Refer to Scientific glass, Inc.: Inventory Management Case Study analysis

This case is about evaluating inventory options and network options for a scientific glass manufacturer and distributor. The company uses a periodic review inventory control process. For purposes of this assignment, you will work primarily with the two representative products whose characteristics are shown in Exhibit 3. 1)

Your first task is to determine how much (inventory) costs will increase if Scientific Glass chooses to implement (and achieve) a 99% service level vs. the optimal service level that overage and underage costs dictate. To do that, you need to think about: a) The average lot size that will drive each products cycle stock b) The uncertainty as measured by standard deviation of demand over review time and lead time for each product. Note that you have to have safety stock to cover the uncertainty over the combined times. c) Combining inventory costs associated with both cycle stock and safety stock. (Hint: Think back to EOQ, which only deals with cycle stock).

2) Your second task is to compare inventory costs across the various system configurations (central, 2 warehouses, 8 warehouses) and quantify any penalties or savings from one option vs. another. How would y ou evaluate whether the differences are significant or not?

3) Given what you have found out about inventory carrying costs, how would you rate the importance of these carrying costs vs. a) Regional warehousing costs (see bottom of page 12) b) Transportation costs from the regional DCs (Winged Fleet) c) Transportation costs charged by Global Logistics Which of these various costs do you think should drive the decision?

bottom page 12 (scientific glass case)

Notes
Cost for bulk shipments	$0.40	per pound
Aside from the capital cost to carry inventory in Atlanta, SG would not have any operating costs for Atlanta.
Global Logistics rates cover warehousing, insurance and delivery costs.
Regional warehousing costs are 15% of annual inventory in the regional warehouses

Exhibit 3: Information on Representative Products

Griffin 500ml Beaker

Erlenmeyer 500ml Flask

2009 units sold

11,268

3,389

Percent of all units sold

0.1%

0.03%

Annual carrying cost (%)

14%

14%

Unit price

$ 8.80

$ 9.50

Unit cost

$ 3.96

$ 4.56

Cost of underage

$ 0.48

$ 0.49

Cost of overage

$ 0.021

$ 0.025

Optimal service level

95.8%

95.3%

Average bi-weekly demand (8 warehouses)

54.2

16.3

Standard deviation of bi-weekly demand (8 warehouses)

21.4

10.9

Average bi-weekly demand (2 warehouses)

216.7

65.2

Standard deviation of bi-weekly demand (2 warehouses)

38.3

19.5

Average bi-weekly demand (1 warehouse)

433.4

130.3

Standard deviation of bi-weekly demand (1 warehouse)

51.0

26

Exhibit 1: Select Income Statement and Balance Sheet Values ($MM)

Income Statement Accounts

2008

2009

Net sales

65.0

86.3

Expenses

Cost of goods sold

29.0

38.9

Sales, general and administrative

10.1

14.0

Research and development

13.5

17.0

Depreciation

2.9

3.1

Other expenses

0.6

1.0

Operating expenses

56.1

74.0

Interest expense

2.4

3.0

Taxes

2.0

2.9

Net earnings

4.5

6.5

Balance Sheet Accounts

2008

2009

Assets

Cash

3.2

3.4

Receivables

3.0

4.0

Inventory

4.9

8.7

Prepaid expenses

4.8

6.1

Current assets

15.9

22.2

Plant property and equipment

28.5

32.9

Other long term assets

2.7

4.3

Total long term assets

31.2

37.2

Total assets

47.1

59.4

Liabilities & Equity

Short term debt

2.7

3.2

Accounts payable

2.3

3.0

Accrued liabilities

0.4

0.5

Current liabilities

5.4

6.7

Long term debt

17.2

21.7

Owners equity

24.5

31.0

Total capitalization

41.7

52.7

Total liabilities & equity

47.1

59.4

Months of inventory

2.028

2.690

Cost of goods sold / sales

0.446

0.451

Long term debt / total capital

0.412

0.412

Exhibit 2: 2009 Sales by product category

Product category

Units sold (000's)

Average price ($)

Sales ($ 000's)

% of total sales

Containers (bottles, flasks)

2,321

15.89

36,881

43%

Measuring devices (beakers, pipettes, cylinders)

1,283

8.98

11,521

13%

Fittings (stoppers, adapters)

442

11.01

4,866

6%

Funnels

185

12.63

2,337

3%

Handlers (stirrers, forceps, trays)

1,732

5.89

10,201

12%

Tubes

4,420

4.55

20,111

23%

Other

18

23.41

421

0%

Total

10,401

8.30

86,339

100%

Number of orders

119,855

Average number of units per order

87

Average sales per order

$ 720.36

Average weight per order (pounds)

9.8

Exhibit 5: Weight and shipping costs for typical products (2009)

Product category

Pounds/case

Units/case

Average price/case

Total pounds shipped in 2009

Forecast pounds shipped in 2010

Containers (bottles, flasks)

3.00

12

190.7

580,250

696,300

Measuring devices (beakers, pipettes, cylinders)

0.75

6

53.9

160,375

192,450

Fittings (stoppers, adapters)

1.88

20

220.2

41,438

49,725

Funnels

1.88

12

151.6

28,906

34,688

Handlers (stirrers, forceps, trays)

0.94

20

117.8

81,188

97,425

Tubes

1.25

20

91.0

276,250

331,500

Other

0.13

1

23.4

2,250

2,700

Total

1,170,656

1,404,788

Shipping costs for Global Logistics and Winged Fleet

Global Logistics (3-day rates)

Delivery from Atlanta to:

Weight (pounds)

Southeast

Northeast

Central

Southwest

Northwest

2.5

$ 6.45

$ 7.31

$ 8.60

$ 9.46

$ 9.89

5

$ 10.28

$ 11.65

$ 13.70

$ 15.07

$ 15.76

10

$ 16.69

$ 18.91

$ 22.25

$ 24.48

$ 25.59

20

$ 27.38

$ 31.03

$ 36.50

$ 40.15

$ 41.98

Winged Fleet

3-day rates are calculated using region, fixed fee and weight fees

The regions are West (equivalent to Northwest and Southwest regions for Global Logistics),

Central, and East (equivalent to Northeast and Southeast regions for Global Logistics)

Within region fee

$5.00

Across 1 region fee

$12.00

Across 2 regions fee

$16.00

Weight fee

$1.16

per pound

Shipping Comparison

Centralized warehousing in Waltham

Winged Fleet: Waltham warehouse to Dallas customer

$ 23.60

Total

$ 23.60

Decentralized warehousing

Bulk transport: Waltham to Dallas warehouse

$ 4.00

Winged Fleet: Dallas warehouse to Dallas customer

$ 16.60

Total

$ 20.60

Centralized warehousing in Atlanta with Global

Bulk transport: Waltham to Atlanta

$ 4.00

Global Logistics: Atlanta to Dallas customer

$ 22.25

Total

$ 26.25

Notes

Cost for bulk shipments

$0.40

per pound

Aside from the capital cost to carry inventory in Atlanta, SG would not have any operating costs for Atlanta.

Global Logistics rates cover warehousing, insurance and delivery costs.

Regional warehousing costs are 15% of annual inventory in the regional warehouses

Exhibit 6: Inventory Balance Detail ($MM)
	December 2009
Raw materials / work in process inventory	2.18
Finished goods inventory
Manufacturing site	0.20
North American warehouses and in transit	4.44
Overseas warehouses and in transit	1.90
Total finished goods	6.54
Total inventory	8.72
Inventory Turnover	6
Annual Rental and Operational Cost compared to Inventory	15%