NOVA SCHOOL OF BUSINESS AND ECONOMICS

OPERATIONS MANAGEMENT 2011/2012

SCIENTIFIC GLASS
INVENTORY MANAGEMENT CASE STUDY

Work done by:

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OPERATIONS MANAGEMENT 2011/2012

1 INTRODUCTION

2 THE COMPANY

3 THE COMPANY’S PROBLEMS

4 ALTERNATIVES FOR THE PROBLEMS

5 ALTERNATIVES’ EVALUATION

6 RECOMMENDATIONS

7 CONCLUSION

8 APPENDIX

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OPERATIONS MANAGEMENT 2011/2012

1. INTRODUCTION
In January 2010, Beane, the newly hired Manager of Inventory Planning for Scientific Glass
(SG), contemplated the critical nature of her first big project with the company. SG needed for
more effective way to manage its inventory urgently. Until recently, the company has treated
inventory management as largely an afterthought. SG, as a fast-growing organization with
annual sales of $86 million, historically emphasized the twin goals of continued sales growth
and high customer satisfaction. However, during 2009, executives at the company had
identified that the inventory balances were increasing substantially, which tied up extra capital
the company needed to fund its growing operation. In recent years the company exceeds its
target debt to total capital ratio of 40%. If this trend persisted, it could jeopardize SG’s ability
to fund a planned expansion into new international markets.
We’re doing this work in order to help Beane to come up with recommendations on how
to make the inventory plan support the company’s sales and customer-service objectives
without requiring a large capital investment. Firstly, we will identify the problems that the
company is dealing and analyzing them. Secondly, we will mention some alternatives for
dealing with the inventory problems and we will evaluate them. Thirdly, by considering the
trade-offs of these evaluations we will come out with our recommendations to Beane and
consequently to SG. Finally, we will have a brief conclusion to more clearly explain our point of
view.

2. THE COMPANY
Scientific Glass is a midsize company, founded in 1992, in an increasingly competitive
industry, focusing on providing durable products, innovative designs and superior customer
service of glassware. The glassware market estimated annual sales of over $2 billion being
distributed for all over the world, being SG present in North America (US and Canada being the
major percentages of sales), Europe and Asia Pacific. However, in the light of the recent
market trends identified, SG committed to increasing its international footprint in 2010 by
securing a distributor in Latin America and adding a second distributor in both Europe and Asia
Pacific.
SG had several formidable competitors in the laboratory glassware industry, including
large, diversified laboratory equipment providers as well as smaller providers. SG enjoyed
above-average growth in the industry because it realized early on that the market would
demand more-creative product designs and lower lifecycle costs (the firm was an early
innovator on new features). However, most competitors now offered the same types of
features that SG had helped to pioneer, and staying ahead of the competition was a constant
challenge.

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OPERATIONS MANAGEMENT 2011/2012

3. THE COMPANY’S PROBLEMS

The sales and finance teams historically set the inventory control policies at SG, and this
continued after the company expanded the warehouse network. SG’s policies regarding target
inventory levels at warehouses were regularly violated. Shipping costs and inventory holding
costs were steadily rising at the company.
Executives at SG believed that the central inventory records were at best, an
approximation of the actual inventory across all warehouses. In addition to record inaccuracies
caused by damaged, lost, and stolen goods, there were opportunities for human error,
including inaccurate returns processing, improperly tracking of warehouse transfers, and
erroneous order fulfillment. These factors led to a mismatch between computer records and
actual inventory.
In order to gain a better tally of the inventory balances by taking physical counts of
inventory at all warehouses and of the stock in the hands of salespeople, however there
weren’t any improvements in the warehouse processes and the problems continued and
errors gradually crept into the inventory records. Even if the a warehouse manager was able to
locate sufficient amounts of the backordered product, the time required to track it down, plus
the time and cost of the inter-warehouse transfer, absorbed much of the profit from the sale.
Briefly writing and emphasizing the most critical ones, as we mentioned before the
company’s need for a more effective way to manage its inventory was urgent. There is an
identified increasing trend in the balances of inventory levels. For a growing company in a
growing market, this high inventory level, in other words tied up money in the inventory,
creates an obstacle for this company to use this extra capital on other areas, such as expansion
to international markets. The debt to capital ratio exceeded the target level of 40% and with
the same approach this increase of this ratio also jeopardizes the company’s funding
expansion plans to international markets.

4. ALTERNATIVES FOR THE PROBLEMS

When identifying the problems we mentioned that average inventory level was high
enough to jeopardize SG’s future plans. Consequently, the main reasons behind this problem
should be analyzed. First of all, the company has a policy related to 99% fill rate, which is also
open to discussion considering the market average of 92% and that warehouse managers are
usually exceed even this limit and they keep more inventory than necessary. Secondly, SG has
a policy to not exceed 60 day’s supply, which is also open to discussion, once most warehouse
managers are exceeding this upper limit.
Considering all these aspects, it’s found that inventory levels and transshipment costs
should be decreased and at the same time responsiveness to customer should be increased in

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OPERATIONS MANAGEMENT 2011/2012

order to be a market leader. Simultaneously, the approach of the warehouse management

could be changed to a better position. By changing policies related to them as it’s tried in the
past with different ways and failed. In addition, when this inventory level kept under control,
debt to capital ratio will be saddled since extra capital tied up in the inventory, will be available
to be used.
In order to solve the analyzed problems in the previous part, there are two main
aspects to consider:
1st: Number of warehouses and their structure can be changed (centralizing or
decentralizing warehousing functions);
2nd: Related Policies can be changed and of course appropriate ones can be
done simultaneously.

CHANGES IN THE NUMBER OF WAREHOUSES AND THEIR STRUCTURE:

 CONTINUING WITH 8 WAREHOUSES

Clarification: This is the option that makes no change on the network of the
warehouses and all regions will be supplied its warehouse if there is no stock-
out.

 ONE CENTRAL WAREHOUSE (CENTRALIZING)

Clarification: One central warehouse near to manufacturing facility at
Waltham will send all customer orders from one location.

 TWO CENTRALIZED WAREHOUSES

Clarification: There will be added, to the main warehouse at Waltham, a
warehouse at the west (Phoenix) and it will be supplied from Waltham. The
demand of east region will be met from Waltham, the demand of the west
region will be met from Phoenix and the demand of central region will be met
from both warehouses, assuming that they have equal shares on the central
region.
 OUTSOURCING THE WAREHOUSE FUNCTIONS
Clarification: All warehousing actions will be outsourced to Global Logistics
(GL) and distribution will start from main warehouse at Waltham and then GL
will be responsible for the rest of the operations.

POLICY CHANGES PROPOSALS:

 PERIODIC AUDITS
 INCREASE IN REPORTING ACTIVITY LEVELS

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OPERATIONS MANAGEMENT 2011/2012

 STOPPING TRUNK STOCK ACTIVITIES

 … ( FALTA-ME ACABAR ESTA PARTE, PORQUE TENHO QUE IR AGORA
PARA A FAC TRABALHAR EM FINANÇAS!)

To address the inventory problems, the following alternatives are available to SG:
1) Centralized warehousing in Waltham: This would allow SG to pool its inventory in order to meet
demand. However, the customer response times would increase.
2) Decentralized warehousing

To conclude, since available options are studied from different aspects, it must be
mentionedthat the company should choose the alternatives and compare the results
of evaluations according totheir priorities. For instance, evaluation criteria like
inventory levels and transportation costs areconflicting on interests. Company can see
their situation from an exchange curve like in the belowgraph (Graph 1) and make
decisions according to priorities. The curve shows the inventory andtransportation
cost levels as the number of warehouses changes.

While exchange curves like given above can be used for the pairwise comparisons,
weightedscore model can be useful for an overall assesment of options (Lecture 3,
Slide 26). A sample weightedscore model with hypotetical weights and scores is
provided in the Table 5 below, in order to

While assessing the weights for factors, it is considered that average inventory level
and thetransportation costs are the most important costs for the company. Then, the
fill rate follows them andit is assumed that the first interpretation of fill rates
mentioned in the previous part is used by thecompany. Time responsiveness is the
next important factor which is followed by additional costs andbenefits with equal
weights for each. Changes in warehouse management is considered as options
otherthan outsourcing does not provide radical policy changes which could make
warehousing managementbetter. These weights and the scores related to our
previous investigations yield that the outsourcing thewarehousing function to Global
Logistics is the best alternative among all.All of investigations and cost studies
conducted in this case study are to find the most costeffective option in order to

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getting closer to the target debt to capital ratio of the company and providemore
capital to fund expansion into new international markets while maintaining or even
improving thehigh customer satisfaction level.