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?

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 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	26.0

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