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Evaluation for addressed challenges in inventory management: It will be conducted from mainly five
aspects: transportation costs, average inventory levels, fill rates and finally additional costs and benefits.
Transportation Costs: To conclude, as it is expected, when number of warehouses are decreased
transportation costs are increased as can be seen from the Table below. From the aspect of transportation
costs, GL option has the smallest cost amount.
8 warehouses
2 warehouses
1 warehouses
outsourcing
2706
2530
2516
2301
Average Inventory Levels: As shown in the Table below, as demand aggregates, in other words, number
of warehouse decreases, level of inventory decreases as it is expected. This is because, the greater the
degree of collaboration, the lower the uncertainty (standard deviation of the error or coefficient of
variation) of the demand model (Lecture 9, Slide 6). This implies that the money tied up in the inventory
decreases and this extra capital can be used in other areas, like expansion plans to international markets.
Total Overstock in 8 Warehouses
547.8593913
245.0949909
163.255314
For Outsourcing
No SG Managed Inventory
Fill Rate: Rather than using one fill-rate for over all products of the company, different rates for different
products can help the company in decreasing inventory costs related to, at least, for some of the products.
Owned Warehouse
Outsourcing
Erlenmeyer
Erlenmeyer
Griffin
Griffin
Additional Costs and Benefits: $10 Million can be avoided from Warehouse maintenance expenses if the
warehousing operations are outsourced to Global Logistics.
Implementing Proposed Policy Changes:
Greater enforcement by the warehouse managers of maintaining only sufficient inventories in the
warehouses to meet the companys target fill rate of 99%.
Merits: Targeting 99% fill rate will help the company to avoid 10% underage cost and 0.6% overage
costs. Reinforce market leadership by exceeding the market standard of 92% fill rate.
Risks: Maintaining a higher level of inventories will lead to the overage costs during demand fluctuations.
Discontinuation of the practice of allowing sales people to maintain trunk stock.
Merits: Efficient inventory management.
Risks: Discontinuation of trunk stock will disable the company from short notice deliveries.
Creation of daily reports and weekly summaries on inventory movements for every warehouse
Merits: With the usage of latest inventory management IT systems, daily reports and weekly reports can
be easily generated without any manual interventions. This will also help the company in reducing the
backorder.
Risks: Additional responsibility for the warehouse managers to keep the reports and summaries; however
this can be mitigated by the use of IT systems.
Periodic physical audits and control procedures for all warehouse stocks.
Merits: Demand and supply of the inventories across the warehouses can be easily monitored and
mismatch between computer records at the centralized warehouse and actual inventory can be avoided.
Risks: Without having efficient warehouse processes like the above steps, the physical audits alone will
not lead to any improvements in the long run, as the error will gradually creep into the system.
Changing Warehousing Functions
Centralizing the Warehousing Function: In this option, the company can maintain a centralized
warehouse near the manufacturing site near Waltham and serve the customer orders from all the regions.
Two centralized Warehouses: With two warehouses option, SG can think of pooling the order from east
and west separately by adding one warehouse in west in addition to the current warehouse in Waltham,
which is located in east. The demands in the central part can be pooled from these two warehouses
independently.
Maintaining the current eight Warehouses: With this option of eight warehouses, each warehouse will be
responding to the demand in its region independent of all the other warehouses.
Outsourcing the Warehousing functions: In this option, SG can outsource the distribution function to
Global Logistics (GL), who provides delivery services that included centralized warehousing in Atlanta.
The outsourcing seems to be the most efficient options due to Lowest inventory cost, Negligible
warehousing operation expenses, No SG managed Inventory, Better fill rate at lower cost, Insurance cost
borne by the Global Logistics
Creative Options
Restructuring Order-Fulfillment Steps
SG can think of shipping the inventories to the customer directly from other warehouses in case of
insufficient inventory at the original warehouse and thereby the company can avoid the transfer price
between the warehouses.
Plan ahead
Company should review its strategy in developing markets especially in Asia Pacific and Latin America
given the relative saturation of North American and European markets. SG should explore the possibility
of establishing their own sales offices and increase their dedicated representation in these developing
markets, something which the distributors will not be able to offer due to their vested interests.
Economies of Scale
SG is experiencing an increase in low-end competition and standardization in quality of laboratories
products, the company by outsourcing its non-core activities can concentrate on its main functions and
focus on understanding the market requirements.