Case Study on Scientific Glass Inc Inventory Management

7/18/2019 Case Study on Scientific Glass Inc Inventory Management

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SCIENTIFICGLASS, INC.:

INVENTORY MANAGEMENT

Canda Demir

Onur Ylma

!ur"u Y##a$


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%anuar& '()(, An$ara


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INTRODUCTION

In this case study, production and operations management (POM) issues of a mid-size company, namedas Scientific Glass Inc., in a highly groing mar!et are studied. "sing the #ac!ground information onpast actions of the company to correct in$entory management and their results, and considering themar!et leadership opportunity, ho in$entory management approach can #e made #etter is e%plained#y e$aluating different alternati$es from different aspects. In the first part, critical POM issues arementioned, folloing that these pro#lems are analyzed. In the third part, alternati$e options are listedand then they are e$aluated. &inally, considering the trade-offs of these e$aluations, a conclusion ismade. 'nd it must #e mentioned that, throughout the case, related points are referenced to the case te%tand lecture notes ith corresponding page and paragraph num#ers.

CRITICAL POM ISSUES

's mentioned in the te%t, there is an identified increasing trend in the #alances of in$entory le$els.(Page , para. ) &or a groing company in a groing mar!et, this high in$entory le$el, in other ordstied up money in the in$entory, creates an o#stacle for this company to use this e%tra capital on otherareas, such as e%pansion to international mar!ets. 'lso, as mentioned, de#t to capital ratio e%ceeded thetarget le$el of *+ and ith the same approach this increase of this ratio also eopardizes thecompanys funding e%pansion plans to international mar!ets. 'lthough, there are many other POMissues are found in the te%t, these mentioned to ere the most critical ones and it is thought that ifthey are sol$ed the other pro#lems ill #e sol$ed spontaneously.

ANALYSIS OF THE CRITICAL POM ISSUES

In the last part, it is mentioned that a$erage in$entory le$el is high enough to eopardize companysfuture plans. /herefore, main reasons #ehind this pro#lem should #e analyzed. &irst of all, company hasa policy related to 00 fill rate, hich is also open to discussion considering the mar!et a$erage of0, and arehouse managers are usually e%ceed e$en this limit and they are !eeping more in$entorythan necessary (Page *, para. 1). Secondly, company has a policy to not to e%ceed 2+ days supply,hich is also open to discussion, and most arehouse managers are e%ceeding this upper limit

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(Page 1, para. 2). 3onsidering all these aspects, it is found that in$entory le$els and transshipment costsshould #e decreased and at the same time responsi$eness to customer should #e increased in order to #ea mar!et leader. 4y doing these, simultaneously, approach of the arehouse management could #echanged to a #etter position #y changing policies related to them as it is tried in the past ith differentays and failed (Page 2, para. 2). In addition, hen this in$entory le$el !ept under control, de#t tocapital ratio ill #e saddled since e%tra capital tied up in the in$entory ill #e a$aila#le to #e used.

IV. ALTERNATIVE OPTIONS FOR PROBLEMS

In order to sol$e the analyzed pro#lems in the pre$ious part, there are actually to main aspects toconsider5 firstly, num#er of arehouses and their structure can #e changed6 secondly, related policiescan #e changed and of course appropriate ones can #e done simultaneously.

&or changing the num#er of arehouses, in other ords, centralizing or decentralizing arehousing

functions, a$aila#le options are considered as5

Continuing with 8 wa!hou"!"# /his option ma!es no change on the netor! of thearehouses andall regions ill #e supplied its arehouse if there is no stoc!-out occurs.

On! $!nta% wa!hou"!# In this option, one central arehouse near to manufacturing facility at 7altham ill send all customer orders from one location.

Two $!nta%i&!' wa!hou"!"# In this option, addition to the main arehouse at 7altham, thereill #ean additional arehouse at the est, at Phoeni%, and it ill #e supplied from 7altham. 8emand of eastregion ill #e met from 7altham, demand of est region ill #e met from Phoeni% and demand of

central region ill #e met from #oth arehouses, assuming to ha$e e9ual shares on the central region.

Out"ou$ing th! wa!hou"ing (un$tion"# In this option, all arehousing actions ill #eoutsourced toGlo#al :ogistics (G:) and distri#ution ill start from main arehouse at

7altham and then G: ill #e responsi#le from rest of the operations.

In addition to these options, there are some policy change proposals hich try to ma!e POM approach#etter, li!e periodic audits and increasing reporting acti$ity le$els, stopping trun! stoc! acti$ities etc.Since these policy changes can #e applied at different arehousing functions these proposals ill #eanalyzed one #y one and their possi#le effects ill #e considered.

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EVALUATION OF ALTERNATIVE OPTIONS

;$aluation of mentioned alternati$es ill #e conducted from mainly fi$e aspects5 transportation costs,a$erage in$entory le$els, time responsi$eness, fill rates and finally additional costs and #enefits.

)*+ Tan",otation Co"t"# /ransportation costs for alternati$es are calculated for the to products,namely Griffin and ;rlenmeyer, since they are mentioned as the #est representati$e for a total of nearly2,=


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8 Warehouses

1 Warehouse

2 Warehouses

Outsourcing

2701,41

12210,16

2332,07

2276,83


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Table 1: Average Total Annual Transportation Costs

Gathered ro! Appendi" Table 1#2#3#4

-*+ A!ag! In!nto/ L!!%"# &irst of all, it must #e decided hich in$entory policy that thecompanyshould apply. 4egin ith the re$ie type6 although firm monitors all the in$entory transfers from 7althamarehouse to other arehouses6 they thin! ta!ing physical counts of in$entory at all arehouses (Page 2,para. 2). /herefore, it is concluded that company uses periodic in$entory re$ie policy. Secondly,company did not mention any due date, therefore the in$entory plans should consider infinite time horizon.'nd lastly, although there e%ists a fi%ed cost for shipments from arehouses to customers6 there is no otherfi%ed cost related to transportation to the arehouses, i.e. no fi%ed ordering cost. /he only order cost is@+.*+ per pound #ul! shipment cost hich is a $aria#le cost ith eight. 's a result, all analysis can #econducted considering critical ratios and the related fill rate $alues, hich is the only option that is left andalso it is considered as the most applica#le to the situation.

Since some of the simultaneous changes can #e done, considering ceteris pari#us principle and hen fillrate is maintained e%actly as 00 for all arehouses, e can calculate the a$erage in$entory le$el thatmust #e !ept at arehouses. 's shon in the 'ppendi% - /a#le 1, for ha$ing , and = arehouses a$eragein$entory le$els are calculated for to representati$e products. 7hen outsourcing option is used, it ill #ethe same for the company in the sense of !ept in$entory le$els for the one-centralized-arehouse optiontherefore they are assumed to #e e9ual. 7eighted-a$erage #iee!ly le$els are found as5

8 Warehouses

2 Warehouses

1 Warehouse

Outsourcing

$88,%3

680,34

%$7,03

%$7,03


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Table 2: &eighted#average bi'ee(l) inventor) levels

Gathered ro! Appendi" # Table %

's shon in the /a#le a#o$e, as demand aggregates, in other ords, num#er of arehouse decreases,le$el of in$entory decreases as it is e%pected. /his is #ecause, Athe greater the degree of colla#oration, theloer the uncertainty (standard de$iation of the error or coefficient of $ariation) of the demand modelB(:ecture 0, Slide 2). /his implies that the money tied up in the in$entory decreases and this e%tra capital

can #e used in other areas, li!e e%pansion plans to international mar!ets.

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0*+ Ti1! R!",on"i!n!""# 8eli$ery system of the company compensates ee!s of shipmentcyclesincluding the stoc!-out situations. In order to #e a mar!et leader, differentiation on this su#ect is alsoneeded and unfortunately since this is not an e%act 9uantitati$e scale, only possi#le situations could #ementioned. &or ha$ing one centralized, or to centralized or = decentralized arehouse options, they all

include at most < days ready to shipment duration (Page 2, para.) and 7inged &leets deli$ery time of atmost < days (Page , ;%hi#it 1) if there is no stoc!-out situation and the stoc!-out pro#a#ilites arediminishing ith the aggregated demands. On the other hand, G: has -day premium shipment in additionto


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Replacing worn

*10+8 - *1,2% +

*10+8 " 2 - *2,% +

*10 +

*10+8 - *1,2% +

equipment cost:


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Warehouse

.nventor) /evel:

.nventor) /evel:

.nventor) /evel:

.nventor) /evel:

%$7,3 " 26 -

680,34 " 26 -

$88,3% " 26 -

%$7,3 " 26 -


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Operating Costs:

1%%2$,8

17688,842%6$7,1

1%%2$,8

Sales Force

32 " *33000


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32 " *33000

32 " *33000

o osts

Payments:

Co!!ision

Co!!ision

Co!!ision


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Table 3: Additional uantitative Co!parisons

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's can #e seen from the /a#le < a#o$e, decreasing num#er of arehouses ill decrease the replacingorn e9uipment costs and since demand aggregates, arehousing operating costs ill decrease also. Itis o#$ious that outsourcing ill relie$e the company from the amount paid to the sales forces.

In addition to these, there are some 9ualitati$e issues that must #e mentioned. &irst of all, hen

G: is used for arehousing, as mentioned in the te%t (Page =, para. ), SGs senior managers ill #ea#le to focus on increasing sales, mar!eting issues and de$eloping ne%t generation of products.Secondly, there are some issues that must #e mentioned from the proposed policy changes. Stoppingthe practice of trun! stoc! could conclude ith a decrease in the time responsi$eness and therefore itshould not #e stopped. /hirdly, also as mentioned in the same proposed policy changes, impro$ing thecontrolling systems ill create a #etter understanding of the current situation after the arehousingfunctions changed. &inally, hen G: is used, the approach of arehouse managers to !eep more than00 fill rate and 2+-day-supply ill not #e a pro#lem, #ecause all of these operating issues ill #eresponsi#ility of G:. /his ill help to company not to !eep e%cessi$e amount of in$entory and lesstied-up money in the in$entory hich can #e used in other areas.

3*+ Fi%% Rat!# 3ompanys fill rate policy should also #e 9uestioned. It is said that companyreplaced theearlier fill rate policy of 0


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1, 2 or 8 Warehouses

Outsourcing

ri!!in

$%45

$6%5

"rlenmeyer$4$5$615

Table 4: pti!al ill#rates or alternatives # Gathered ro! Appendi" Table 6

/hese num#ers can #e interpreted in to different ays5 &irst, if company is fle%i#le a#out the

determination of fill rate, in other ords if it can loer the fill-rates from 00 to optimal le$els,outsourcing option pushes the optimal fill rates to higher le$els hich results in larger in$entories and moremoney to tie up. Second, if the company still insists on !eeping fill rate at 00, the additional costs thatmust #e paid to maintain 00 fill-rate le$el is loered in the outsourcing alternati$e. 3onse9uently, the#etter policy related to fill rates depend on the attitude of the company.

&inally, another policy change a#out fill-rates can #e considered. Eather than using one fill-rate for o$er allproducts of the company, different rates for different products can help the company in decreasing in$entorycosts related to, at least, for some of the products.

VI. CONCLUSION

/o conclude, since a$aila#le options are studied from different aspects, it must #e mentioned that thecompany should choose the alternati$es and compare the results of e$aluations according to their priorities.&or instance, e$aluation criteria li!e in$entory le$els and transportation costs are conflicting on interests.3ompany can see their situation from an e%change cur$e li!e in the #elo graph (Graph ) and ma!edecisions according to priorities. /he cur$e shos the in$entory and transportation cost le$els as thenum#er of arehouses changes.


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Graph 5 ;%change cur$e for in$entory le$el and transportation cost

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7hile e%change cur$es li!e gi$en a#o$e can #e used for the pairise comparisons, eighted score model can#e useful for an o$erall assesment of options (:ecture


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Transportation Costs1324

'&

Average .nventor) /evels

4

2

1

4

1&

Ti!e esponsiveness3214

1(


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ill ate

3

3

3

2

)**itional Costs

(

eplaing &orn 9uip!ent

4

3

2

4

(


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&arehouse perating4324

(

;ales ore


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(

9"tra ti!e o senior !anagers

2

2

2

4

(

Changes in 'arehouse !anage!ent1114

#otal: 1&&


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#O#) SCOR"S:28(2-(1.(

'.&

1: Poor2: Acceptable 3: Good 4: Excellent

Table %: =)potetial &eighted ;ore +odel


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7hile assessing the eights for factors, it is considered that a$erage in$entory le$el and the transportationcosts are the most important costs for the company. /hen, the fill rate follos them and it is assumed that thefirst interpretation of fill rates mentioned in the pre$ious part is used #y the company. /ime responsi$eness is

the ne%t important factor hich is folloed #y additional costs and #enefits ith e9ual eights for each.3hanges in arehouse management is considered as options other than outsourcing does not pro$ide radicalpolicy changes hich could ma!e arehousing management #etter. /hese eights and the scores related to ourpre$ious in$estigations yield that the outsourcing the arehousing function to Glo#al :ogistics is the #estalternati$e among all.

'll of in$estigations and cost studies conducted in this case study are to find the most cost effecti$e option inorder to getting closer to the target de#t to capital ratio of the company and pro$ide more capital to funde%pansion into ne international mar!ets hile maintaining or e$en impro$ing the high customer satisfactionle$el.

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VII. APPENDI4

#a/le 1: Calculating #ransportation Costs !or 8 Warehouses Option

ri!!in"rlenmeyerCommentsTotal >e!and6%,041$,%6Calulated b) 205 inreaseill ate0,010,01. there is no poli) hange about it?ul( ;hip!ent ate0,4

0,4

$nter0Warehouse #ransportations $! stocout occurs3

Total ?i'ee(l) Costs0,032%0,01$6

Total ?i'ee(l) Cost or 8 'h0,26010,1%6

Total Annuall) Costs @16,76414,068

From Waltham to Warehouses

Total A!ount to Carr)4%%,28

136,$2

Total ?i'ee(l) Cost22,76413,6$2

Total Annuall) Costs @2%$1,8643%%,$$2

ill ate " Total >e!and " Cost

ate " &eight

To seven other 'arehouses TotalA!ount to Carr) B &eight B ?ul(


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ate

From Warehouses to Customers )4erage 15,( poun*s shipments /y Winge* Fleet3

Total A!ount to Carr)%20,32

1%6,48

Total ?i'ee(l) Cost$2,123%%,41

i"ed Cost Total >e!and " Cost

ate " &eight

Total Annuall) Costs @323$%,201440,66

Total Annual Costs @1232$$3,831800,72


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elative &eight in ;ales7%,4$524,%15

elated ;ales evenue Total

;ales evenue ro! both

)4erage )nnual Cost2.&1,-

#a/le 2: Calculating #ransportation Costs !or 1 Centrali6e* Warehouse Option

ri!!in

"rlenmeyerComments

Total >e!and @?i'ee(l)%20,081%6,36

>e!and or one 'h region6%,01


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1$,%4%Calulated b) dividing total de!and b) 8>e!and or Central egion130,023$,0$To Toronto and Chiago>e!and or &est egion1$%,03

%8,63To ;eattle, >enver and


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#a/le ': Calculating #ransportation Costs !or 2 Centrali6e* Warehouses Option

ri!!in

"rlenmeyer

Comments

Total >e!and @?i'ee(l)%20,081%6,36

Calulated b) onsidering 205 inrease

>e!and or one 'h region

6%,01

1$,%4%

Calulated b) dividing total de!and b) 8

>e!and or Central egion130,023$,0$

To Toronto and Chiago

>e!and or &est egion

1$%,03

%8,63%

To ;eattle, >enver and


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To Atlanta and +assahusetts


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Total Annual Costs

2%84,%8

1%%4,0$

elative &eight in ;ales7%,%05

24,%05

D @>e!and o &est B &eight EB @% " 1 1$,% 116 D>e!and

o Central B 0,% B &eightE B@12 " 1 1$,% 116

D @>e!and o 9ast B &eight EB @% " 1 1$,% 116 D>e!and o Central B 0,% B &eightEB@12 " 1 1$,% 116

&ests >e!and =al o Centrals >e!and

&eight " A!ount " ?ul( ;hip!ent ate

elated ;ales evenue Total ;ales evenuero! both

)4erage )nnual Cost

2''2,&.7


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#a/le - : Cost Calculation !or Outsourcing the Warehouse

+ul Shipment Costs to )tlanta

ri!!in"rlenmeyer

Comments


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Total >e!and

13%21,6

4066,8

Calulated b) 12 " >e!and o 200$

?ul( ;hip!ent Cost ate0,4

0,4


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Total Annual Costs @1

676,08

406,68

Total >e!and B &eight B ?ul( ;hip!ent Cost

ate


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eli4ery Costs !rom )tlanta

Griin

9rlen!e)er

Total >e!and13%21,6

4066,8


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>e!and or one region

2704,32

813,36

.t is assu!ed ive regions have eual de!and

>e!and o egion B &eight B Average

;outheast egion Costs

28$,327

87,01$1

;hip!ent &eight B elated Cost @ro! 9"hibit

%


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ortheast egion Costs

327,812

1$7,1877

Central egion Costs

38%,712232,0162

;outh'est egion Costs

424,370

2%%,267

orth'est egion Costs443,612266,84%


1870,83%

1038,337


2%46,$1%

144%,017%

elative &eight in ;ales0,7%48$0,24%

elated ;ales evenue Total ;ales evenuero! both

)4erage )nnual Cost 22.7,8'-

10


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#a/le (: Calculating /iweely o4erall in4entory le4els !or options

ri!!in"rlenmeyer

8 &h

2 &h1 &h

+ean @200$%4,2

216,7433,4Fariane @200$21,438,3%1

+ean @20106%,04260,04%20,08Fariane @201030,816

%%,1%273,44+iweely Ranges

/o'er#14,1%7

118,2$$36331,33$2pper @B144,237401,78064

708,8208

verall bi'ee(l) sto( level11%3,8$7803,%6128708,8208

8 &h

2 &h

1 &h

16,3

6%,2

130,410,$1$,%26


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1$,%678,241%6,48

1%,6$6

28,08

37,44

#20,77872

6,0744

60,2%$2%$,8$8721%0,40%62%2,7008

47$,18$76300,81122%2,7008

H@alpha - H@001#2,%7

Relati4e Weight in SalesGriin:

9rlen!e)er:elated ;ales evenue Total ;ales evenue ro!

0,7%4$

0,24%1both


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8 &arehouses

2 &arehouses

1 &arehouse

Weighte* )4erage588,(2778&,''.(5.,&27

$n4entory e4els


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#a/le 7: Calculation o! !ill rates

10208 Warehouse Options

Outsourcing

ri!!in"rlenmeyer

ri!!in"rlenmeyerComment


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nit Cost

3,$64,%6

3,32643,8304

Ta(en ro! 9"hibit 3

nit


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0,03$60,04%6

0

0

51 o the unit ost

Cost o Capital0,%%40,638

0,46%6$60,%36

514 o the unit ost

&arehousing perations

0,%$40,684

0

0

51% o the unit ost


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Gross +argin4,844,$4

%,4736%,66$6

nderage Cost

0,4840,4$4

0,%47360,%667

105 o gross !argin

verage Cost0,02380,0273

0,01$$%0,022$8

065 o unit ost


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Fill Rate

&,5('2&,5-.(

&,57-8&,571&

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Case Study on Scientific Glass Inc Inventory Management

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