Scientific Glass provides particular glassware for a variety of organizations such as pharmaceutical companies, clinics, research labs, quality-control sites and evaluating facilities. As of January 2010, there was a substantial increase in their inventory balances which tangled up the capital essential for further investment necessary for expansion. The debt-to-capital ratio surpassed the target of 40% stopping the company to utilize their capital in the areas. In addition, the delivery costs were growing, competitive stresses were accelerating, and certain market segments in North America and Europe were becoming saturated which underscored the need for capital investment for expanding market opportunities in Latin America and Asia. In addition, widening warehousing network increased the inventory levels along with costs, records complexities and mistakes.
The company employed a new Administrator of Inventory Planning, Ava Beane, to come up with an effective intend to control SGs inventory without requiring a big capital investment. In order to finance procedures in time 2010, SG requires an exterior funding of $53. 8 million (Exhibit1). These expenditures would further limit the business to work with their existing capital in other areas such as research and development and growing to international market segments. To improve customer service levels, SG possessed increased the target customer load rate to 99% and added six more leased ware properties to meet up with the demand more accurately. This led to an increase in the inventory levels as some warehouse managers maintained extra inventory to be able to meet up with the company target fill rate.
Good practices
Maintained persisted sales growth and higher customer satisfaction
Produced creative products with lower life routine costs
Focused on durable products, progressive designs and superior customer services
Reduced time taken between ordering and delivering the products to the customers
Bad practices
Treated inventory management as an afterthought, credited to which inventory imbalances were increasing
The company exceeded its aim for debt to capital ratio of 40%
Incurred both underage and overage costs
High Inventory Problem
Due to increasing in customer support level, SG prepared to add local warehouses in many parts US. SG has the key and the most significant one in Waltham, MA, which is next to manufacturing facility. SG also offers another warehouse that located outside of Phoenix, Az. However, at the end of 2008, SG bought other six warehouses. This means SG has the total 8 warehouses to provide customers. Annual rental and procedure costs for North American warehouses were 15% of the price of the warehoused inventory. However, in 2006, before add more 6 warehouses, SG already made investment to grow the warehouse at Waltham in anticipation of continued expansion, but after these 6 warehouses have been bought, this warehouse can not work full efficiency of its capacity. Another problem of warehouse management is company likely to reach advanced of customer support to 99%, so that warehouse managers keep order inventory ahead before it reach threshold of inventory level to order new one to assure that they'll meet the customer support concentrate on level at 99%. This example causes high inventory levels than required and also high inventory turnover. Furthermore, salespeople were allow having its products up to $10, 000 price from ware house and stored them in trunk stock in their homes and vehicles in order to deliver this inventory on short notice to any customer who was within driving distance. This amount could lead to high finished goods in warehouse and in-transit as shown in show 6. It could lead to absent products in inventory, and lost.
Proposed solutions to inventory problem
In order to solve the inventory issues, there are two main aspects to consider:
Number of warehouses and their composition can be improved;
Related guidelines can be modified and undoubtedly appropriate ones can be done simultaneously.
For changing the number of warehouses, quite simply, centralizing or decentralizing warehousing functions, available options are considered as:
Centralized warehousing in Waltham:
In this option, one central warehouse near to manufacturing facility at Waltham will send all customer requests from one location. Centralize warehousing in Waltham to meet demand in Southeast and Northeast locations using delivery service of Winged Fleet as their rates are cheaper for both of these regions. This might allow SG to pool its inventory to be able to meet demand. However, the customer response times would increase
Decentralized warehousing:
In addition to the key warehouse at Waltham, there would be another warehouse at Dallas which would be supplied from Waltham. This might allow demand to be met for all your regions and stop any stock-outs in one warehouse.
Continuing with 8 warehouses:
This option makes no change on the network of the warehouses and all parts will be offered its warehouse when there is no stock-out occurs.
Two centralized warehouses:
In this option, addition to the main warehouse at Waltham, you will see an additional warehouse at the western, at Phoenix, and it will be provided from Waltham. Demand of east region will be achieved from Waltham, demand of western world region will be achieved from Phoenix and demand of central region will be fulfilled from both warehouses, presuming to have similar stocks on the central region.
Outsourcing the warehousing functions:
In this program, all warehousing activities will be outsourced to Global Logistics (GL) and syndication begins from main warehouse at Waltham and then GL will be in charge from remaining procedures. Outsource warehousing to GL to meet demand in the Central, Southwest and Northwest regions because shipping costs for those parts is cheapest with the GL rates. Outsource warehousing to Global Logistics (GL) that will provide a centralized warehousing in Atlanta. Goods will be carried in mass from Waltham to Atlanta and GL would take responsibility of inventory-control and delivery to the clients. This way SG would not have to endure the warehouse rental charges and could focus on increasing sales and develop newer products to meet customer needs.
Changes in inventory insurance policy:
In addition to these options, Beane should propose the following actions to Eric Gregory and Melissa Hayes
Lower load rates to the industry-average to be able to decrease inventories.
Greater enforcement by managers to avoid keeping excess inventories in the warehouses.
Have regular reviews of inventory and control techniques for all companies in the warehouses.
Evaluations of the proposed solutions
Evaluation of described alternatives will be conducted from mainly five aspects:
Transportation costs,
Average inventory levels,
Time responsiveness,
Fill rates and
Additional costs and benefits
Transportation Costs:
Transportation costs for alternatives are computed for both products, namely Griffin and Erlenmeyer, since they are stated as the best agent for a complete of nearly 3000 products of Scientific Cup. In addition, for every single option, demand for another year calculated considering the 20% increase in sales. When warehouse to customer shipments are believed average shipment weight of 19, 5 pound can be used and to have an average vehicles cost value, both of these products' costs are averaged corresponding to their relative percentage in sales. It also be described that, inter-warehouse transshipments happen only when stock-out occurs so when the number of warehouses are lessening, aftereffect of this costs will be diminished; therefore, it is only considered in the choice where there are 8 warehouses.
For the 1st option, having 8 warehouses and making no change, from Waltham to all or any other 7 warehouses all items are directed by bulk shipment. Inter-warehouse transshipments are calculated by bulk shipment rates and they're considered only when a stock-out occurs, therefore fill up rate is included in these calculations and average total cost found as $2701, 41
For the 2nd option, when there is merely one warehouse, all customer shipments are calculated for rates of Winged Fleet. In this program, average total cost is computed as $12210, 16.
For another option, when two centralized warehouses considered, it is assumed that Waltham will give east region, Phoenix will give will western region and they'll equally provide you with the central region. Average total cost is found as $2332. 07.
For the latter, when warehousing functions are outsourced, presuming the 5 regions of Global Logistics (GL) will have equivalent amount of demand. Total average cost is computed as $2276, 83.
To conclude, as it is expected, when numbers of warehouses are reduced transport costs are increased.
From the aspect of transportation costs, GL option has the smallest cost amount.
Average Inventory Levels:
First of most, it must be chosen which inventory policy that the business should apply.
Begin with the review type; although company monitors the entire inventory exchanges from Waltham warehouse to other warehouses; they think taking physical counts of inventory whatsoever warehouses. Therefore, it is figured company uses periodic inventory review insurance policy.
Secondly, company didn't mention any deadline, therefore the inventory plans should think about infinite time horizon. And finally, though there is a preset cost for shipments from warehouses to customers; there is absolutely no other resolved cost related to vehicles to the warehouses, i. e. no fixed ordering cost. The one order cost is $0. 40 per pound volume shipment cost which is a varying cost with weight. Because of this, all evaluation can be conducted considering critical ratios and the related load rate prices, which is the only option that is remaining and also it is recognized as the most applicable to the problem. Since some of the simultaneous changes can be carried out, considering ceteris paribus principle and when fill rate is retained just as 99% for all those warehouses, we can calculate the average inventory level that must definitely be placed at warehouses.
Weighted-average biweekly inventory levels are found as:
8 warehouses : 98853
2 warehouses : 68034
1 warehouse : 59703
Outsourcing : 59703
When outsourcing option is used, it'll be the same for the company in the sense of retained inventory levels for the one-centralized-warehouse option therefore these are assumed to be similar.
As quantity of warehouse decreases, degree of inventory lowers as it is expected. This is because, "the higher the amount of collaboration, the lower the uncertainty (standard deviation of the mistake or coefficient of variance) of the demand model"
This means that the money tangled up in the inventory cut down sand this extra capital can be utilized in other areas, like expansion plans to international markets
Time Responsiveness:
Delivery system of the company compensates 14 days of shipment cycles including the stock-out situations. In order to be a market innovator, differentiation on this subject matter is also needed and however since this isn't an exact quantitative level, only possible situations could be talked about.
For having one centralized, or two centralized or 8 decentralized warehouse options, each of them include at most 3 days ready to shipment duration and Winged Fleet's delivery time of at most 3 days when there is no stock-out situation and the stock-out probabilities are diminishing with the aggregated demands.
On the other hand, GL has 1-day high quality shipment in addition to 3-day regular shipments. Considering the highly growing market situation and various portion of products, having different delivery times to different products and also to different customers can make this company give attention to the most yielding areas.
Therefore, it could be said that working with GL has the benefit of differentiating customers/requests and, since you will see 2 warehouses, stock-out probability and related durations will be less compared to other choices. And all of these aspects will boost the time responsiveness of the business.
Additional Costs and Benefits:
Quantitative issues to related to options of inventory management
In order to continue with the existing warehouses total of $10M investment is necessary, the assumption is that all of the amount will be equally shared among all warehouses.
Since warehouse operating costs would be the of the full total warehoused inventory, these costs could be straight compared with the annual average inventory levels that are stored in each option
The amount paid to sales pushes will not change when the business has 1, 2 or 8 warehouses since it is assumed that as the number of warehouses decreased, variety of salesperson per warehouse increase and total of 32 will not change. On the other hand, when warehousing is outsourced this amount will not be paid
Qualitative issues to related to options of inventory management
When GL is used for warehousing, SG's older managers can concentrate on increasing sales, marketing issues and expanding next generation of products.
There are some conditions that must be pointed out from the proposed policy changes. Preventing the practice of trunk stock could conclude with a decrease in the time responsiveness and therefore it should not be ceased.
Also as mentioned in the same suggested policy changes, improving thec ontrolling systems will generate a better understanding of the existing situation after the warehousing functions transformed.
Finally, when GL can be used, the approach of warehouse managers to keep more than99% fill rate and 60-day-supply will never be a problem, because all of these operating issues will be responsibility of GL. This will help to company not to keep abnormal amount of inventory and less tied-up profit the inventory which may be used in the areas.
Fill Rate:
Company's fill up rate policy should also be calculated for the several alternatives.
The company changed the earlier load rate insurance policy of 93%, which is merely marginally better that the industry average fill rate of 92%, with 99%. However, there is no sign that the company is applying this policy because it is the better approach that must be taken for the company objectives. Moreover, by using a fill rate higher than optimal level causes higher inventories and more income tied up in the inventory. Therefore, company should lower the rates right down to optimal levels, if there is no other matter related to advertise leadership or customer satisfaction.
To calculate the perfect levels of load rates for all four alternatives we should consider cost items which are added to underage and overage costs. However, the sales leadership mentioned that underage costs are 10% of the gross margin and overage costs are 0. 6% of the machine cost of any product. Also it is assumed that product costs covers all the costs such as warehouse rental and procedure costs, cost of capital and inventory write-offs. For the three alternatives apart from outsourcing, there is no change in expense items, only the multiplied volumes are changed; but the outsourcing alternative gets rid of the 15% warehouse rentals and working costs and 1% inventory write-offs. As a result, overage costs are decreased while underage costs are increased. Producing optimal load rates are as follows:
1, 2, or 8 warehouses Outsourcing
Reference product 1 95. 4% 96. 5%
Reference product 2 94. 9% 96. 1%
These amounts can be interpreted in two different ways:
If company is versatile about the determination of load rate, quite simply if it can lower the fill-rates from 99% to optimum levels, outsourcing option pushes the perfect fill rates to raised levels which results in much larger inventories and more money to link up.
If the business still insists on keeping load rate at 99%, the additional costs that must be paid to keep 99% fill-rate level is reduced in the outsourcing alternative.
Consequently, the better insurance policy related to complete rates be based upon the frame of mind of the company.
Finally, another insurance policy change about fill-rates can be considered. Rather than using one fill-rate for total products of the company, different rates for different products can help the company in reducing inventory costs related to, at least, for a few of the merchandise.
Conclusion
To conclude, since available options are studied from different aspects, it must be brought up that the business should choose the alternatives and compare the results of assessments according with their priorities. For instance, evaluation requirements like inventory levels and vehicles costs are conflicting on hobbies. Company can easily see their situation and make decisions corresponding to priorities.
While examining the weights for factors, it is known as that average inventory level and the travel costs are the most important costs for the business. Then, the fill rate practices them. Time responsiveness is another important factor which is accompanied by additional costs and benefits with equal weights for each.
Changes in warehouse management are believed as options other than outsourcing do not provide radical insurance plan changes which could make warehousing management better. These weights and the scores related to your previous investigations produce that the outsourcing the warehousing function to Global Logistics is the foremost solution among all. Most of investigations and cost studies conducted in cases like this study are to get the most cost effective option in order to getting closer to the target personal debt to capital percentage of the business and provide more capital to fund extension into new international marketplaces while maintaining or even improving the high client satisfaction level
