if inventory was centralized and may offset the savings that a reduced inventory would produce.
What are the alternatives available for dealing with the inventory problems? How would you evaluate the alternatives?
One alternative to deal with the inventory problems is to connect the information flow throughout the supply chain. Link the information from the inventory flow and the production information from the manufacturing facility in Waltham can give the company a new line of sight into its needs and their flow of demand. A better line of sight can give them the opportunity to handle their inventory in a more planned proactive manner instead of reacting to unforeseen changes in demand. There could be a high cost in combining these data sources, but the benefits of forecasting more efficiently will lead to improved lead times and lower down inventory on hand (because of better planning) which have the effect of lower down operational expenses.
Another alternative to deal with inventory problems would be to outsource their product fulfillment to Global Logistics Service. Even though SG’s marginal cost would increase by $6, there are various aspects that SG should consider:
- There is a 15% cost associated to the total inventory held at the regional warehouses.
- Their Winged Fleet will increase the transportation time for inventory leading to increase lead times
- They currently are managing their fulfillment at a decently high cost, and they are expanding globally. They should consider focusing on their core competency and partnering up with a firm that can take focus and efficiencies of fulfillment out from SG’s scope.
Finally, following Beane’s logic, SG should determine the critical fractile for its product line and then start implementing a program that is specific to each warehouse. The company has an overall goal of achieving a 99% service level, whereas the industry’s average service level is 92%. The leadership of SG has placed substantial incentives on warehouse managers, encouraging them to meet a 99% service level, which has led managers to over order certain products beyond the 99% service level. The proposed changes mention greater enforcement by warehouse managers to only maintain sufficient inventory levels. However, that is a vague statement with no actionable items. Instead, the incentive program should be adjusted so that the program does not only focus on maintaining a 99% service level but also focuses on controlling costs of inventory. By changing the focus on the incentive program, SG can address the current issue of 10% of its product line being overstocked beyond the critical fractile by establishing an upper order limit and through better training of the warehouse managers, ultimately improving the company’s bottom line. This program, by requiring more rigorous inventory tracking at the individual warehouses, has the bonus of correcting the discrepancies between computer inventory and actual inventory. Because the warehouse managers would be incentivized to control inventory level costs, this requires an accurate count of their inventory levels which would result in more frequent and updated reports.
What actions should Ava Beane propose to Eric Gregory and Melissa Hayes?
In determining a recommendation, Beane must consider the three areas of improvement that her recommendation needs to address- service levels, timeliness of order delivery, and inventory control. SG currently has the policy to achieve a 99% service level in order to differentiate itself from competitors. According to the analysis, SG’s two main products, the Griffin beaker, and the Erlenmeyer flask show an optimal order quantity and 95.8% and 95.3% respectively. Given that customers are much more likely to be concerned about the amount of time it takes to receive the products ordered from the order placement, it should be examined whether a 99% service level is the right metric to achieve SG’s intended result. Service level refers to the amount of time that a company does or does not stock out. A high service refers to the probability that a company can fill the demand. The fill rate answers the total amount of units you will fill versus what is ordered. In order to determine the fill rate, you must know the total amount of stock out units- units not able to be filled in order. After finding the total sum of stockouts, the total sum of stockouts is subtracted from the total demand, and then that numerator is divided by the total demand to find the fill rate. A customer is much more likely to care about the fill rate since the fill rate is more closely related to how short their order is rather than how many times the company is able to fill all of its customer’s orders. Therefore, we recommend that SG readjust its service level goal to the optimal order quantity to reduce its level of expenditure on extra units, and focus more on increasing its fill rate.
Second, by centralizing warehouse operations down to a single warehouse, SG will lose its economies of scale. Having more than one warehouse throughout the country will allow SG to fulfill its customer orders in a faster manner if SG corrects its inventory management system. Currently, the inventory management system is filled with discrepancies and inaccuracies due to human error, product losses or damages, and otherwise. Instead of centralizing the warehouse operations to one location, having centralized inventory management would adequately allow SG to pool resources in order fulfillment as long as the reporting system is redesigned to increase its accuracy and reliability. By adjusting the incentives placed on warehouse managers, warehouse managers can be held responsible for accuracy in reporting their warehouse’s inventory. When a proper system is in place, order fulfillment can be a centralized function, and the warehouse that has the inventory in stock that can ship the order the fastest or cheapest, depending on the order requirements, can be responsible for fulfillment. By correcting the inventory management system, customer backorders can be more adequately addressed since the time from order placement to time of order shipment will be reduced as the sales team does not need to spend time tracking down the items in the order. Previous efforts have shown that the result of expansion was unsatisfactory as warehouses were operating at a fraction of its capacity due to the regional warehouses being brought online. Demand is expected to rise in markets outside of North America, while North American markets are heavily saturated and face a steady demand. Therefore, it is reasonable the entire operating system of North America is examined, by combining regional warehouse operations to increase utilization. By reducing the number of warehouses from 8 to 2, SG can retain its economies of scale by strategically placing warehouses on opposite coasts, address utilization issues, and benefit from resource pooling. The existence of two warehouses can mitigate business continuity issues that might appear due to catastrophic weather events or other events threatening operations.
Additionally, Beane was considering outsourcing shipping to Global Logistics, so that an outside company could focus on one part of the ordering process, and SG could focus on its core competencies. This recommendation presents a risk, as SG will have less control over its operations, making it harder to maintain specific metrics, such as its fill rate or service level, as well as present a hold-up problem, should SG become too dependent on Global Logistics’ warehousing and inventory management services. While outsourcing shipping may be a viable option, it is paramount that SG finds an in-house solution to more appropriately managing inventory production, in order to adequately address its issues in the overproduction of units beyond the critical fractile. By redesigning the system of information joining the warehouses to the inventory management system, SG will have a better line of sight of their operations, where they are falling short or spending excessively, and better anticipate re-order points customized to each product rather than a blanket two-week re-order point to optimize their production lines when attempting to meet demand and increase its fill rate.
😄 #TechDisruptor 🚀
Hi there! I’m a Full Stack Developer and Project Manager with experience in delivering creative and effective solutions across healthcare, higher education, nonprofits, and other industries. I’m very passionate about transforming operations with technology and challenging standard practices. My strategy tends to focus is on people interactions, how we learn, perform, and communicate.