What are the problems facing SG in 2010?
Scientific Glass is a provider of specialized glass equipment to a variety of organizations which include research laboratories, pharmaceutical companies, and testing facilities. The company faced inventory management problems in 2010 and it is these problems that are the focus of this write-up. As of January 2010, SG noted a substantial increase in the level of inventories (Wheelwright & Schmidt, 2011). The implications were that the company noted increased levels of tied-up capital. The debt to capital ratio rose beyond the target level of 40% meaning that the organization could not use the capital in other areas. Further, the company’s borrowing capacity was weakening and as a result the corporation could not meet the capital requirements for planned expansion. The high inventory levels also came with high holding costs, the shipping costs were plummeting, and the competitive pressures were accelerating. The inventory management problems transcended into the warehousing processes with increased inventory levels leading to documentation complexities, errors, and carrying costs. The problems required the organization to hire a new manager for inventory planning and it was for this reason hat Ava Beane was hired.
How do SG’s problems illustrate the relationship between the number of warehouses and inventory levels?
Scientific Glass operated 3,000 standardized products and a high number of custom glassblowing services (Wheelwright & Schmidt, 2011). The products were handled in different warehouses and tracking the inventories under each category became a difficult task. In the many warehouses operated by the organization, the levels of inventory may have appeared as low but when aggregated, the inventories resulted in mammoth amounts of inventory. The many warehouses came with high fixed costs whose allocation to the inventories resulted in high handling costs. Inventory tracking was complex considering there were many errors in recording and the optimization of the inventory recording system is considerably difficult. Additionally, the many warehouses complicate the inventory distribution mechanism especially with the concerns of the location of some inventories in relation to the demand of the same in some regions. In other words, some inventories were considerably higher in regions where the demand was low and low where the demand was high hence resulting in distribution problems (Rushton, Croucher & Baker, 2014). Generally, a high number of warehouses is closely related to high levels of inventories even though the inventories for each warehouse may appear to be considerably low. Secondly, there exists a positive relationship between inventory carrying costs and the number of warehouses and thirdly, the distribution problems increase with the number or warehouses (Axsäter, Howard & Marklund, 2013).
How would you evaluate the alternatives that are available to SG in terms of the options being able to solve SG's problems?
Scientific Glass is considering solutions at three levels. In the first level, the organization considers improving the customer service levels above the industry average levels. At the time of consideration, the customer service levels stood at 92%. Scientific Glass must ensure that the service levels are improved above the 93% level at which it currently operates. This will be achieved by differentiating and having the highest possible service level at 99% (Wheelwright & Schmidt, 2011).
The second action towards solving the inventory crisis at Scientific Glass is the improvement of the customer responsiveness of the company firstly by reducing the amount of time between the receiving of an order and the time for the delivery of the product. Improvement of the customer responsiveness works hand in hand with customer satisfaction. Having a direct sales force in the United States and Canada would help in improving its position in the organization, improve customer responsiveness, and deal with the competition. Additionally, this would also help in faster movement of the inventories and reduce the inventory levels. The same case applies to the use of distribution sales representatives in Europe and Asia Pacific.
The decision under consideration involves the expansion of the warehousing capacity by adding 6 leased warehouses to the current two warehouses owned by the organization. The first is located at Waltham and the next in Arizona. The general consideration of this alternative indicates that having 8 warehouses is not a satisfying solution because evidence showed minimal result for the expansion option. The decision will be assessed further in the following sections.
Under the third category is the consideration of the inventory management and control options. Scientific Glass’ solution includes the need to improve the warehousing processes. The solution will be accomplished by the improvement of order fulfillment times, reduction of the customer returns, reduction of the number of times in which the sales team requires to be involved in tracking delayed customer orders, and increase the inventory turns. The warehousing process must be improved through policy changes in recording, documenting, and performing physical audits of the entire inventory periodically or perpetually. It must also involve the elimination of trunk costs.
On the choice of the number of warehouses, there is he consideration of the whether to have one centralized warehouse, two centralized warehouses, or 8 warehouses. The decision requires the following computation of inventory level and economic order quantity for determination.
What specific actions would you recommend to management?
Considering the computation above, the case recommends the recentralization of the warehouse in North America. Having a single warehouse leads to higher shipment costs for the company (Bookbinder & Locke, 2013). However, the overall inventory management costs (total costs) are reduced considerably. The overall level of safety stock is also reduced considerably under the centralized warehouse model and at the same time, the standard deviation of demand is reduced considerably by pooling the inventory handling (Liang, Sethi, Shi & Zhang, 2014). This decision is also supported by the fact that the centralized warehouse enables the company to easily record and track inventory hence better inventory management and control practices.
References
Axsäter, S., Howard, C., & Marklund, J. (2013). A distribution inventory model with transshipments from a support warehouse. Iie Transactions,45(3), 309-322.
Bookbinder, J. H., & Locke, T. D. (2013). Simulation analysis of just‐in‐time distribution. International Journal of Physical Distribution & Materials Management.
Liang, C., Sethi, S. P., Shi, R., & Zhang, J. (2014). Inventory Sharing with Transshipment: Impacts of Demand Distribution Shapes and Setup Costs. Production and Operations Management, 23(10), 1779-1794.
Rushton, A., Croucher, P., & Baker, P. (2014). The handbook of logistics and distribution management: Understanding the supply chain. Kogan Page Publishers.
Wheelwright, S. C., & Schmidt, W. (2011). Scientific Glass Inc.: Inventory management. Harvard Business School
