Inventory

Management
Case Study: Steel Works Inc.

Presented by: Waqas Iqbal & Ci Chao

Company Background

Founded in 1980, USA, by 3 material scientists from

MIT
A manufacturer of

Custom Use Steels Custom Products Division

Specialty Use Steels Specialty Products Division

Currently employs more than 2,500 people at 5 different

locations

Current Issues
Inventory levels are extremely high !!!
Customer service level is the worst !!!
Customers are going to competitors losing
market share
Sales are dropped 30% !!!
Expenses are up 25% !!!
CEO wants to know how to
fix all these problems in 1week
3

Data Collection & Analysis :

Custom Product Division:

General Strategy :
Operates in 3 manufacturing plants, located near R&D
centers and several warehouses, to serve West, Midwest,
and Eastern regions of the U.S. Customers

Develops under contract for a single customer, and sale

exclusively to that particular customer

Data Collection & Analysis :

Custom Product Division:
Negotiates with that customer to allow to sell the
product to anyone by the time the product is no longer
leading-edge, with premium added

Data Collection & Analysis

Custom Product Division:
Custom Products

10%
Sold to only one
customer
Sold to more than
one customer

90%

Data Collection & Analysis

Custom Product Division:
Response to the question Why the inventory
levels are so high? as follows;
Weve got to keep our customers happy.
Customers arent satisfied when you tell them
that they to wait 3 weeks for delivery! We
listened to that corporate inventory reduction
mandate in 1991 and cut our inventories back 20
percent and we were running out of product every
week!
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Data Collection & Analysis

Specialty Product Division:

General Strategy :

Operates in 3 plants with 6 different product lines

Exploit economies of scale in production
Rely on the logistics network to distribute products
Mainly manufactures product families in the same plant
to minimize manufacturing costs

Generates 67% of the companys total revenue

Specialty Divisions largest customer brings 10% of the
companys total revenue

Data Collection & Analysis

Specialty Product Division:
Profile of Specialty Products Customers
(approx. 130 customers)
18

5
Big Customers (>
$25mm) : 15% of
total revenue
107

Small Customers (<

$1mm)
All Others

Data Collection & Analysis

Specialty Product Division:
Demand Variation in Specialty Product
(approx. 120 products)
20%
C.V. > 0.5
80%
C.V. < 0.5

10

Data Collection & Analysis

Specialty Product Division:
Suggests that the manufacturing is to be blamed
for not having any steel in the warehouse to ship

MF
G

11

Data Collection & Analysis

Customer Service Level:
Customer Service Level

30%
70%

12

Scheduled to be
shipped from stock
within 48 hours
Canceled by the
customer at the time
of entry / Placed in a
backorder file

Consulting

Feasible solution(s) recommended by logistics

consultant
Discontinue all slow-moving products that are either
rarely sold of never sold at all, and focus on high margin
& volume products
Use least squares regression to predict demand
Consolidate warehouses : fewer warehouse = less
inventory

13

Reality Sets In
Conflicts to the consultants solutions:

Discontinue all slow-moving products that are either

rarely sold of never sold at all, and focus on high margin
& volume products
Most important customers buy those products

Use least squares regression to predict demand

80% of specialty products fall in High

Volatile Category (C.V. > 0.50)

Reduce warehouses

Longer leadtime, maybe cost more by added

transportation costs
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Other Provided Data of Specialty Products

Monthly Sales of DURABEND R12 (SKU # S0121958):

15

Other Provided Data of Specialty Products

Monthly Sales of DURABEND R12 (SKU # S0121958):
1,600
1,400
1,200
1,000
Demand (thousands units)

Customer
Customer
Customer
Customer
Customer
Customer

800
600
400
200
Month
16

ID
ID
ID
ID
ID
ID

445
444
195
147
223
194

Other Provided Data of Specialty Products

,

17

Other Provided Data of Specialty Products

,
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
-

DURABEND R10

Demand

DURABEND R12

10

11

1,800.00
1,600.00
1,400.00
1,200.00
1,000.00
800.00
600.00
400.00
200.00
-

12

Avg. Inventory

Demand

DURABEND R15
3,500.00
3,000.00
2,500.00
2,000.00
1,500.00
1,000.00
500.00
-

Demand

Avg. Inventory

18

10

11

12

Avg. Inventory

10

11

12

Our Recommended Solution(s)

Solutions for Customer Division:
Since most of the custom products sell exclusively to only
one particular customer, to reduce the high inventory level,
yet service level is maintained,, the company should
negotiate with each customer to use Demand Pull
Ordering which its production lead time matches with the
customers required date of delivery.

WIN WIN
SITUATION

19

Our Recommended Solution(s)

Solutions for Specialty Division:
Customers Forecast and Forecasts Follow-Up (to
manage products in a high volatile category)
Centralized Computer-Based System

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Discussion Questions
a) Based on the spreadsheet data, characterize Steel Works
products?. About Steel Works customers? Give your answer and
the information in the case what does this suggest?
Ans: Steel works has two types of products; Custom Products
and Specialty Products. It contains following range;
Durabend R12
Durabend R10
Durabend R15
Durabend R23
Customers: Steel works has 130 customers and 120 products in
specialty division.

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Discussion Q uestions
b) What does the coefficient of variation tell us? Can you
determine the coefficient of variation for Durabend and DuraFlex
product lines?
Ans: In probability theory and statistics, the coefficient of
variation (CV) is a standardized measure of dispersion of a
probability distribution or frequency distribution. It is defined as
the ratio of the standard deviation to the mean.
CV for Durabend: 5.25
CV for DuraFlex: 5.62

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Discussion Questions
c) How much inventory has steel works been holding? How
much would they have been holding?
Ans:

DF R15 and
DF R23 are
very lumpy,
so might set
base stock
equal to
maximum
monthly
demand

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Discussion Questions
d) Although no data is given for custom products division, are
there any obvious opportunities that are suggested by the
information in the case?
Why is actual
Ans:

service so
bad?
Not enough
Item Available

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