Business Case of Scientific Glass, Inc: Inventory Management Cost Benefit Analysis

Current Scenario-Do Nothing Scenario

If the company does nothing to respond to the challenge for inventory management, it will continue to operate with the 8 warehouses. This option will have no effect on the network and operations of warehouses. It will lead to the increasing trend of costs of inventory. The effect of this situation  in financial terms is described in Table 1 as shown in Appendix.

It is observed that the sales are expected to rise even if the company does not respond to the problems of inventory management. However, these sales do not incorporate the storage of inventories in the warehouses. For this reason, the inventory turnover rate will be analyzed. Before the problem of inventory management, the company has an inventory turnover ratio of 6% but the challenge of inventory management has resulted in the decrease of inventory turnover as shown in the Appendix as Table 2.


It is expected that if the company would not take any steps to respond to the challenge of inventory management then the cost of inventory will increase as compared to sales.

The Net present value and Internal rate of return with the current scenario is calculated to be $0.33 Million and 0.003364% respectively as referred in the Appendix as Table 3. NPV is positive but IRR reflects a negative signal for the company if it operates with the current pace.

Do the Second Best Project

In order to select the second best project, the centralizing option can be considered for the Scientific Glass Incorporation. The transportation costs for alternatives are estimated for two products namely Griffin and Erlenmeyer because these products are represented as best products among approximately three thousand products of the organization.   It is considered that warehouse to consumer shipments are assumed with average shipment weight of 19.5 pounds and to obtain the average transportation cost, the product’s costs are averaged based on the relative proportion in sales. It is observed in the appendix that if there is one centralized warehouse, then consumer shipments are estimated for rates of Winged Fleet as provided in the appendix. The average total cost for one centralized warehouse for the Scientific Glass is observed to be equal to $12210.16. 

The table in the appendix is also providing that the decrease in number of warehouses cause the decrease in inventory level of the organization under consideration. The total biweekly demand based on one central warehouse is 520.08 for Griffin and 156.36 for Erlenmeyer. The demand of Griffin for Central Region with one central warehouse is 130.02 and for Erlenmeyer are 39.09. It can be observed from the appendix that the demand of Griffin for West Region is 195.03 and the demand for Erlenmeyer in West Region is 58.63. Similarly, the demand of Griffin in East Region is found to be 130.02 and the demand for Erlenmeyer in West Region is 39.09. Considering all these costs of both products within regions, the total cost for Griffin within region is 154.99, across 1 region is 160.825, and across 2 regions is 246.234. On the other hand, the total cost for Erlenmeyer within region is 46.6, across 1 region is 48.35, and across 2 regions is 74.03. It is known that there are 52 total weeks in a year and based on biweekly, the total weeks in a year are 26. Therefore, the total biweekly costs for Griffin are 562.049 and the total biweekly costs of Erlenmeyer are 168.98 words. The total annual costs for one centralized warehouse for Griffin are 14613.274 and for Erlenmeyer are 4393.48.


In comparison to the‘do nothing’ scenario in the previous section of the paper, it is obvious that the inventory trend of both products is intending to decrease in‘do the second best project’. The increasing trend of inventory level for the Scientific Glass in the scenario‘do nothing’ is not reflecting the solution for the organization but probable solution to minimize inventory level for the organization is reflected in the scenario‘do the second best project’. The scenario‘do nothing’ is reflecting that the NPV of the project is approving the acceptance of the project, whereas, IRR is reflecting the rejection decision for the project under this scenario. The IRR and NPV of the‘do nothing scenario’ cannot reflect the cost effectiveness of the project in terms of expansion but it can be said that this alternative cannot solve the issue of inventory management for the Scientific Glass.

On the other hand,‘do the second best project’ is providing the cost effectiveness for the expansion of the business in the context of managing inventory and distribution of products to consumers on international level. It can be said that the comparison of both scenarios for the Scientific Glass provides that the senior management should consider the most cost effective solution in terms of accepting the‘do the second best project’. In other words, it can be said that the‘do the second best project’ is illustrating the centralization of warehouse with having one warehouse with the most cost effective benefits for the organization.

Outsourcing- Do this Project Scenario

In this scenario, the company will outsource all its warehousing operations to the Global Logistics (GL). The distribution of the products will be started from the main warehouse and the rest of the operations will be performed by the Global Logistics Company. The outsourcing will help the company to focus on its sales, carrying out marketing research for changing consumer demands, and increase the line of products. The cost of outsourcing is estimated to be 2276,834 Million annually on the basis of data gathered by the new inventory manager of the company. The annual cost of outsourcing is calculated as shown in the appendix as Table 5.

The bulk shipment costs to Atlanta include the total demand for both products which are taken as sample for analyzing the demand and inventory turnover. The total demand of Griffin and Erlenmeyer are expected to increase by a rate of 20% which resulted in increasing the annual demand for these products. The forecasted demand of Griffin and Erlenmeyer are calculated to be 13521, 6 and 4066, 8 respectively. The cost for bulk shipment is $0.40 per pound. The incorporation of these costs resulted in the total annual delivery cost to be 676,08 for Griffin and 406,68 for Erlenmeyer.


The option of outsourcing incorporates the delivery costs from Atlanta which includes the transportation costs from all the warehouses present in different regions. The regions include southeast region, Northeast region, central region, southwest region and Northwest region. The demand for each region is estimated through the data provided by the Scientific Glass Company separately for the two products that are analyzed for calculating the demand and cost. It is assumed that the five regions are having equal demand for the two products but the related costs and shipment weights are different for each region. The total annual delivery costs for considering the option of outsourcing is estimated to be 1870,835 for Griffin and 1038,337 for Erlenmeyer.  The incorporation of the bulk shipment costs to Atlanta and the delivery costs from Atlanta result in the total annual cost of 2546,915 for griffin and 1445,0175 for Erlenmeyer. The aggregated costs for these two products can be calculated by finding out the relative weight of each product in sales which can be calculated by dividing the related sales revenue of each product with the total sales revenue coming from both the products.  The calculated result for both the products shows the average annual costs which would occur if the Scientific Glass Company goes with the option of outsourcing its warehousing functions.  The average annual cost for incorporating this project is estimated to be $2276,834.

The comparison of the option of outsourcing with that of centralizing warehouse facilities reveals the fact that the cost incurring in outsourcing is lesser than centralization of warehouses. The transportation cost of the Scientific Glass Company is projected to be increased if it centralizes the warehouse facilities because the distribution will required a higher amount of fuel and mileage. On the other hand, the outsourcing of warehouse facilities will lead to saving the costs of managing workforce of sales.  The payments to sales force will be eliminated from the expenses of the company because of the non requirement of sales force to distribute the products among clients and customers. The operating costs of warehouse will also minimize because all the activities related to the products will be performed by the Global Logistics. The cost of replacing worn equipment incurred in case of outsourcing and warehousing is almost same but it is less in amount than the cost of maintaining equipments of 8 warehouses.


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