ASU Supply Chain and Alternative Inventory Management Strategies Questions Scientific Glass Case Instructions–Maximum of 4 pages Learning Objectives 1.

ASU Supply Chain and Alternative Inventory Management Strategies Questions Scientific Glass Case Instructions–Maximum of 4 pages

Learning Objectives

1. Explore the flexibility as a driver supply chain strategy.

2. Develop and analyze alternative inventory management strategies, and identify the trade offs between managing centralized and decentralized inventory.

3. Understand the relationships among finance, sales, operations and supply chain management and the impact these relationships can have in shaping an inventory management system.

Case Instructions

Scientific Glass Spreadsheet (Student).xlsx

1. (20 Points) Using Exhibit 1, prepare a table to analyze and compare the changes in key financial KPIs between 2008 and 2009, as follows:

Inventory growth rate, inventory turns, and sales growth
Net Working Capital and Days Working Capital
DIO, DSO, DPO, and CCC

2. (20 points) Using the supporting data and analysis from #1, provide a one paragraph analysis of the current situation at SG. Identify the key symptoms and provide clear problem statements to identify the root causes that result in the symptoms and poor performance. Please use the course strategic framework tools, concepts, and Operations Rules for your analysis.

3. (20 points) Using the data in Exhibit 3, what is the optimal inventory level for Griffin 500 ml Beaker given the cost of underage is 48 cents, cost of overage is 2 cents and average bi-weekly demand (1 warehouse) is 433.4 units and standard deviation of bi-weekly demand is 51 units?

4. ( 15 points) If you are consulting Scientific Glass, what strategic actions should management take to fundamentally improve the company’s long-term performance? Each recommendation on actions should improve in more than one dimension. 4210, Revised 01/04/2011
Exhibit 1: Select Income Statement and Balance Sheet Values ($MM)
Income Statement Accounts
Net sales
Expenses
Cost of goods sold
Sales, general and administrative
Research and development
Depreciation
Other expenses
Operating expenses
Interest expense
Taxes
Net earnings
2008
Balance Sheet Accounts
Assets
Cash
Receivables
Inventory
Prepaid expenses
Current assets
Plant property and equipment
Other long term assets
Total long term assets
Total assets
Liabilities & Equity
Short term debt
Accounts payable
Accrued liabilities
Current liabilities
Long term debt
Owners equity
Total capitalization
Total liabilities & equity
2008
Months of inventory
Cost of goods sold / sales
Long term debt / total capital
2009
65.0
86.3
29.0
10.1
13.5
2.9
0.6
56.1
2.4
2.0
4.5
38.9
14.0
17.0
3.1
1.0
74.0
3.0
2.9
6.5
2009
3.2
3.0
4.9
4.8
15.9
28.5
2.7
31.2
47.1
3.4
4.0
8.7
6.1
22.2
32.9
4.3
37.2
59.4
2.7
2.3
0.4
5.4
17.2
24.5
41.7
47.1
3.2
3.0
0.5
6.7
21.7
31.0
52.7
59.4
2.028
0.446
0.412
2.690
0.451
0.412
Exhibit 2: 2009 Sales by product category
Product category
Containers (bottles, flasks)
Measuring devices (beakers, pipettes, cylinders)
Fittings (stoppers, adapters)
Funnels
Handlers (stirrers, forceps, trays)
Tubes
Other
Total
Number of orders
Average number of units per order
Average sales per order
Average weight per order (pounds)
Units sold (000’s)
2,321
1,283
442
185
1,732
4,420
18
10,401
$
119,855
87
720.36
9.8
Average price ($)
15.89
8.98
11.01
12.63
5.89
4.55
23.41
8.30
Sales ($ 000’s)
36,881
11,521
4,866
2,337
10,201
20,111
421
86,339
% of total sales
43%
13%
6%
3%
12%
23%
0%
100%
Exhibit 3: Information on Representative Products
2009 units sold
Percent of all units sold
Annual carrying cost (%)
Unit price
Unit cost
Cost of underage
Cost of overage
Optimal service level
Average bi-weekly demand (8 warehouses)
Standard deviation of bi-weekly demand (8 warehouses)
Average bi-weekly demand (2 warehouses)
Standard deviation of bi-weekly demand (2 warehouses)
Average bi-weekly demand (1 warehouse)
Standard deviation of bi-weekly demand (1 warehouse)
Griffin 500ml Erlenmeyer
Beaker
500ml Flask
11,268
3,389
0.1%
0.03%
14%
14%
$
8.80
$
9.50
$
3.96
$
4.56
$
0.48
$
0.49
$
0.021
$
0.025
95.8%
95.3%
54.2
16.3
21.4
10.9
216.7
65.2
38.3
19.5
433.4
130.3
51.0
26.0
Exhibit 5: Weight and shipping costs for typical products (2009)
Average
Pounds/case Units/case price/case
3.00
12
190.7
0.75
6
53.9
1.88
20
220.2
1.88
12
151.6
0.94
20
117.8
1.25
20
91.0
0.13
1
23.4
Product category
Containers (bottles, flasks)
Measuring devices (beakers, pipettes, cylinders)
Fittings (stoppers, adapters)
Funnels
Handlers (stirrers, forceps, trays)
Tubes
Other
Total
Shipping costs for Global Logistics and Winged Fleet
Global Logistics (3-day rates)
Weight (pounds)
2.5
5
10
20
Southeast
$
6.45
$
10.28
$
16.69
$
27.38
Northeast
$
7.31
$ 11.65
$ 18.91
$ 31.03
Total pounds
shipped in 2009
580,250
160,375
41,438
28,906
81,188
276,250
2,250
1,170,656
Delivery from Atlanta to:
Central
Southwest
$
8.60 $
9.46
$
13.70 $
15.07
$
22.25 $
24.48
$
36.50 $
40.15
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
Across 1 region fee
Across 2 regions fee
Weight fee
$5.00
$12.00
$16.00
$1.16 per pound
Shipping Comparison
Centralized warehousing in Waltham
Winged Fleet: Waltham warehouse to Dallas customer
Total
$
$
23.60
23.60
Decentralized warehousing
Bulk transport: Waltham to Dallas warehouse
Winged Fleet: Dallas warehouse to Dallas customer
Total
$
$
$
4.00
16.60
20.60
Centralized warehousing in Atlanta with Global
Bulk transport: Waltham to Atlanta
Global Logistics: Atlanta to Dallas customer
Total
$
$
$
4.00
22.25
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
Forecast pounds
shipped in 2010
696,300
192,450
49,725
34,688
97,425
331,500
2,700
1,404,788
$
$
$
$
Northwest
9.89
15.76
25.59
41.98
Exhibit 6: Inventory Balance Detail ($MM)
Raw materials / work in process inventory
Finished goods inventory
Manufacturing site
North American warehouses and in transit
Overseas warehouses and in transit
Total finished goods
Total inventory
December 2009
2.18
0.20
4.44
1.90
6.54
8.72
For the exclusive use of A. Alsadah, 2020.
4208
REV: JANUARY 4, 2011
STEVEN C. WHEELWRIGHT
WILLIAM SCHMIDT
Scientific Glass, Inc.: Inventory Management
In January 2010, Ava Beane, the newly hired Manager of Inventory Planning for Scientific Glass
(SG), contemplated the critical nature of her first big project with the company. During her interviews
for the job, several executives had told her very directly that the company’s need for a more effective
way to manage its inventory was urgent. At the time, Beane had felt confident she could address the
problem quickly and meaningfully. Now on the job for several weeks, Beane was gaining a fuller
appreciation of the difficulties of the task.
Until recently, SG had treated inventory management as largely an afterthought. As a fastgrowing organization with annual sales of $86 million, the company historically emphasized the twin
goals of continued sales growth and high customer satisfaction. During the past year, however,
executives at the company had identified a disturbing trend: Inventory balances were increasing
substantially, which tied up extra capital the company needed to fund its growing operations. In
recent years the company exceeded its target debt to total capital ratio of 40%. If this trend persisted,
it could jeopardize SG’s ability to fund a planned expansion into new international markets.
Beane was given four weeks to come up with recommendations on how to make the inventory
plan support the company’s sales and customer-service objectives without requiring a large capital
investment. Faced with such a tight deadline, she hit the ground running on her first day at the
company, interviewing relevant staff and gathering data. Three and a half weeks later, Beane felt that
she had most of the information she needed to develop recommendations. In two days, she was
scheduled to discuss her findings with Eric Gregory, the head of sales, and her new boss, Melissa
Hayes, Chief Operating Officer and the executive owner for this project. Beane turned to her
computer to review the information that she had collected.
________________________________________________________________________________________________________________
HBS Professor Steven C. Wheelwright and William Schmidt prepared this case solely as a basis for class discussion and not as an endorsement, a
source of primary data, or an illustration of effective or ineffective management. The authors thank Patricia Brodkey (HBS MBA 1989) of PMB
Consulting and Greg Herrema (HBS MBA 1998) of Thermo Fisher Scientific for their valuable contributions to the development of this case. This
case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional
references to actual companies in the narration.
Copyright © 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
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For the exclusive use of A. Alsadah, 2020.
4208 | Scientific Glass, Inc.: Inventory Management
Company Background
SG, founded in 1992, was a privately held company that provided specialized glassware for
laboratory and research facilities. A midsize player in this increasingly competitive space, the
company had successfully carved out a niche by focusing on providing durable products, innovative
designs, and superior customer service. (See Exhibit 1 for a summary of SG’s 2008 and 2009
financials.)
The global scientific glassware market had estimated annual sales of over $2 billion:
approximately 40% in North America, 30% in Europe, 20% in the Asia Pacific region, and 10% in the
rest of the world. Annual sales growth for the industry over the past decade ranged from 3% to 5%,
reflecting remarkable resilience to regional and global downturns. SG originally focused most of its
sales efforts on North American markets, but in 2002 the company developed relationships with a
distributor in Germany to serve the European market, and another in Singapore to serve the Asia
Pacific market. Now approximately 20% of the company’s sales came from Europe, 10% from the
Asia Pacific region, and the remaining 70% from the United States and Canada.
Product Information
Like other providers in the market, SG was selling its products to a variety of organizations,
including pharmaceutical companies, biotechnology firms, hospitals, academic and government
research labs, environmental testing facilities, industrial research and development facilities, and
quality-control sites. Unit prices for SG’s products ranged from less than $3 to more than $200, with
most falling between $4 and $20. Although the products were traditionally made of glass, some were
made of plastic or specialty metals, either for durability or to handle specific chemicals. In addition to
manufacturing more than 3,000 different standardized products, the company offered custom
glassblowing services to customers who required specialized solutions. (See Exhibit 2 for a
breakdown of 2009 sales into the major product categories.)
Beane knew that she could not hope to do a thorough inventory analysis on each of SG’s 3,000
standardized products. Instead, she collected detailed information on two products that were
representative of the types of products that SG sold (see Exhibit 3). This information included data on
average bi-weekly demand for the products in each region. The demand for all of SG’s products was
assumed to follow a normal distribution; therefore, Beane needed only the average demand and the
standard deviation of demand in order to fully define the demand distribution. Demand patterns
across each of SG’s sales regions were remarkably similar. As a result, Beane distilled her analysis
down to the assumption that the demand for a product followed the same distribution in each region.
For both products, Beane collected average North American biweekly demand and the standard
deviation of biweekly demand for three different situations. The first situation assumed that
customer demand in each sales region was realized separately and was filled entirely by the
warehouse in that region. This was a good approximation of the current situation at SG, in which
each warehouse responded to the demand in its region independent of all the other warehouses. The
second situation assumed that demand in the East could be pooled and demand in the West could be
pooled. This was a good approximation of a situation in which SG maintained a warehouse in the
East and a warehouse in the West, each of which independently served its half of North America. The
third situation assumed that all demand was pooled. This was a good approximation for a situation
in which SG maintained a single warehouse to serve all of North America, or in which SG’s
warehouses provided integrated service to meet customer demand. (Exhibit 3 summarizes all of this
demand information.)
2
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Scientific Glass, Inc.: Inventory Management | 4208
Competitive Pressures
SG had several formidable competitors in the laboratory glassware industry, including large,
diversified laboratory equipment providers such as Thermo Fisher Scientific and smaller providers
such as Ace Glass. The larger firms often provided a full range of lab equipment and specialized
laboratory glassware. Smaller firms, on the other hand, often offered broad ranges of laboratory
glassware but had limited offerings in other categories of laboratory equipment.
SG enjoyed above-average growth in the industry because it realized early on that the market
would demand more-creative product designs and lower lifecycle costs. The firm was an early
innovator on new features such as external etchings on glassware that changed colors when the
contents were heated above a certain temperature, stacking systems that allowed glassware to be
securely stored using less space, and external coatings that minimized leakage and shattering if the
glassware were dropped or impacted.
Most competitors now offered the same types of features that SG had helped to pioneer, and
staying ahead of the competition was a constant challenge. The last few years brought several new
trends in the market that had an impact on the firm’s strategy and execution, including:
1.
2.
3.
Increased entry of low-end competitors
Relative saturation in the North American and European markets, but relative growth in the
Asia Pacific and Latin American markets
An increase in the number of industrial quality-control laboratories, particularly overseas
Sales and Distribution
SG focused on landing long-term supply contracts with its customers that ranged from 1 to 3
years and often had automatic rollover provisions. The sales cycle ranged from 3 to 6 months,
depending on factors such as the sales representatives’ access to the decision makers, existing
contracts in place by competitors, and the effort required to negotiate prices and minimum
commitment levels. As an enticement to sign long-term supply contracts, the firm regularly agreed to
pay for ground shipping on all orders in excess of $200. As a result, the vast majority of orders
received by SG exceeded that threshold.
Building a Dedicated Domestic Sales Force
To maintain growth, SG had pursued two major initiatives over the past three years. Both
initiatives had been championed by Eric Gregory, who strongly believed that to maintain an edge on
the competition, the company had to provide the “gold standard” for customer responsiveness in the
industry. The first initiative was to build a dedicated sales force in North America. For many years
SG had relied on relationships with independent distributors whose sales representatives visited
prospective accounts to promote SG’s products alongside products from other firms. In 2006, at
Gregory’s urging, the firm concluded that the distributor’s sales representatives focused on selling
products that were already well established and that a dedicated sales force could do a better job of
educating the market about SG’s new product features. Over the next eight months, the company
established its direct sales force along geographical lines with eight territories in the U.S. and Canada.
SG paid each of its 32 salespeople $33,000 plus a tiered commission structure based on the revenue
they generated in each quarter. The company decided to maintain its distribution partners only in
Europe and the Asia Pacific region, primarily due to the difficulty associated with managing an
overseas sales and distribution function.
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4208 | Scientific Glass, Inc.: Inventory Management
Increasing Customer Service Levels
The second major initiative SG undertook was to reduce the amount of time that elapsed between
securing an order and delivering the product. SG initiated this effort in 2008 using a combination of
forecasting demand more accurately, improving customer service levels, and placing more products
closer to large customer concentrations by increasing the number of warehouses operated by the
company. Previously, SG’s service level—or the probability of not stocking out using available
inventory—had been 93%. This was only marginally better than the industry average service level of
92%. The sales leadership believed it was critical for SG to differentiate itself by having the highest
possible service level.
SG followed a two-week order cycle and had a one-week in-transit time on most of its products,
so if a product was not available at a warehouse a customer might have to wait as long as three
weeks for the next shipment to arrive. The sales leadership noted that, on average, SG incurred costs
of 10% of the gross margin for any product a customer ordered that was not available in the
inventory of that region’s warehouse. Costs from these unfilled orders were termed “underage” costs
and potentially included lost revenue from canceled orders, backorder administration, shipment of
product from other warehouses, and customer ill-will. SG also incurred costs for units that were in
stock but not purchased during the demand period. These costs were termed “overage costs,” and SG
estimated that they amounted to approximately 0.54% of the unit cost of any product that was held in
inventory without being sold.
Beane knew that it was possible to calculate the optimal service level for a product by using its
underage (C u ) and overage (C o ) costs in the following formula:
Service Level =
Cu
Cu + Co
Beane also knew that since demand for SG’s products followed normal distributions, she could
calculate the optimal order-up-to level (Q*) for a product using the following formula:
? Cu ?
Q* = F ?1 ?
?
? Cu + Co ? ,
where F–1 denotes the inverse of the cumulative distribution function for the demand of the product
being evaluated.
In 2008 the company put a compensation program in place that provided strong incentives for
manufacturing, operations, and warehousing staff to achieve a 99% customer service level, by far the
best in the industry. In spite of this already very high target, some of the warehouse managers began
ordering even more inventory to provide greater assurance that they would exceed the target service
level for their region. Beane learned that for approximately 10% of SG’s product lines, warehouse
managers maintained even higher inventory levels than required by the 99% service level target.
Adding Warehouses
In addition to increasing customer service levels, SG attempted to improve customer response
times by adding regional warehouses. SG’s largest warehouse was next to its manufacturing plant in
Waltham, Massachusetts. Prior to 2008, the company operated only one other warehouse, located
4
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Scientific Glass, Inc.: Inventory Management | 4208
outside of Phoenix, Arizona. This warehouse was considerably smaller than the Waltham warehouse
and primarily served customers in Arizona and central and southern California. By the end of 2008,
SG brought on line six other leased warehouses, strategically situated near Toronto, Seattle, Denver,
Dallas, Atlanta, and Chicago. Each of the warehouses was dedicated to a sales territory and was sited
so t…
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