Zhou Bicycle Company, located in Seattle, is a wholesale distributor of bicycles
ID: 386397 • Letter: Z
Question
Zhou Bicycle Company, located in Seattle, is a wholesale distributor of bicycles and bicycle parts. Formed in 1981 by University of Washington Professor Yong-Pia Zhou,the firm’s primary retail outlets are located within a 400-mile radius of the distribution center. These retail outlets receive the order from ZBC with 2 days after notifying the distribution center, provided that the stock is available. However, if an order is not fulfilled by the company, no backorder is placed; the retailers arrange to get their shipment from other distributors, and ZBC loses that amount of business.The company distributes a wide variety of bicycles. The most popular model, and the major source of revenue to the company, is the AirWing. ZBC receives all the models from a single manufacturer in China, and shipment takes as long as 4 weeks from the time an order is placed. With the cost of communication, paperwork, and customs clearance included, ABC estimates that each time an order is place, it incurs a cost of $65. The purchase price paid by ZBC, per bicycle, is roughly 60% of the suggested retail price for all the styles available, and the inventory carrying cost is 1% per month (12% per year) of the purchase price paid by ZBC. The retail price (paid by the customers) for the AirWing is $170 per bicycle. ZBC is in interested in making an inventory plan for 2016. The firm wants to maintain a 95% service level with is customers to minimize the losses on the lost orders. The data collected for the past 2 years are summarized in the following table. A forecast for AirWing model sales in 2016 has been developed and will be used to make an inventory plan for ZBC.
March
Discussion Questions:
You need to develop an inventory plan to assist ZBC.
Discuss your ROPs and total cost results.
How can a demand that is not at the level of the planning horizon be addressed?
Month 2014 2015 Forecast for 2016 January 6 7 8 February 12 14 15March
24 27 31 April 46 53 59 May 75 86 97 June 47 54 60 July 30 34 39 August 18 21 24 September 13 15 16 October 12 13 15 November 22 25 28 December 38 42 47 Total 343 391 439Explanation / Answer
Use =AVERAGE() and =STDEV.S() formulae to the 2016 forecast data to find the monthly average demand and standard deviation as follows:
Average monthly demand, d = 36.58
Std. deviation of monthly demand, s = 25.67
Average lead time, L = 4 weeks = 1 month
Ordering cost per order, S = $65
Holding cost per unit per month, H = 1% x 60% x $170 = $1.02
Cycle service level = 95%
Reorder point (ROP) = d*L + Safety stock
Safety stock = Z * s * SQRT(L) = NORMSINV(0.95) * 25.67 * SQRT(1) = 42.22
So, ROP = 36.58*1 + 42.22 = 78.8 or 79 units.
EOQ = (2.d.S / H)1/2 = SQRT(2*36.58*65 / 1.02) = 68.28 or 69
Inventory policy
A continuous review policy (Q, R) is suggested with Q = 69 and R = 79. In other words, an order of 69 units is to be placed when the existing inventory level reduces to 79 units.
Total relevant cost (i.e. excluding the purchase cost) = Ordering cost + Holding cost for cycle stock + Holding cost for safety stock
= (d / Q) * S + (Q/2) * H + Safety sock * H
= (36.58 / 69) * 65 + (69/2) * 1.02 + 42.22 * 1.02
= $112.7 per month
= $1352.6 per annum
A higher safety stock can reduce the risk of a high demand (i.e. higher than the planning horizon figures). So, planning can be done with a higher safety stock if fulfilling a customer order in time is critical for the goodwill of the business. Otherwise, for one-time lumpy demands, a back ordering strategy can also be planned.
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