Question

Chapter 12 Case– Inventory Management

Background

Zhou Bicycle Company (ZBC), located in Seattle, is a wholesale distributor of bicycles and bicycle parts. Formed in 1981 by University of Washington Professor Yong-Pin 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 within 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, ZBC estimates that each time an order is placed, 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 interested in making an inventory plan for 2016. The firm wants to maintain a 95% service level with its 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.

Month	2014	2015	2016 Forecast
January	6	7	8
February	12	14	15
March	24	27	31
April	46	53	59
May	75	86	97
June	47	54	65
July	30	34	39
August	18	21	27
September	13	15	16
October	12	13	15
November	22	25	28
December	38	42	47
Totals	343	391	447

Solution Requirements

Utilize Microsoft Excel to complete the following steps. Submit the assignment in Excel for credit. No credit will be given for work submitted in another file format. Pay attention to formatting and clearly label all steps:

Develop an annual inventory plan for to help ZBC by completing the following steps.

1. Calculate the economic order quantity for ZBC’s estimated demand.

Hint: Have to convert the inventory carrying cost % to annual $ amount.

2. Determine how many times orders should be placed throughout the year. How often should orders be placed?

Hint: assume 300 working days per year.

3. Calculate the reorder point, include safety stock.

4. Determine the total costs of inventory, including product costs.

5. Write a short paragraph or memo outlining the process that ZBC should follow with their inventory plan.

6. Bonus Question: Trace the inventory balance over the course of the year. Assume a starting inventory balance of 35 bicycles. Also assume that retail orders are called into ZBC the first business day of every month and the first order to ZBC suppliers is on Jan 4, 2016.
What conclusions or recommendations do you draw from tracing the inventory?

Hint: Take into consideration orders to suppliers and supplier lead time, orders from retailers and lead time in shipments to retailers, as well as the estimated time between orders to suppliers. Consider creating a table similar to the one below. Make sure to fill in dates, order quantities, and calculate the inventory balance.

Date Description Order Amt. Inventory In Inventory Out Inventory Balance Beginning inventory 35 1/4/2016(Monday) Retail order received 8 35 1/4/2016(Monday) order placed to supplier EOQ 35 #### retail order sent out 8 27 #### Supplier order received EOQ ### 2/1/2016(Monday) Retail order received 15 ### #### Retail order sent out 15 ### #### Order placed to supplier EOQ ### *Please show excel formulas and excel sheet* Thank you!

Answer 1

5) The forecasted demand for ZBC is 447 bicycles for the year 2016. ZBC should order 69 units each time to minimize its total annual inventory costs. The order should be placed every 46.31 days and total number of orders in 2016 is 6.47 orders (~ 7 orders). ZBC should order as and when the inventory level of bicycles drops to around 46 units. This inventory plan will minimize the total annual costs of ZBC with annual ordering cost = $421.09, annual inventory carrying cost = $422.28, product costs = $45,594.00 making the total annual cost = $46,437.37