Question

Zhou Bicycle Case Study

Zhou Bicycle Company, located in Seattle, is a wholesale distributor of bicycles and bicycle parts. Formed in 1991 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 bicycle. 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 one month from the times an order is place. 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 70% 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 as inventory plan for 2019. The firm wants to maintain a 97% service level with is customers to minimize the losses on the lost orders. A forecast for AirWing model sales in 2019 has been developed and will be used to make an inventory plan for ZBC.

DEMAND FOR AIRWING MODEL

Month	Forecasted 2019
January	8
February	15
March	31
April	59
May	97
June	60
July	39
August	24
September	16
October	15
November	28
December	47
Total	439
Average demand per month	36.58
Standard deviation of the monthly demand	Use Excel to calculate it

Discussion Questions

Develop an inventory plan to help ZBC:

1) Determine the simple EOQ, assuming constant demand throughout the year (which obviously is not true; to be dealt with later).

2) Calculate the annual inventory cost under this EOQ policy (carrying cost plus ordering cost).

3) Assuming that that the demand is variable (with the mean of 36.58 and the standard deviation to be calculated by you), use the relevant formula in the powerpoint file and calculate the ROP.

4) Calculate the annual cost of holding the safety stock throughout the year and add it to the cost in p. 2 above. This is your total annual inventory cost.

5) Plot the projected future bicycle sales (use Excel) and evaluate the nature of the demand. As mentioned above, it is obviously not constant throughout the year.

6) Segment the planning horizon into three separate intervals:

a) January, February, and March

b) April, May, June, and July

c) August, September, October, November, and December

(Note: other segmentations are also possible, e.g., precisely by the quarters, etc., but please use the one I am suggesting).

7) Repeat the analyses from Q1.-Q4 above, separately for each of the three segments. Of course, you will have to adjust the planning horizon accordingly.

8) Calculate the total cost across the three segments thus producing the total annual inventory cost.

9) Compare it against the cost in Q4 above. Which approach is better and why? Provide a full rationale for your answer.

Answer 1

Detailed Solution Provided Below

Explanation:

Annual Demand for Airwing Model, D = 439Order

Cost for Airwing Model, S = $65 per order

Retail price per unit for Airwing model, P = $170

Cost per unit for Airwing model for ZBC, C = 70% of 170 = $119

Annual Holding Cost per unit of Airwing Model, h = 12% of 119 = $14.28

Lead time for delivery from the supplier of Airwing model, L = 1 month

Service Level, α = 0.97

Therefore, Zα = NORM.S.INV(α)

Zα = NORM.S.INV(0.97)

Zα = 1.88

1)   EOQ = √(2*D*S/h)

EOQ = √(2*439*65/14.28)

EOQ = 63.22 ~ 63 units

2)   Annual Carrying Cost for Airwing Model, HC = EOQ*h/2

HC = 63.22*14.28/2 =$451.38

Annual Ordering Cost for Airwing Model, SC = D*S/EOQ

SC = 439*65/EOQ

SC = $451.38

Annual Inventory Cost for Airwing Model = Annual Carrying Cost for Airwing Model + Annual Ordering Cost for Airwing Model

Annual Inventory Cost for Airwing Model = $451.38 + $451.38 = $902.75

3)   Mean of monthly demand of Airwing model, μ = 36.58

Standard deviation of monthly demand of Air wing model, σ = √((Σ(Xi- μ))/(12-1)) = 25.67

Xi = Forecasted demand of Airwing model for month i

Reorder point, R = μ*L + Zα*σ*√L

R = 36.58*1 + 1.88*25.67*√1

R = 84.87 ~ 85

4)   Safety Stock, SS = Zα*σ*√L

SS = 1.88*25.67*√1

SS = 48.29

Annual cost of holding the safety stock of Airwing Model = SS*h = 48.29*14.28
= $689.56

Total Annual inventory cost of Airwing Model = 902.75 + 689.56 = $1,592.31

5)    The graph plotted will be

Cyclicity of demand with its peak attained in April, May June with May having the highest demand

6)    

7)   

a)   Horizon -January, February, and March

Total Periodic Demand of Airwing Model, D = 8 + 15 + 31 = 54

S = $65 per order

P = $170

C = $119

Holding Cost per unit of Airwing Model during the period, h = 3*1% of 119 = $3.57

EOQ = √(2*D*S/h)

EOQ = √(2*54*65/3.57)

EOQ = 44.34 ~ 44 units

Periodic Carrying Cost for Airwing Model, HC = EOQ*h/2

HC = 44.34*3.57/2 =$79.15

Periodic Ordering Cost for Airwing Model, SC = D*S/EOQ

SC = 54*65/44.34

SC = $79.15

Periodic Inventory Cost of Airwing Model = Annual Carrying Cost of Airwing Model + Periodic Ordering Cost of Airwing Model

Periodic Inventory Cost of Airwing Model = $79.15 + $79.15 = $158.3

Mean of monthly demand of Airwing Model, μ = 18

Standard deviation of monthly demand of Airwing Model, σ = √((Σ(Xi- μ))/(3-1)) = 9.63

Reorder point for Airwing Model, R = μ*L + Zα*σ*√L

R = 18*1 + 1.88*9.63*√1

R = 36.11

Safety Stock for Airwing Model, SS = Zα*σ*√L

SS = 1.88*9.63*√1

SS = 18.11

Annual cost of holding the safety stock = SS*h = 18.11*3.57

= $64.64

Total Annual inventory cost = 158.3 + 64.64 = $222.94

b)   April, May, June, and July

Total Periodic Demand for Airwing Model, D = 59 + 97 + 60 + 39 = 255

S = $65 per order

P = $170

C = $119

Periodic Holding Cost per unit for Airwing Model, h = 4*1% of 119 = $4.76

EOQ = √(2*D*S/h)

EOQ = √(2*255*65/4.76)

EOQ = 83.45 ~ 83 units

Annual Carrying Cost for Airwing Model, HC = EOQ*h/2

HC = 83.45*4.76/2 =$198.62

Periodic Ordering Cost, SC = D*S/EOQ

SC = 255*65/83.45

SC = $198.62

Periodic Inventory Cost for Airwing Model = Periodic Carrying Cost for Airwing Model + Periodic Ordering Cost for Airwing Model

Periodic Inventory Cost for Airwing Model = $198.62 + $198.62 = $397.23

Mean of monthly demand of Airwing Model, μ = 63.75

Standard deviation of monthly demand for Airwing Model, σ = √((Σ(Xi- μ))/(4-1)) = 20.94

Reorder point for Airwing Model, R = μ*L + Zα*σ*√L

R = 63.75*1 + 1.88*20.94*√1

R = 103.14

Safety Stock for Airwing Model, SS = Zα*σ*√L

SS = 1.88*20.94*√1

SS = 39.39

Periodic cost of holding the safety stock for Airwing Model = SS*h = 39.39*4.76

= $187.51

Total Periodic inventory cost for Airwing Model = 397.23 + 187.51 = $584.74

c)    August, September, October, November, and December

Total Periodic Demand for Airwing Model, D = 24 + 16 + 15 + 28 + 47 = 130

S = $65 per order

P = $170

C = $119

Periodic Holding Cost per unit for Airwing Model, h = 5*1% of 119 = $5.95

EOQ = √(2*D*S/h)

EOQ = √(2*130*65/5.95)

EOQ = 53.29 ~ 53 units

Periodic Carrying Cost for Airwing Model, HC = EOQ*h/2

HC = 53.29*4.76/2 =$158.55

Periodic Ordering Cost for Airwing Model, SC = D*S/EOQ

SC = 130*65/53.29

SC = $158.55

Periodic Inventory Cost for Airwing Model = Periodic Carrying Cost for Airwing Model + Periodic Ordering Cost for Airwing Model

Periodic Inventory Cost for Airwing Model = $158.55+ $158.55 = $317.1

Mean of monthly demand for Airwing Model, μ = 26

Standard deviation of monthly demand for Airwing Model, σ = √((Σ(Xi- μ))/(5-1)) = 11.58

Reorder point for Airwing Model, R = μ*L + Zα*σ*√L

R = 26*1 + 1.88*11.58*√1

R = 41.77

Safety Stock for Airwing Model, SS = Zα*σ*√L

SS = 1.88*11.58*√1

SS = 21.77

Periodic cost of holding the safety stock for Airwing Model = SS*h = 21.77*5.95

= $129.54

8)   Total Annual inventory cost for Airwing Model = 317.11 + 129.54 = $446.65

Total Annual Inventory Cost for Airwing Model = 222.94 + 584.74 + 446.65 = $1,254.33

9)   Cost savings when compared to Annual EOQ policy for Airwing Model = $1,592.31 - $1,254.33 = $337.97

As the planning horizon is divided into segments of high demand ((b)April, May, June, and July ), less demand ((a)January, February, and March)and medium demand ((c)August, September, October, November, and December), later approach is better. We, can also avoid ordering of large quantities(EOQ = 63 units) in the low(EOQ = 44 units) and medium demand period (EOQ = 53 units)

PLEASE LIKE THIS ANSWER, IF ITS USEFUL TO YOU! THANK YOU!