Provide an assessment of SG’s current situation (Using exhibit 1 compare inventory growth to sales growth and compare inventory turns too). What are the main culprits for the current situation?
Eric Gregory championed a major initiative within Scientific Glass Inc. over the past three years. Gregory strongly believed that in order to maintain an edge on the competition, the company had to provide the “gold standard” for customer responsiveness. This initiative resulted in SG adding six new warehouses to its North American operation and incentivizing staff to reach a 99% service level target. As a result, SG has encountered significant inventory ...view middle of the document...
3) The annual rental and operation costs of all of the North American warehouses were about 15% of the cost of the warehoused inventory.
4) Overall, the company’s new initiative of adding warehouses has increased expenses as well as inventory. Inventory is up 77.6% from 2008 while sales are only up 32.8%. In addition, inventory turns are down from 13.26 in 2008 to 9.92 in 2009.
5) Profits were being affected by poor inventory tracking. Salespeople regularly asked managers to perform manual inventory checks that took a significant amount of time and in addition to the time and costs of inter-warehouse transfers.
What are the pros and cons of the different options proposed?
Keeping the existing inventory and distribution system while making only modest changes to existing practices and policies most likely won’t solve the underlying problems. The inventory tracking system is antiquated (two separate systems), inefficient, and inaccurate. Inaccurate inventory tracking causes sales to feel they need to keep “Trunk Stock” to protect from “stock-outs” to their best clients. Warehouse staff is also spending a considerable amount of time physically verifying inventory levels for sales. Enforcing warehouse levels and discontinuing trunk stock are good goals but the cause of the problem needs to be addressed before the symptoms will subside. Daily reports of inventory movement and periodic audits are also a result of an inaccurate system. Address the inventory tracking system and many of the issues above will be reduced.
Consolidating several warehouses into a few key locations or a single location has several advantages. The high target of 99% customer fill rate causes warehouse managers to overstock all warehouses, which inherently have a high variability in demand. Reducing the number of warehouses will smooth the demand fluctuation on a given facility and requires less overall idle inventory throughout the organization. An obvious drawback is the time to delivery for a given customer. Fewer warehouse facilities means longer delivery times and fees to certain customers. Other than the cost of the physical inventory, the company has a very low cost to hold extra inventory as compared to the cost of a stock-out.
Outsourcing warehousing to Global Logistics would effectively free Scientific Glass from the warehousing and order fulfillment function, allowing them to focus on their core business. To be competitive in the future SG will likely need to upgrade their inventory system, but outsourcing to Global Logistics SG could forgo the capital outlay for a new system. One drawback to outsourcing is the control over the customer experience. SG has built a reputation for providing superior customer service and innovation. An argument can be made to outsourcing a function they are not good at so they can focus on innovation and design, but at the same time outsourcing could dilute the brand if the partner...