Steel Works, Inc.
OM 783
Supply Chain Strategy and
Analysis
Background of Steel Works, Inc.
• Annual sales of $400 Million?
– Can this be possible given information in case?
– Conflicting data? What do we do about it?
• 5 Locations
• Custom division
– Develop products for single customer
• Specialty division
– Sell custom products to other companies at higher
price
Inventory
What is the objective?
• Stay in business!
– Grow business?
– Improve customer satisfaction? How?
• Minimize inventory cost
– What are components of cost?
– How measured?
• Provide high level of customer service
– How high?
– How measured?
Consultant Recommendations
1. Discontinue products that have low sales.
2. Use statistical forecasting to predict demand.
3. Reduce number of warehouses.
Staff Reaction:
Won’t work! Why?
What do data in case tell us?
• Exhibit 2: 80% of products have high volatility?
– Maybe, but …
LABEL
DURABEND R10
DURABEND R12
DURABEND R15
DURAFLEX R10
DURAFLEX R12
DURAFLEX R15
DURAFLEX R23
MEAN
15.583
1008.000
2463.583
97.250
18.583
54.833
35.583
STD. DEV.
13.187
255.917
494.209
92.524
11.429
80.054
45.862
• What about Exhibit 1?
– 5 large customers (> $25 mill)
– 107 small customers (< $1 mill)
– Is this a potential problem?
C.V.
0.846
0.254
0.201
0.951
0.615
1.460
1.289
% of Sales
0.4%
27.3%
66.7%
2.6%
0.5%
1.5%
1.0%
What is proper model for this scenario?
• Are we in a continuous review or a periodic
review inventory setting?
– Why? How do we know?
• What are proper parameters for model?
– Why?
– How measure in reality?
• Can we validate our choice of model and
assumptions?
– How?
• Look at production batch sizes given in case
How to analyze case?
• Model suggestions?
Assume we use Periodic Review with r = 1 month and L = 1
week
r
E[ Inventory] 
 z r  L
2
Calculate expected inventory and compare to Steel Works,
Inc. actual inventory.
– What do we find?
Recommendations?
• Why do divisions operate separately?
– Any economies to be gained by combining?
• How can Steel Works better manage their
customer relationship process?
• How can Steel Works make sure that they are
continuing to use right model, right parameters,
etc.?
• Should we adjust production parameters by
product? How?
Questionable Assumptions?
• How confident are you that demand is normally
distributed?
– How can you test?
• Are data accurate?
– How can you test?