At the beginning of the year 2010, Scientific Glass Inc. (SG) was enjoying rapid growth, high customer satisfaction and plans of international expansion. However, problems with its inventory management processes had become apparent and the company’s need for a more effective way to manage its inventory was urgent, to say the least. Ava Beane was hired to address this very issue. Beane’s goal was to maintain the company’s service level or “fill rate” of 99% while decreasing “underage” and “overage” costs. In this case write up, I will analyze Beane’s proposal, current alternatives, upper management’s decisions as well my own recommendation on this issue. My goal is to come as close to Beane’s goal as possible, while giving a realistic, affordable alternative to SG’s inventory management’s problem.
Shipping cost and inventory holding costs were steadily rising at SG. Beane discovered that the company incurred costs as high as 10% of the gross margin for products that customer’s ordered but were not available in the warehouses. These costs are called “underage” costs and included lost revenue from cancelled orders and backordered administration. The company also had inventory that were in stock at the warehouses but were not sold during the demand period, these are “underage” costs. In order to address some of these issues, SG added regional warehouses, each of which handled approximately 1/8 of SG’s total customer orders.
This plan attempted to improve customer response times and therefore decrease underage and overage costs because more inventory would be available at the different regions. However, company policies regarding target inventory at the regional warehouses were regularly violated. The company attempted to get a better idea of the inventory balances by taking physical inventory periodically, but without any improvements in the warehouses processes, the problems continued and errors appeared once again in the inventory record.
The first possible solution to SG’s inventory dilemma could be to decrease the service level from 99% to 95%. The service level is the probability of not stocking out using available inventory. SG’s previous service level was 93%. Since the industry’s average service level is 92% SG would still be better than the industry average. Although the sales leadership in the company believes it is critical for SG to differentiate itself by having the highest possible service level, it would be more realistic to still place above-average service level but retain the ability to properly keep track of all inventory. Increasing the service level marginally over time, while bettering the inventory management processes, could be a better option. The increase from 93% to 99% may have been too high of an initial jump and developing new inventory processes around this 99% goal could incur further costs or unreliable solutions. A smaller yet ambitious goal, 95%, will still place SG above industry average and above previous year’s service levels.
A second suggestion would be the discontinuation of the practice allowing salespeople to maintain trunk stock. A problem with this practice is the fact that the inventory that salespeople hold on to cannot be accounted for accurately or in a timely manner. If the salespeople are no longer allowed to carry inventory with them, the error margin for inventory count should decrease. However, sales managers worry that they will have less influence on the sales territories and this policy would undermine their ability to maintain hard-won customer accounts.
I agree with these concerns and understand the sale management’s point of view, nevertheless, the same central inventory computer system used to track inventory could be used by the sales representatives. This will allow them to check the status of their regional warehouse and confirm inventory available during their sales presentations with prospects. Although they would not be able to deliver the products themselves, this is a safer alternative that still allows them to have meaningful conversations with potential clients about the availability of their products and delivery time.
Another possible solution would be to recentralize the North American warehousing function in SG’s main warehouse in MA and close down all, or at least some, of the regional warehouses. This is a good option for many reasons; first of all, this will allow for easier, much faster physical audits and control procedures because inventory location would be narrowed down. Secondly, SG could decrease the cost of shipping between warehouses when one was low on inventory. Nonetheless it still presents some problems.
Beane is not sure how this move may affect the cost of shipping. Since the warehouse is located in MA, orders for customers who are further away may cost more. SG has a “free-shipping” policy for orders over $200.00, but this may not be a high enough threshold for customers who require shipment to place further away. It is important to note that customer orders for SG were spread evenly across the entire delivery region which means that they will have high volumes in the areas were the other regional warehouses are located.
After looking at all the possible solutions I could come up with, as well as the ones presented in the case, I have come up with a combination which I believe to benefit Scientific Glass. The first step is to centralize the inventory management computer system. The system is currently being used to compute commission payments, conduct sales analyses, and update inventory records. Updating the inventory records more frequently into the system will allow sales representatives to access this information in real-time when they are making a sale. When they look for a product on the system, it will let them know if the product is “available” or “out-of-stock” with an available date if it’s not currently in stock.
Using this system more thoroughly will also facilitate the use of SG’s online services. Customer would be able to place orders online and know right away whether the product is available or when it would be available if it’s out of stock. This approach is used very often with retail stores that also allow customers to place orders online. If an item is out-of-stock in a certain size or color, the system will let you know when it will be available. If the date still works for customers, they are able to pay for it ahead of time and wait until the item is available and shipped to them.
The second step is to discontinue the “trunk stock” practice, which allows sales representative to carry inventory with them. As mentioned before, this may present some problems with the sales management team, however, if the inventory management computer system is used properly, sales representatives will still have access to inventory availability electronically, and if they choose to, be able to pick up products that are available in the regional warehouses and deliver them to customers that are in driving distance if they choose to. It may not be as convenient as carrying inventory at hand, but it is safer and more cost-effective for the company.
Finally warehouse supervisors should create weekly reports and summaries on the movement of inventory in and out of their respective warehouses. The first step is to take physical inventory of what’s currently available in the regional warehouse. Each warehouse manager will then use this information to generate the weekly reports based on the orders place for that week. Once the physical inventory’s data is collected, it should be uploaded into the central computer system, so it is current and available for view for other region and corporate office.
The data will then be used to generate the weekly reports and summary which will include information on that week’s number of orders, number of returns and low inventory count. Information sharing among warehouses, managers and sales professionals is crucial for this plan to work. Every time the computer system inventory is updated, it should be made available to all key players, including Beane.
I believe that this integration of information, the reduction of inventory at hand and physical audits will decrease the error margin for Scientific Glass and allow the company to develop a more efficient inventory management process.