Scientific Glass, Inc.: Inventory Management Case Solution & Answer

Scientific Glass, Inc.: Inventory Management Case Solution 

Introduction and Background

Scientific Glass Incorporation (SG) was founded in 1992, which is a private limited company with specialty in providing glassware for research-facilities and laboratories. It is the fastest growing company-which has been able to generate the revenue-of $ 2 billion globally through its  3,000 standardized products(Schmidt, 2010). The company also offers customized glassblowing services to those customer who need specialized solutions. The following chart shows the percentage of sales of SG incorporation from all over the world.

The company’s growth, over the past few years, has been attributed to the fact that it is a privately held company that serves-research facilities and laboratories with specialized glassware. In 2010, the company added a dedicated domestic sales force, which will impact its inventory’s need. The company also announced that it has planned to increase its customer responsiveness and reduce its inventory fill rate, which will oblige the company to increase-its warehouse capacity and outsource fulfillment services.

Despite its strong growth, the company’s inventory management is inconsistent. It has only paid attention to its inventory management when needed. Consequently, it didn’t have money to fund its expansion. Moreover, the company’s inventory levels were highly volatile, and its customers were losing money. As a result, the company has been facing a tough competitive environment. This is why Ava Beane should consider taking action.

In 2010, the company faced an inventory problem. This problem was caused by the lack of attention given to the inventory management. It had to pay more attention to growing sales to be able to expand its operations, but the management was more concerned about the inventory management problems and their profits. They had hired Ava Beane to fix these problems. The inventory management problems made the company’s stock price go up, but it suffered as serious loss not in terms of financials but also in terms of customers’ number which it previously had.

In 2010, the company’s inventory level had increased at an alarming rate. The company had been struggling to increase sales, and its inventory was rising. Its current cash flow and debt levels were also extremely high. The firm had to increase its sales to stay afloat. Its management was also focusing on maximizing profit margins, which was one of the key reasons why it started having difficulties with its inventory.

Problems Facing by SG

There are two main problems which the Scientific Glass Incorporation is facing:

Increasing Inventory Balances

The main problem which Scientific Glass Incorporation is facing is the increasing inventory balance and it wants to reduce it without affecting its current 99% of services. In order to do it successfully, the company has hireda Manager of Inventory Planning: Ava Beane who is given the responsibility of coming up with plans and strategies to reduce the level of inventory balances.

The Scientific Glass stems from the fact that senior management focuses on increasing the sales but in the process; the team has turned completely oblivious towards inventory management, which has resulted in a high debt-to-capital ratio. This indicates that the company might not be able to use debt financing to have further expansion. The company is also facing an intense competition in the market, which is expected to stifle the growth in the next few years.

The company’s inventory levels hada significant increase in the first half of 2010 due to the lack of attention from its senior management team. The problems mainly stemmed from an increased debt-to-capital ratio. Without debt financing, Scientific Glass will not be able to continue its expansion plan. In addition to this, the competitive environment is exerting immense pressure on the company’s sales and profits. As a result, Ava Beane, the CEO of the company, should propose actions to Melissa Hayes and Eric Gregory to address these issues.

Extra Capital Needed

SG Company has also planned for expansion in 2010, and has foretasted to grow its sales from 20%, for which an additional $ 10 million is required.Scientific Glass is faced with many problems with its inventory, as it has a high inventory level. The company’s management is not paying enough attention to the inventory management and has instead focused extremely on just sales and profit, which has resulted in the company having an excessive level of inventory. As a result, the company’s debt-to-capital ratio has become over 40 percent and it might not be able to use debt financing in order to have further expansion. These issues are affecting the company’s ability to compete in a very competitive environment-and has posed severe risks to the company in regards of facing problem sin getting the extra capital to be used in its expansion.

External Funding

Scientific Glass Incorporation has maintained its targeted capital structure which is approximately 40% debt and 60% Equity. The operation manager of the company has informed that an additional $ 10 million is required to finance the investment to change the damaged equipment and the operation of 2010. It is also required for providing sufficient amount to meet the company’s future investment requirements.

Scientific Glass Incorporation is a private limited company and because it maintains its debt to equity ratio which is 40%, it must have used the residual payout policy to finance the capital expenditure. Companies use the residual payout policy to payout the dividend to their stakeholders and to maintain their capital expenditure. Net income is also distributed according to the debt to equity ratio.

Scientific Glass Incorporation’s net income was $ 6.5 million in 2009, and using the residual payout policy to calculate; the additional capital required is 60% of the net income, which is $ 3.82 million transferred to equity and the rest 40%, i.e. $ 2.68 million, will be used to payout the long term debts. After the distribution of net income, the equity part from the net income: $ 3.82 million, is deducted from the additional required investment to meet the overall forecasted requirements of 2010, which is $ 10 million, resulting in the actual capital expenditure amount or working capital needed for the operations of 2010, i.e. $ 6.18 million. (See Appendix 1)

SG Problems Associated With the Number of Warehouses and Inventory Levels

The warehouse function is one of the most important supporting functions in an institution or company. It plans and organizes storage and maintenance of materials to provide products to customers and other key departments. Dealing with inventory requires a high degree of efficiency and accuracy. However, the amount of space required for storage and handling varies significantly between companies and industries. It is also crucial to manage stock levels to avoid loss incurrences. Following are some of the problems associated with the number of warehouses and their inventory levels:

Increasing the number of warehouses and staff is not a reliable solution to the problem of rising inventory levels. It is not feasible for the company to increase its number of warehouses and staff without improving the productivity of each warehouse. The reason why it is not effective is that warehouses must be staffed properly. An inefficient inventory management system will not result in lower inventory levels. Instead, it will cause more losses.

In order to solve these challenges, there are a variety of inventory management systems. A typical warehouse management system collects inventory data using a handheld or fixed device and sends it to a software solution. The software system then catalogues inventory and tracks it. This process is effective for managing inventory and reducing costs. APS Fulfillment, Inc. has an inventory management system that helps it to do its job effectively.

In addition to increasing costs, a warehouse can become overcrowded and suffer from fluctuations in demand. In larger warehouses, multiple warehouses may have several hundred employees, and each warehouse can be overcrowded. The extra workers in a large company can also make the environment unhealthy for both employees and customers. This is where a small business must keep its inventory. If it is unable to control the levels of inventory, it will suffer from high-cost situations.

Available Alternatives and Evaluations

There are three alternatives available for SG, which are:

  1. One consolidated Warehouse.
  2. Outsourcing Warehouses.
  3. Use of Optimal Service Level.
  4. Alternate 1 – One Consolidated Warehouses

    The Scientific Glass Incorporation is considering new plans from which one consolidated warehouse is the top priority they are looking forward to shut down some or all the warehouses other than North American warehousing which is functioning in Walt-ham and the customers’ orders from the North America would be fulfilled from the few or one located warehouse in Walt-ham. But the total transportation cost combined from all the three locations which are Central Region, West Region, and East Region is $ 887,814 for both the products i.e. “Griffin 500ml Beaker” and “Erlenmeyer 500ml Flask” is huge and the level of inventory problem may also arrive in adopting this alternate. (See Appendix 2)

    Advantages of One Consolidated Warehouse

    A single consolidated warehouse can provide efficient supply chain management. Moreover, the centralized warehouse can accommodate both national and international customers. Using one consolidated warehouse will help the company to improve its sales performance. It can improve its profitability and reduce costs. The centralized warehouse will be able to handle demand of goods from both regional locations. A single consolidated warehouse is also an asset in a thriving company. If they are a SG supplier, one consolidated warehouse will be invaluable for the business………………

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