Scientific Glass Inc - Inventory Management

• Introduction
• Scientific glass house is a mid sized fast growing organisation engaged in the production of specialized glass ware and known for durable
products , innovative designs and customer service
• The goals of the organisation are continued sales growth and customer satisfaction
• The Risk -Increasing inventory balance and hence requirement of additional capital . Debt to Capital ratio is more than 40 %. If this trend
continues it will endanger the future of the organisation .
• The market -The estimated global sales is over 2 billion but in 2008 and 2009they could only achieve a turnover of 65 million and 86.3
million respectively .
• The expected market penetration is 40% from North America , 30% from Europe , 20% from Asia Pacific and the remaining from rest of the
world. The industry sales growth is ranging from 3 to 5 percentage .The main sales focus was North America , they made a tie up with a
distributor in Germany and one in Singapore to serve the European and Asia pacific market respectively . The sale percentage is 20% from
Europe 10 % from Asia Pacific and 70 % from US and Canada
Product
• Their customers includes pharma companies , bio technology firms , hospitals etc and they have got products having value form Rs.3 to
more than Rs.200 . Products are mainly made of glass and also have got plastic as well as special purpose materials . They offer
customised products also in addition to the standardised products . ( Around 3000 varieties ) .
• Competition -They face competition from large players as well as small players . SG has a got a competitive edge due to the innovations
introduced by them . They understood the importance of creative product designs and lower life cycle costs and also got product features
external etchings that are temperature sensitive , stacking systems and external coatings etc .
• But they are losing their competitive advantage as most competitors offer same features also . And the latest industry trends including
• 1. increased entry of low end competitors
• 2 North American as well as European markets are relatively saturating and also the there is a relative growth in Asia pacific and Latin
American Markets .
• 3. more industrial quality control laboratories .
Sales and Distribution

• Long term supply contracts ranging from 1 to 3 years and also automatic roll over provisions
• Sales cycles ranges from 3 to 6 month which depends on factors such as sales reps access to decision makers, existing contracts in place by
competitors and negotiation efforts
• Most of the ship orders are exceeding $200 as SG will pay ground shipping for orders above this limit
New Initiatives
SG stopped relying only on the sales rep of distributors and a new dedicated sales force to promote the new product features were hired . The
distributors reps will concentrate on established products . The remuneration was 33000 plus commission based on revenue ,. 32 sales reps were
appointed
• Initiated the effort to reduce Lead time .They used a combination of techniques such as accurate demand forecasting , improved customer
service levels and placing more products closer to large customer concentrations .
• They increased warehouses to achieve this .In addition to the Waltham and Arizona warehouses company leased six additional ware houses .
• Sales people were also allowed to store trunk stock SG;s service level was 93 % which was above industry level of 92 %. Leadership believe
in having highest possible service level.
Issues in ordering

• If the stock is not readily available a customer has to wait almost three weeks for delivery (It include three week order
cycle and one week waiting time .SG incurred two kinds of stock one is underage cost which comes to 10 % of gross
margin and other one is overage cost which comes to .54 % .
• Company is desirous of having a 99% customer service level so they announced a strong incentive . IN spite of this
higher target some of the managers ordered even higher inventory
• The European and Asian distributors operated a central ware house in their region . SG always try to lean the
inventory as lean as possible in these places as they could recover the amount after end sales .
• SG also made significant investment to expand Waltham warehouse as they expect growth . After the ware houses
opened Waltham was operating far below the operational capacity
• The Operation and rental cost are around 15 % of the ware housed inventory.
• Expansion Plans
• As part of expansion they bring in new international distributors and from past experience since they felt that
distributors may be reluctant to promote new products in order to over come that they insisted to have $ 7 50000
inventory .
• Sales projection for 2010 expected 20 % increase and an investment of 10 million is also expected
Inventory control System

• Inventory controls are formulated and controlled by sales and finance team . The controls were not in strict
measures as inventory levels were regularly violated .
• Inventory system was maintained in two separate computers one track the ordering and tracking and
another for manufacturing and ware housing .
• Inventory control included minimum stock orders , a review cycle is two weeks . Stock level incudes in hand
and in transit . Abnormal loss of inventory is 1 %
Orders can placed directly and online .
Order system- will route to appropriate territory and if goods in stock shipment will happen in a day . If goods
are out of stock they will search for the best possible options to deliver and it will be marked against the
service level of that ware house .Order full fill ment has a definite process . Once order is received good are
treated as “ in transit “It will last for 5 days and .Transportation was outsourced @0.40 per pound .Waltham
orders will not incur any transportation cost . Inventory from warehouse will reach customer through Winged
fleet
Inventory challenges

• Inventory controls are formulated and controlled by sales and finance team . The controls were not in strict
measures as inventory levels were regularly violated .
• Inventory system was maintained in two separate computers one track the ordering and tracking and
another for manufacturing and ware housing .
• Inventory control included minimum stock orders , a review cycle is two weeks . Stock level incudes in hand
and in transit . Abnormal loss of inventory is 1 %
Orders can placed directly and online .
Order system- will route to appropriate territory and if goods in stock shipment will happen in a day . If goods
are out of stock they will search for the best possible options to deliver and it will be marked against the
service level of that ware house .Order full fill ment has a definite process . Once order is received good are
treated as “ in transit “It will last for 5 days and .Transportation was outsourced @0.40 per pound .Waltham
orders will not incur any transportation cost . Inventory from warehouse will reach customer through Winged
fleet
Inventory challenges
• The cost of shipping and inventory holding are rising .
• A centralized inventory monitoring and recording system at Waltham warehouse was assumed to be enough but
it fail to capture the inaccuracies caused by damaged, lost, and stolen goods. Slowly human errors led to the
mismatch between the computer generated record and the actual inventory. Sales force used to ask warehouse
managers to perform manual inventory checks but the time required to track it down, and the time and cost of the
inter-warehouse transfer, absorbed much of the profit from the sale.
• The policy revisions include
 Greater enforcement by the warehouse managers for maintaining sufficient inventories
 The warehouses to meet the company’s target fill rate of 99%
 Discontinuation of the practice of allowing salespeople to maintain trunk stock
 creation of daily reports and weekly summaries on inventory movements for every warehouse
 periodic physical audits and control procedures for all warehouse stocks.
• But later found that sales managers are concerned about Truck stock , and some of them thought it will affect their
customer accounts also
Changing Warehousing Functions
• Centralizing the Warehousing Function:
• Two centralized Warehouses:
• Maintaining the current eight Warehouses:
• Outsourcing the Warehousing functions:
• Advantages of ware housing
• After outsourcing senior managers can concentrate on core activities and though initially it seems to be
expensive as per attachments
Analysis
• Centralized warehousing in Waltham
• Winged Fleet: Waltham warehouse to Dallas customer $ 23.60
• Total $ 23.60
• Decentralized warehousing
• Bulk transport: Waltham to Dallas warehouse $ 4.00
• Winged Fleet: Dallas warehouse to Dallas customer $ 16.60
• Total $ 20.60
• Centralized warehousing in Atlanta with Global
• Bulk transport: Waltham to Atlanta $ 4.00
• Global Logistics: Atlanta to Dallas customer $ 22.25
• Total $ 26.25
The additional facts
 cost of capital is 14%
 Customer orders were spread approximately evenly across all of the delivery regions.
 • The average customer shipment is 9.8 pounds.
 • company used to achieve an inventory urnover ratio close to 6.0.
 • 25% of the 2009 inventory balances was raw materials / work in process, whereas the rest was finished-goods
inventory across the North American and international regions
 Prices are budgeted to stay flat in 2010, and thesales forecast 20% is entirely due to a forecast increase in the
number
Solutions
• A proper centralised inventory management system need to be in place
• It would be ideal to allow warehouse managers to maintaining only sufficient inventories
• The practice of allowing sales people to maintain trunk stock needs to be changed
• Educating sales force on the importance of inventory control
• Out sourcing non core activities
• Implementing Inventory controls and standaridised process and procedures.