Scientific Glass Inc.

:
Inventory Management
SUBMITTED BY:-
SAKSHI SHARDA, SUBHASISH DAS, K PARTHA SARADHI, SHUBHAM BOPCHE,
DHARMIK TANDEL, BAISAKHI SINGH ROY, KMD RIAZ
INTRODUCTION
• In the case study of Scientific Glass case, the production,
distribution and inventory management systems of the company
Scientific Glass case have been discussed.
• Scientific Glass Inc., is a mid-sized company which was
growing at a fast pace. The company is trying to resolve its
inventory management issues as it is blocking a lot of working
capital hindering the growth and expansion of the organization.
• This case study critically analysis the various alternatives for
improving the inventory management system.
• Scientific Glass, Inc. (SG) established in 1992 is a midsize player in
specialized glassware industry providing specialized laboratory and
research facilities.
• SG is a fast growing organization with annual sales of $86 million for the
year ending 2009. The companies existing market regions include North
America, Europe, Asia Pacific and Rest of the World.
• The industry that SG operates forecasts a robust annual sales growth of
3%-5%.
• SG manufactures more than 3000 different standardized products
ranging from less than $3 to more than $200 and the company decided
to establish its direct sales force along geographical lines with eight
territories in US and Canada.
• SG also attempted to improve its fill rate and customer response time by
adding warehouses apart from their largest warehouse
• The key issue or the key problem at Scientific Glass Incorporation
is that the management of the company had treated the inventory
management as an afterthought and it resulted in the imbalances
and the total inventory increased.
• The company had also exceeded its target debt to equity ratio of
40% and the management had incurred underage and overage
coats.
• The company wanted to achieve 99% customer service level made
most of the warehouse managers to keep higher inventory levels
than required. The policy of 99% fill rate is a point to be considered
while 92% being the industry standard.
 KEY APPROACHES

The inventory issues can be handled by changing warehousing functions

and the options given in the case are:
•Maintaining the current eight Warehouses: With this option of eight
warehouses, each warehouse will be responding to the demand in its
region independent of all the other warehouses.
•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.
•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.
•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.
 LOGISTICS
COST

INVENTORY WAREHOUSE
COST OPERATING
COST

TRANSPORTATION
COST
 8 warehouses

A Inventory Cost 2009 2010

GB EF GB EF
BI-weekly Demand 54.2 16.3 65.04 19.56
Weekly Demand 27.1 8.15 32.52 9.78
BI-weekly SD 21.4 10.9 25.68 13.08
Weekly SD 15.13208512 7.707463915 18.1585 9.248957
Lead time(L) weeks 1 1 1 1
Periodic time(P) weeks 2 2 2 2
P+L weeks 3 3 3 3
z-value 2.33 2.33 2.33 2.33
Safety Stock(CSL 99%) 61.06822878 31.1048455 73.28187 37.32581
Average demand over 3 weeks 81.3 24.45 97.56 29.34
OUL 142.3682288 55.5548455 170.8419 66.66581
total Safety Stock 488.5458302 248.838764 586.255 298.6065
Cycle stock 216.8 65.2 260.16 78.24
Unit Cost 3.96 4.56 3.96 4.56
Cost of Capital 0.14 0.14 0.14 0.14
Safety Stock cost 270.8498083 158.8586669 325.0198 190.6304
Cycle Stock Cost 120.19392 41.62368 144.2327 49.94842
Total Inventory Cost 391.0437283 200.4823469 469.2525 240.5788
591.5260752 709.8312902
B Transportation Cost
2009 2010
Average weight of one order 9.8 9.8
Forcasted pounds to be shipped 1170656 1404788
Bulk Shipment from Main WH to 7 WH(1) 409729.6 491675.8
cost of shipping one order within range 16.368 16.368
cost of shipping to Customer(2) 1955234.429 2346282.651
Total Transport Cost(1+2) 23,64,964.03 28,37,958.45

C Warehouse Operating Cost

Warehouse Maintaince Cost 1,00,00,000.00
Sales Force Salary 1056000
Total Cost 1,10,56,000.00

Total Logistic Cost(2010) 1,38,94,668.28

 2 warehouses

A Inventory Cost 2009 2010

GB EF GB EF
BI-weekly Demand 216.7 65.2 260.04 78.24
Weekly Demand 108.35 32.6 130.02 39.12
BI-weekly SD 38.3 19.5 45.96 23.4
Weekly SD 27.08218972 13.78858 32.49863 16.5463
Lead time(L) weeks 1 1 1 1
Periodic time(P) weeks 2 2 2 2
P+L weeks 3 3 3 3
z-value 2.33 2.33 2.33 2.33
Safety Stock(CSL 99%) 109.2950076 55.64628 131.154 66.77554
Average demand over 3 weeks 325.05 97.8 390.06 117.36
OUL 434.3450076 153.4463 521.214 184.1355
total Safety Stock 218.5900152 111.2926 262.308 133.5511
Cycle stock 216.7 65.2 260.04 78.24
Unit Cost 3.96 4.56 3.96 4.56
Cost of Capital 0.14 0.14 0.14 0.14
Safety Stock cost 121.1863044 71.04917 145.4236 85.25901
Cycle Stock Cost 120.13848 41.62368 144.1662 49.94842
Total Inventory Cost 241.3247844 112.6729 289.5897 135.2074
353.9976388 424.7971666
B Transportation Cost
2009 2010
Average weight of one order 9.8 9.8
Forcasted pounds to be shipped 1170656 1404788
1/2 of order 585328 702394
Bulk Shipment Cost From Main WH to Seconf WH 234131.2 280957.6
Cost of shipping order within Range 16.368 16.368
Cost of shipping order within Range 1 23.368 23.368
Cost of shipping 1/2 order within range 977617.2147 1173141.326
Cost of shipping 1/2 order within range 1395708.643 1674851.326
total Cost 26,07,457.06 31,28,950.25

C Warehouse Operating Cost

Warehouse Maintaince Cost 25,00,000.00
Sales Force Salary 1056000
Total Cost 35,56,000.00

For 2010,
Total Logistic Cost 66,85,375.05
 Centralized warehouses

A Inventory Cost 2009 2010

GB EF GB EF
BI-weekly Demand 433.4 130.3 520.08 156.36
Weekly Demand 216.7 65.15 260.04 78.18
BI-weekly SD 51 26 61.2 31.2
Weekly SD 36.06244584 18.38477631 43.27494 22.06173
Lead time(L) weeks 1 1 1 1
Periodic time(P) weeks 2 2 2 2
P+L weeks 3 3 3 3
z-value 2.33 2.33 2.33 2.33
Safety Stock(CSL 99%) 145.5364331 74.19504431 174.6437 89.03405
Average demand over 3 weeks 650.1 195.45 780.12 234.54
OUL 795.6364331 269.6450443 954.7637 323.5741
total Safety Stock 145.5364331 74.19504431 174.6437 89.03405
Cycle stock 216.7 65.15 260.04 78.18
Unit Cost 3.96 4.56 3.96 4.56
Cost of Capital 0.14 0.14 0.14 0.14
Safety Stock cost 80.68539849 47.36611629 96.82248 56.83934
Cycle Stock Cost 120.13848 41.59176 144.1662 49.91011
Total Inventory Cost 200.8238785 88.95787629 240.9887 106.7495
289.7817548 347.7381057
 B Transportation Cost
2009 2010
Average weight of one order 9.8 9.8
Forcasted pounds to be shipped 1170656 1404788
1/3 of order 390218.6667 468262.6667
Cost of shipping order within Range 16.368 16.368
Cost of shipping order within Range 1 23.368 23.368
Cost of shipping order within Range 2 27.368 27.368
Cost of shipping 1/3 order within range 651744.8098 782094.2171
Cost of shipping 1/3order within range 1 930472.4288 1116567.55
Cost of shipping 1/3order within range 2 1089745.354 1307695.17
total Cost 26,71,962.59 32,06,356.94

C Warehouse Operating Cost

Warehouse Maintaince Cost 12,50,000.00
Sales Force Salary 1056000
Total Cost 23,06,000.00

Total Logistic Cost 55,12,704.68

 Outsourcing

A Transportation Cost 2009 2010

Average order weight in Pounds 9.8 9.8
Pounds to be shipped 1170656 1404788
each region demand 234131.2 280957.6
Southeast region costs 398739.7682 478487.9943
Northeast region costs 451777.6522 542133.4914
Central region costs 531573.3878 637888.4286
Southwest region costs 584850.1812 701820.6171
Northwest region costs 611369.1233 733643.3657
Total Cost for region wise 2578310.113 3093973.897
Cost for transfering from main WH to Global 468262.4 561915.2
Total Transportation Cost 30,46,572.51 36,55,889.10

B warehouse maintanace cost 12,50,000

Inventory Cost would be similar to centralized one

total Logistic Cost 49,06,237

 Comparisons
Options 8 WH 2 WH Centralized Outsourcing
Transportation Cost 28,37,958.45 31,28,950.00 32,06,357.00 36,55,889.00
Inventory Cost 709.831 424.797 347.738 347.738
Total Logistic Cost 1,38,94,668.00 66,85,375.00 55,12,704.00 49,06,237.00

As, we can see Transportation Cost goes up as we keep on decreasing the number of
warehouses and the inventory cost decreases and also the warehouse maintenance cost.
Moreover, using a fill rate higher than optimal level leads to higher inventories and more money tied
up in the inventory. Therefore, company should lower the rates down to optimal levels, if there is no
other concern related to market leadership or customer satisfaction.
Owned Warehouse Outsourcing
ErlenmeyerGriffi n ErlenmeyerGriffi n
Unit Price 9.5 8.8 9.5 8.8
Unit Cost 4.56 3.96 3.876 3.366
Gross Margin 4.94 4.84 5.624 5.434
Underage Cost 0.494 0.484 0.5624 0.5434
Overage Cost 0.02736 0.02376 0.023256 0.020196

Fill Rate 0.947522 0.953206 0.960291 0.964166

Taking CSL=96% and calculating the cost again

With 96% CSL

Inventory cost 583.651 368.36 310.47
Total Logistic Cost 1,38,94,542.00 66,85,318.00 55,12,667.00
Differnce 126.00 57.00 37.00
Implementing the policy
99% CSL
Advantage:
• Targeting 99% fill rate will help the company to avoid 10% underage
cost and 0.6% overage costs.
• Reinforce market leadership by exceeding the market standard of 92%
fill rate.
• Improve customer satisfaction by reducing the unfilled orders.
Disadvantage:
• Maintaining a higher level of inventories will lead to the overage costs
during demand fluctuations.
Discontinuation of the practice of allowing
sales people to maintain trunk stock.
Advantage:
Efficient inventory management.
Disadvantage:
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.
Creation of daily reports and weekly summaries
on inventory movements for every warehouse
Advantage:
With the usage of latest inventory management IT systems, daily reports
and weekly reports can be easily generated without any manual
interventions. This will also help the company in reducing the backorder.
Maintaining reports and summaries in every warehouse will reduce the
time and cost of inter-warehouse transfer.
Disadvantage:
Additional responsibility for the warehouse managers to keep the reports
and summaries, however this can be mitigated by the use of IT systems.
Periodic physical audits and control procedures for all warehouse
stocks.

Advantage:
Demand and supply of the inventories across the warehouses can be
easily monitored and mismatch between computer records at the
centralized warehouse and actual inventory can be avoided.
Disadvantage:
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.
Conclusion
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
• Insurance cost born 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.
With all order-fulfillment and inventory-control, Global Logistics personnel would
administer functions, and outsourcing seems to be the cost effective option, SG need not
go for the implementation of the proposed policy changes.
Thank You