Scientific Glass, Inc.: Inventory Management

Scientific Glass, Inc., a glassware manufacturing company looking to take advantage of growth opportunities within its industry, both domestically and internationally. Before leaping into expansion the company is well aware they need to drastically improve their poor inventory management and controls. In this paper, I will access the company’s key issues and through analysis, I will give meaning to why the key issues require immediate attention and change. Furthermore, I will give recommendations to Scientific Glass, Inc. on initiatives that can be taken to improve their key issues as well as some strategic ideas on how they may want to focus their resources. My analysis and recommendations are based on the information provided in the case study, “Scientific Glass, Inc.: Inventory Management”, written by Steven C. Wheelwright and William Schmidt and concepts from the textbook “Operations Management”, by J. Heizer and B. Render.

Scientific Glass, Inc. (SG) is a specialty scientific glassware company that manufactures and houses their inventory. The company and industry are fast growing; SG’s sales are projected to grow 20% in 2010. The company stands by their “twin goals of continued sales growth and higher customer satisfaction” (Wheelwright, S., Schmidt, W., 2011), and to maintain such a competitive edge, in 2008, SG increased their customer service level target to 99%. To improve customer response time they added six leased warehouses throughout the U.S. and Canada, but without a well-thought-out inventory management system in place, SG soon faced problems with increasing inventory. The company just hired Ava Beane for the position of Manager of Inventory Planning; Beane’s challenge is to implement an inventory control system that is aligned with SG’s “twin goals” (Wheelwright, S., Schmidt, W., 2011). Successful strategy and execution are crucial for the company as they prepare for growth and global expansion.

Issues SG’s key issues: (1) Poor inventory control system and high inventory balances; inventory increased by 78% from 2008 to 2009. (2) An unnecessary number of regional warehouses have become costly and inefficient. (3) Capital needed to invest in new plant equipment in 2010 and for international distribution expansion in Latin America, Europe and the Asia Pacific. Also consider a higher than industry order fulfillment rate of 99%

The first problem identified is the use of two separate computer systems: “one for ordering and inventory tracking and another for manufacturing and warehousing operations” (Wheelwright, S., Schmidt, W., 2011, pg. 5). This misalignment creates miscommunication which ultimately creates inaccuracies in inventory records. Additionally, the company’s ordering system is automated and places orders on a 2-week cycle, when inventory (according to inaccurate records) reaches a certain threshold the system automatically places inaccurate manufacturing orders. Poor inventory controls are costly due to excessive inventory and counts against SG’s service level when they are unable to fulfill an order due to stockout.

Over the year 2008, SG leased six warehouses across North America adding to their two existing warehouses, one located in Waltham, MA and one located in Phoenix, AZ. The additional warehouses were meant to decrease customer response times by moving products closer to the customers. This initiative actually damaged the company by creating cost and time inefficiencies: high inventory holding costs (note: total operating costs increased by 32% from 2008 to 2009), too many variable factors in the order fulfillment process, the need to take physical counts of inventory, and manual inventory checks to ensure product was in stock before orders were placed – all which attributed to absorbing sales profits (Wheelwright, S., Schmidt, W., 2011, pg. 7). It is worth mentioning that before leasing the six additional warehouses SG had invested into the expansion of the Waltham warehouse in preparation for operations growth; to date, Waltham is operating at a fraction of its capacity.

As SG plans for global expansion in 2010, they will require sufficient capital. Distributor network expansion is an approximate $2.25 million investment to add one distributor in Europe, one distributor in the Asia Pacific, and a new distributor in Latin America; each distributor will require approximately $750,000 worth of stocked inventory. In addition, the 20% forecasted sales growth in North America will require SG to replace worn equipment, a capital investment worth $10 million (Wheelwright, S., Schmidt, W., 2011). Although SG is currently over their target 40% capital-to-debt ratio they may consider issuing stock to raise capital. Their current turnover rate is 4.47 (see Index #1), increasing the turnover ratio will assist in raising capital by reducing the cost of goods sold and reducing inventory levels.

Recommendations

It is imperative to reduce inventory. Initiatives to be taken: (1) implement a computer system that consolidates the inventory tracking system with the manufacturing and operations system. (2) Conduct an ABC analysis to classify on-hand inventory, this will help SG focus on inventory policies for high priority products. Good point(3) Improve inventory by implementing a perpetual inventory system as well as cycle counting (Heizer, J. & Render, B., 2014, p. 477-480). The above changes will aid management in enforcing their proposed policy changes: sufficient inventory to meet 99% target service level, daily and weekly reports on inventory activity, and periodic audits. (4) Expand in Europe only in 2010, as sales are booming in the European market, and wait to expand into Latin America and the Asia Pacific until 2011. (5) Centralize warehousing and maximize capacity in Waltham. Analysis of bi-weekly demand (see Index #2) revealed benefits including accurate order forecasting and inventory planning, and decreased customer response times by minimizing lag times and backup orders. (6) Planning for re-centralization to Waltham should begin in 2010 with a completion date by end of 2011. (7) To meet forecasted growth SG should proceed with $10 million dollar investment on new equipment; a meeting with the CFO and COO is in order to analyze the best way to raise capital.

SG primary focus should be on inventory and warehousing and then prepare for 2010 growth by investing in new equipment; expansion plans will need to be secondary. To maintain true to their “twin goals” SG will need to keep their current customers happy and prevent them from fleeing to the competition. The greater international expansion will most certainly follow suit when the company is running at optimal levels. Right now, a competitive edge in inventory management will be the key to SG’s growth and obtain their target 99% service level.