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Scientific Glass, Inc. (SO), founded in 1992, was a midsized player

in the industry that provided specialized glassware for laboratory
and research facilities. Enjoying annual sales of $86 million for
2009 and an above-average growth In the Industry, SO faced a
constant challenge of competition with both large laboratory
equipment providers and smaller glassware provider. To stay at
leading position in such a highly competitive industry, the company
had established Its own dedicated direct sales force along with the
attempt to increase customer service levels and improve customer
response times by adding additional warehouses.

By the end of 2008, in Dalton to the two original warehouses, SO

had managed to bring on line six more warehouses strategically
spread out over North America. The company had identified a
substantially increasing inventory levels that tied up extra capital
and could Jeopardize the company’s ability to further expand if the
problem persisted. Moreover, the debt to total capital ratio of the
company had exceeded its set target of 40%. There was also a
mismatch in the inventory records that computer records failed to
keep up with changes in actual Inventory.

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However, he critical problem was believed to be the high Inventory

level, which would help solve the other problems spontaneously
once It was solved. Besides, the company’s historically set
inventory control policies were regularly violated, which had further
increased the inventory level and tied up even more capital. To
decrease the current inventory level and set up a more efficient
inventory management system, two main alternatives should be
considered. Firstly, related policies could be revised to alleviate this
inventory problem; secondly, the warehouses could be rearranged
and restructured to address the Inventory Issue.

However, the first proposal of revising polices were found to be

undesirable among sales managers as they believed it would
undermine their influences on the allocation of inventory and their
ability to maintain hard-won customer accounts. Consequently, the
implementation of policy revisions would require more
communication and efforts in order to convince the sales managers.
Additionally, the proposed policy revisions could be employed along
with the warehouse changes, so assessments on different options
of warehouse changes would be more concerned.

In regards to warehouses restructuring, there are four options to be

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considered. Firstly, the existing eight warehouses were retained,

each working independently, and demands were filled entirely by
the correspondent warehouse in that region. Secondly, the main
warehouse in Waltham, Massachusetts was kept along with a
warehouse In the West, eliminating the rest of six warehouses. In
this case, each of the two warehouses Independently served Its
half of North American and took on half of demands In the Central
area.

A third option was to pool all the demands and maintained one
centralized warehouse to serve the whole country. Lastly, SO could
outsource its entire warehousing function to Global Logistics (GEL)
so that GEL would be responsible for the inventory management.
To evaluate the four warehousing options, detailed analysis were
conducted on four main aspects, including transportation costs,
average inventory levels, optimal Till rates Ana toner costs I nee
escalated costs were calculated Tort two products, Griffin and
Erlenmeyer, which were the most representative among G’s
products.

All the average values were weighted according to each products

relative proportion in sales. In addition, the demand for each
product in 2010 was forecast to represent a 0% increase in sales.
Calculations were all tabulated in the Excel file. In calculating the
transportation costs, demand patterns across each of the sales
regions were assumed to follow the same distribution and demands
were assumed to be evenly spread. All goods sent from Waltham to
the rest warehouses through bulk shipment were subjected to a
rate of $0. 40 per pound.

Considering the shipments from warehouses to customers, the

average customer shipment weight of 9. 8 pounds were used to

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estimate the number of orders shipped. Shipment costs between

warehouses were also considered in case of occurrences of
stocking out with a 99% ill rate. For the eight warehouses option,
average annual cost was $3,088. 65; for the two centralized
warehouses option, the cost was $2,055. 28; for the one centralized
warehouse option, the cost was $3,480. 91 and for the outsourcing
option, the cost was $2,678. 61.

In the calculation of average inventory levels, a desired service

level of 99% and a review period of 14 days with a lead time of 5
days were used to calculate the safety stocks and order-up-to-
levels for each product under each circumstance. Then the
amounts of overstock units were obtained by calculating the
differences teen Oils and average demands, and the overstock
inventories were the overstock units multiplied by the unit cost. The
annual average inventory levels were calculated to be $31 ,560. 75
for the eight warehouses option, $14,120. 28 for the two
warehouses option and $9,403. 4 for the one centralized
warehouse option. As for the outsourcing option, the responsibility
of inventory management would fall upon GEL, so that there would
be no inventories for SO. In the calculation of optimal fill rates, 10%
of the gross margin was calculated as the underage cost and 0.
54% of the unit cost was calculated as the overage cost. However,
with the outsourcing option, there were no costs due to loss and no
operation costs. Therefore, using the formula provided, optimal fill
rates were found to be 95. 77% for Griffin and 95. 25% for
Erlenmeyer under the three warehousing circumstances.

For the outsourcing circumstance, optimal fill rates were 96. 82%
for Griffin and 96. 48% for Erlenmeyer. In calculating other related
costs, annual warehouse operation costs, fixed component of

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salespeople’s salaries and worn equipment replacement cost were

considered. The operation costs were calculated as 15% of the
average inventory costs. It was assumed that the investment of
$MM to replace worn equipment was equally shared by each
warehouse. As the result, other costs were $1 1 M for the eight
warehouses option, $3. MM for the two warehouses option, $2. 1 M
for the one centralized warehouse option and $1. MM for the
outsourcing option. In conclusion, based on the evaluation, the
outsourcing option would be the most efficient one to be
implemented. First of all, there would be no SO managed inventory,
which would be the most direct solution to the existing inventory
problem, while it also helped managers to focus on increasing
sales, understanding customer needs and evolving new products.
Secondly, outsourcing the warehousing function would transfer
some of the responsibilities to the Global Logistics resulting in a
lower total cost.

Even though the transportation cost of shipping from Waltham to

Gal’s warehouse In Atlanta was not ten lowest among all ten pitons,
It was negligible comparing to the enormous amount of other costs
less than other options. Additionally, SO would be able to operate at
a better optimal fill rate at a lower cost, which would make this the
most cost effective option. For implementation, by outsourcing its
less important function, SO would be able to concentrate on its core
unction’s and further promote its sales and customer service
quality.

Also, the outsourcing would eventually free up the previously tied-

up inventory resulting in more funds to be reinvested to help
company grow. However, there were concerns of losing track of
inventories and having lower quality of products. To address these

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concerns, a policy revision on building up a more systematic

inventory system and maintaining close communication with GEL
would be a plus on the outsourcing option. It would also be possible
for SO to apply the outsourcing option to its overseas market to
further reduce costs if viable.

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