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Scientific Glass, Inc.: Inventory Management

Executive Summary

Scientific Glass (SG) provides specialized glassware for a variety of organizations such as

pharmaceutical companies, hospitals, research labs, quality-control sites and testing facilities. As of 
January 2010, there was a substantial increase in their inventory balances which tied up the capital
necessary for further investment needed for expansion. The debt-to-capital ratio surpassed the
target of 40% preventing the company to use their capital in other areas. In addition, the shipping
costs were rising, competitive pressures were accelerating, and certain markets in North America
and Europe were becoming saturated which underscored the necessity for capital investment for
expanding market opportunities in Latin America and Asia. Moreover, expanding warehousing
network increased the inventory levels along with costs, documentation complexities and errors.
The company hired a new Manager of Inventory Planning, Ava Beane, to come up with an effective
plan to manage SGs inventory without requiring a large capital investment.

In order to finance operations in year 2010, SG requires an external funding of $53.8 million (Exhibit
1). These expenses would further limit the company to use their existing capital in other areas such
as research and development and expanding to international markets. To improve customer service
levels, SG had increased the target customer fill rate to 99% and added six more leased warehouses
to meet the demand more accurately. This led to an increase in the inventory levels as some
warehouse managers kept extra inventory in order to meet the company target fill rate.

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: In addition to the main warehouse at Waltham, there would be

another warehouse at Dallas which would be supplied from Waltham. This would allow demand to
be met for all the regions and prevent any stock-outs in a single warehouse.
3) Outsource warehousing to Global Logistics (GL) which will provide a centralized warehousing in
Atlanta: Goods will be transported in bulk from Waltham to Atlanta and GL would take responsibility
of inventory-control and delivery to the customers. This way SG would not have to bear the
warehouse rental charges and could focus on increasing sales and develop newer products to meet
customer needs.

Ava Beane should propose the following actions to Eric Gregory and Melissa Hayes:
1) Centralize warehousing in Waltham (option 1) to meet demand in Southeast and Northeast
regions using delivery service of Winged Fleet as their rates are cheaper for these two regions
(Exhibit 2).
2) Outsource warehousing to GL (option 3) to meet demand in the Central, Southwest and
Northwest regions because shipping costs for those regions is cheapest with the GL rates (Exhibit 2).
3) Lower fill rates to the industry-average in order to decrease inventories.
4) Greater enforcement by managers to avoid keeping excess inventories in the warehouses.
5) Have periodic reviews of inventory and control procedures for all stocks in the warehouses.

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Exhibit 1

External Funding Required in Year 2010

Expansion production and machines $ 10,000,000
Inventory for additional distributors $ 1,500,000

Operating expenses $ 88,800,000

Liabilities $ 6,700,000
Total $ 107,000,000
Less current assets $ 22,200,000
Less owners equity $ 31,000,000

Total External Funding required $ 53,800,000

Exhibit 2

Shipping Comparison*

Centralized warehousing in Waltham Southeast Northeast Central Southwest Northwest

Winged Fleet: Waltham warehouse to customer $ 27.62 $ 27.62 $ 34.62 $ 38.62 $ 38.62

Decentralized warehousing Southeast Northeast Central Southwest Northwest

Bulk transport: Waltham to Dallas warehouse - - $ 7.80 $ 7.80 $ 7.80
Winged Fleet: Dallas warehouse to customer $ 27.62 $ 27.62 $ 27.62 $ 34.62 $ 34.62
Total $ 27.62 $ 27.62 $ 35.42 $ 42.42 $ 42.42

Centralized warehousing in Atlanta with GL Southeast Northeast Central Southwest Northwest

Bulk transport: Waltham to Atlanta - - $ 7.80 $ 7.80 $ 7.80

GL: Atlanta to customer - - $ 22.25 $ 24.48 $ 25.59
Total $ 30.05 $ 32.28 $ 33.39

*Based on average customer shipment weight of 19.5 lbs

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Scientific Glass; Inventory Management

Scientific Glass, Inc; Inventory Management

Company Background

Scientific Glass established in 1992. It manufactures specialized glassware for laboratory

usage and research facilities. Especially, middle size target is very high competition, which
focusing on providing durable product, innovative design, and superior customer service.
This forces the company focus on niche market by using information system to enable
specific market focus in order to serve target better than competitors.

In this industry continues growth over the past decade, which ranged from 3% to 5%. For 
Scientific Glass focused of its sales effort in North America for 70% of total sales. Moreover,
after SG developed relationship with distributor in Germany in 2002, it makes SG has 20% of 
total sales come from Europe. Another 10% is come from Asia market, which has distributor 
in Singapore server that market.

The main customers of this industry, like the other providers, SG selling its products to many
organizations such as;

1) Pharmaceutical companies

2) Biotechnology firms

3) Hospitals

4) Academic and government research labs

5) Environmental testing facilities

6) Industrial research and development facilities

7) Quality control sites

The price range of its product is from less than $3 to more than $200, with the average
range is falling in $4 to $20. SG has more than 3,000 different standardized products. Also,
company offers custom glassblowing services to customer who required specialized solution
for its products.

High Inventory Problem

Due to increasing in customer service level, SG planned to add regional warehouses in

many parts US. SG has the main and the largest one in Waltham, MA, which is next to

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manufacturing plant. SG also has another warehouse that located outside of Phoenix,
 Arizona. However, at the end of 2008, SG bought other six warehouses. This means SG has
the total 8 warehouses to serve customers. (Annual rental and operation costs for North
 American warehouses were 15% of the cost of the warehoused inventory.)

1) Waltham, Massachusetts. (Main and the largest)

2) Phoenix, Arizona

3) Toronto, ON, Canada

4) Seattle, WA

5) Denver, CO

6) Dallas, TX

7) Atlanta, GA

8) Chicago, IL

However, in 2006, before add more 6 warehouses, SG already made investment to expand
the warehouse at Waltham in anticipation of continued growth, but after these 6 warehouses
had been bought, this warehouse does not work full efficiency of its capacity.

  Another problem of warehouse management is company expected to reach high level of 
customer service to 99%, so that warehouse managers keep order inventory ahead (before
it reach threshold of inventory level to order new one) to assure that they will meet the
customer service target level at 99%. This situation causes high inventory levels than
required, and also high inventory turnover.

Moreover, salespeople were allow having its products up to $10,000 worth from warehouse
and kept them in trunk stock in their homes and cars in order to deliver this inventory on
short notice to any customer who was within driving distance. This amount could leads to
high finished goods in warehouse and in-transit as shown in exhibit 6. It could lead to
missing products in inventory, and lost.

MIS in Action

1) Reducing high inventory level

Since SG decided to expand the warehouse at Waltham, MA, and bought other 6 warehouse
to support its growth in the later time. It¶s made the main and the largest warehouse does not
work at the full efficiency. I would like proposed to reduce the number of regional

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warehouses down to 2 main warehouses in order to reduce the cost of rental and operating
warehouses, reduce inventory turnover, and easier to control demand between East and
West. Warehouse at Arizona will become a second distribution point in West side and
Waltham will be the main one in East side. Centralization warehouses separately in East and
West are in order to pool demanding in each inventory and serve customer with high service
level in each sides. Each warehouse placed orders from manufacturing facility once per 
week, and it takes five business days to arrived and stocked in destination warehouse. The
shipping to other warehouse uses third-party bulk shipper at $0.40 per pound. And the
delivery to customers, SG uses ground delivery service called Winged Fleet. In table 1
showing the cost analysis in several shipping process. The lowest cost is come from
decentralization, but it will affect the rental and operating warehouses cost, which is about
15% of the cost of the warehoused inventory. The 2 centralizations would be the better and
the best option to maintain high service level with the lowest cost.

Data warehouses normally uses for collect current data and historical data of potential
interest to decision makers throughout the company. It is effective for management reporting
and analysis, which this information provides users with information about the data available
in the warehouse. Thus, to meet all demand in each area, we can use data mining to find the
pattern and relationships in customer behavior. Identification the profitable customers in
different areas would be efficiency way to make assumptions about future conditions to
predict probability a customer will respond to an offer or purchase a specific product. As
shown in figure 2 show sales of major product categories in 2009, it is simple forecasting the
demand in 2010 that containers (bottles and flasks) would be the main portion of sales so
that SG has to prepare the inventories in order to meet the demand in next year.

Moreover, the trunk stock problem that came from salespeople keeping its stock amount up
to $10,000 can be solved by reduce and limit the amount of inventories that they can held. I
believe that to keep some amount of products with salespeople is necessary in order to keep
up the urgent demand, recover missing order, and for sample products to customers.
However, company needs to track all inventories where are they going into the system to
prevent missed order and goods.

| Winged Fleet | Winged Fleet | Global Logistics |

| 2 Centralization | Centralization | Decentralization | Centralization with GL |

Southeast | 23.368 | 23.368 | 20.288 | 20.61 |

Northeast | 16.368 | 16.368 | 16.368 | 18.91 |

Midwest | 23.368 | 23.368 | 20.288 | 26.17 |

Southwest | 16.368 | 27.368 | 20.288 | 28.4 |

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Northwest | 23.368 | 27.368 | 20.288 | 29.51 |

 Average | 20.568 | 23.568 | 19.504 | 24.72 |

Forecast shipment cost in 2010 | 28,893,679.58 | 33,108,043.58 | 27,398,985.15 |

34,726,359.36 |

Main Warehouse at Waltham, Massachusetts

Main Warehouse at Waltham, Massachusetts

Table 1

Figure 1

Figure 1

Second Warehouse at Phoenix, Arizona

Second Warehouse at Phoenix, Arizona

Figure 2

2) Single inventory system

For inventory control system, it should provide a single system, which it¶s easier to collect,
synchronize, and access all data with one single database. However, we have to limit the

accessible data of each level of employees for security and work effectiveness. Furthermore,
the main warehouse is Waltham, Massachusetts will be the center of database to record and
collect all information. Anything comes and goes have to be record in this database, and
using warehouse at Arizona, as another branch to link information and get inventories from
the main one. It would one important factor to help company reduce number of inaccurate
record, such as human errors, inaccurate return processing, and improperly tracking of 
warehouse transfers.

  Another improvement inventory system is that SG needs to implement RFID technology.

From the article, SG still needs to use manually check the stock in warehouse to recheck
and confirm that products are available before customers placed a large order. This would
cause many time consuming and cost that company might lose. Also, SG plans to meet the
high customers service level at 99%. The manager of inventory planning positions, it would
create a great enforcement to maintain only sufficient inventories in their warehouses to
meet that target. RFID will provide effective system that every movement of all inventories
will be recorded to database in real time system. Thus, the inventories recorded can have

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data that up to date and accuracy. With RFID technology, single high efficiency database,
and well management, it would not occur backorder products.

3) Be ready for growth

In North American and European market are relative saturation, but Asia Pacific and Latin
 American markets are has relative growing in every year. However, Europe and Asia Pacific
region do not have its salespeople. Company hired sales representative of distributors
partnership to promote its products alongside products from other firms due to the difficulty
associated with managing an overseas sales and distribution function.

I believe that growth in Latin America, Europe and Asia Pacific would be great potential for 
company to stepping forward. Investment in Asia and Latin America by adding another 
distributors and hiring sales representation of its own, not from distributor partner, would
create significant benefits to the company to expand the market and sales the product more
efficiency.

For Europe, I think it would be not necessary now to invest in second distributor, but it would
be better off to hiring sales representation that directly report to the company, which do not
work for distributor partner. With this changing, it would increase demand, broaden target
area, and sales its product more efficiency.

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