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,