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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.

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This case study critically analysis the various alternatives for

improving the inventory management system. The proposed
alternatives have been evaluated and a final conclusion has been
drawn. The case analysis has been divided into 3 sections. In the
first section the issues that the company is facing have been
highlighted. In the second section, the issues have been analysed
and finally in the last section the various proposed alternatives have
been discussed thus arriving at a conclusion.

Issues

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The company was facing some serious inventory and financial

issues which was hindering the growth and expansion of the
company. 1) The executives had identified a disturbing trend. The
inventory balances were increasing substantially, which was
blocking the capital required for the growth of the company. 2) The
company has exceeded its target debt to capital ratio of 40%. 3)
The company was focussing on increasing the customer fill rate to
99% and maintain it at the expense of high inventory levels and
thus exhausting the financial resources. 4) The rules with respect to
maximum inventory levels were violated by the warehouse
managers and sales executives, but no strict action was taken in
order to prevent it.

Analysis of the issues

In the year 2008, the company initiated an effort to improve the

customer fill rates by placing more products closer to large
customer concentrations
by increasing the number of warehouses operated by the company.
The fill rate of the company at the time was 93% and the company
aimed to increase it to 99%. However, as a result, the warehouse
managers began ordering more than the requirement in order to
ensure fulfilment of the target for their region. This action increased
the inventory levels to a large extent thus blocking the capital and
increasing the overage costs. The company’s warehouse network
had been expanded in order to expedite the delivery time.

Hence, inventory levels had to be maintained in each of these

warehouses to meet the company’s fill rate expectation. Although
the company’s policy mandated that no warehouse could maintain
more than a 60 day supply, the policy was often violated. Moreover,
the trunk stock allocated to individual sales representatives counted

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against this total. In effect, the employees were not working purely
in the interest of the organization. Rather the warehouse managers
were more concerned how to maintain the high delivery levels of
their own warehouse. And the sales executives did not want to
bring down their trunk stock levels.

Hence, the bigger picture of efficient inventory management and

effective funds utilization while maintaining a high fill rate was being
lost. Hence, it was imperative for the company to modify its policies
of inventory management and be stricter in order to ensure that
they are being adhered to. The company also needs to work upon
strategies to reduce the shipment and delivery costs without
bringing down its fill rate.

Alternative Options

As can be observed, the company never emphasized too much on

reducing the inventory costs until it started facing financial crunch
inhibiting its expansion plans. Prior to that, it was more concerned
with increased sales and customer satisfaction. However, the
executives realized they will neither be able to increase sales nor
maintain customer fill rate without addressing the inventory issues.
Hence, they came up with some new ideas after a lot of
brainstorming. The distribution network had to be modified to make
the inventory management system more effective. This could be
achieved in primarily two ways. Change in the warehouse structure

Change in the existing policies or implementation of new ones

Warehouse Structure

In order to change the warehouse structure the options of

centralization, outsourcing were considered as opposed to the
existing structure of decentralization. Decentralized Structure with 8

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warehouses: No changes would be required and the regional

warehouses would supply their respective territories except in case
of stock outs. Centralization with one warehouse: Centralize the
North American warehousing with one warehouse in Waltham by
closing down the regional warehouses.

In this way, the inventory requirements could be pooled to meet the

demand. Centralization with two warehouses: The demands of the
West and the East could be pooled respectively and supplied from
warehouses in each of these regions. Outsourcing: Outsourcing the
inventory function to Global Logistics who would be responsible for
warehousing, inventory management, and order fulfilment
(including picking, packing and shipping). This would enable the
company employees to focus more on sales and expansion of the
company while ensuring that the inventory management is in able
hands.

Policy Changes

Some policy changes were proposed as an outcome of the

brainstorming session: Sufficient inventories only to meet customer
fill rate of 99% and avoid surplus inventory Discontinuation of trunk
stock maintenance by sales executives Daily reports and weekly
summaries of inventory movement for every warehouse Periodic
physical audits and control procedures for all warehouse stocks

Evaluation of the Alternative Options

The alternative options proposed can be evaluated on the following

grounds: Inventory Levels: The inventory levels to be maintained
should be sufficient to abide by the policy of 99% customer fill rate.
There is no mention of ordering cost, hence that need not be taken
into account while determining the inventory level. Since each of

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the warehouse managers would prefer to keep an extra buffer, the

inventory level increases with the increase in the number of
warehouses. Hence, with respect to this parameter, the lesser the
number of warehouses, the lower is the cost. Hence, Centralization
and Outsourcing can be considered as good options.

Delivery Time: The Company had an efficient delivery system

where the products were ready for shipment within 3 days except in
the case of stock outs. This was applicable for 1 warehouse, 2
warehouses or 8 warehouses. After that, the Winged Fleet ensured
shipment to the client within 3 days at most. However, the new
shipment company being considered Global Logistics offered an
additional facility of 1 day premium delivery apart from the 3 day
regular shipment. This facility could be considered as a
differentiating factor and provide and added advantage to the
company. This option would also include 2 warehouses one in
Waltham and the other in Atlanta, thus ensuring minimum stock
outs.

Operating Costs: The operations manager suggested that the

company would need to spend around $10M to replace the worn
out equipment and produce stock sufficient enough to satisfy the
future sales growth. This $10M can be assumed to be distributed
across the 8 warehouses. Hence, with the decrease in the number
of warehouses, the expected cost would come down. Hence,
centralization or outsourcing would be a better option in this
respect. Moreover, with outsourcing the sales force also need not
be maintained by the company and hence the cost of sales force
will be nil. FillRate: The Company has a policy to maintain 99%
customer fill rate which is much higher than the industry average of
92%.

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SG is trying to achieve this at the cost of blocked working capital,

thus inhibiting the growth and expansion. However, SG can work
towards bringing down the FillRate without compromising on the
customer satisfaction levels. Given the underage and overage cost
as 10% of gross margin and .6 % of unit cost respectively he
FillRate for the two typical products has been calculated for in
house warehousing and outsourcing. From the result it can be
concluded that the FillRate on outsourcing inventory management
to Global Logistics is higher than in-house inventory management.

These figures indicate two things. Firstly, if the company is ready to

lower the fill rate of 99%, the outsourcing fill rate of 96% is higher
than the current structure. This would lead to higher inventory
levels and thus higher costs. On the other hand, if the company
sticks to its 99%, the inventory cost on outsourcing would be lower.
Additionally the company can opt for different fill rates for different
products and thereby reduce the inventory cost for some of its
products.

Shipment cost: The total shipping cost on outsourcing inventory

management to Global Logistics turns out to be $26.25. If the
company went with the current system of decentralization with 8
warehouses, the cost turns out to be $20.60. If SG centralizes
warehousing with one warehouse in Waltham and uses Winged
Fleet as its shipment company, the cost turns out to be $23.60.
From this perspective, GL seems to be a more expensive option
and decentralization seems to be the best option.

Miscellaneous: If the company outsourced its inventory

management to Global Logistics, the company’s senior managers
would be able to focus more on increasing sales, understanding
emerging customer needs, and developing the next generation of

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the firm’s products. Additionally the company need not be

concerned about the warehouse managers’ tendency of
maintaining more than 60 day supply, as the warehouse
management would be under GL. However, the negative side of
outsourcing is that the goods have to be shipped from Waltham to
Atlanta before delivery. As far as the policy changes are concerned,
the sales executives should be allowed to maintain trunk stock as it
might decrease the time responsiveness.

Conclusion

From the above parameters, outsourcing and central warehousing

are favourable options in some cases, where as decentralizing is
favourable in others. With respect to the inventory levels and
operating costs, centralization is a very good alternative. This
includes both internal warehousing and outsourcing. However, if we
look at the delivery time, outsourcing gives an added advantage
with the 1 day premium shipment facility provided by the Global
Logistics. The Fill Rate factor favours outsourcing only in case the
company sticks to the policy of 99%.

The outsourcing to GL, also provides the advantage in quantitative

terms such as additional time for the senior executives to
concentrate on growth and expansion rather than be involved in the
nitty gritties of inventory management. The shipment cost
decreases with the increase in the number of warehouses, i.e. with
decentralization compared to outsourcing or centralization. From
the above points, it can be observed that most of the parameters
are in favour of outsourcing the inventory management to Global
Logistics.

In addition to the above discussed alternative of centralization,

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decentralization and outsourcing, SG can also consider the option

of appointing established distributors with good infrastructure at a
zonal level. This would relieve the company of managing regional
level wareshouses, at the same time reducing the operating costs
of warehouse management. The company would be able to
dedicate additional funds for expansion. The distributors would not
stock additional inventory than required to meet the 99% customer
fill rate, as it would block its own capital. Being a regional player,
the distributors would have better control and knowledge of the
market.

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