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:

.

.

.

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.

Please answer questions 5 to 9.

Answer 1

5)    The graph plotted will be

Just by looking at the graph we can see a cyclicity with demand peaking in the period April, May June with May having the highest demand

   

7)   

a)   January, February, and March

Total Period Demand, D = 8 + 15 + 31 = 54

S = $65 per order

P = $170

C = $119

Periodic Holding Cost per unit, h = 3*1% of 119 = $3.57

EOQ = √(2*D*S/h)

EOQ = √(2*54*65/3.57)

EOQ = 44.34 ~ 44 units

Annual Carrying Cost, HC = EOQ*h/2

HC = 44.34*3.57/2 =$79.15

Annual Ordering Cost, SC = D*S/EOQ

SC = 54*65/44.34

SC = $79.15

Annual Inventory Cost = Annual Carrying Cost + Annual Ordering Cost

Annual Inventory Cost = $79.15 + $79.15 = $158.3

Mean of monthly demand, μ = 18

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

Reorder point, R = μ*L + Zα*σ*√L

R = 18*1 + 1.88*9.63*√1

R = 36.11

Safety Stock, 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 Period Demand, D = 59 + 97 + 60 + 39 = 255

S = $65 per order

P = $170

C = $119

Periodic Holding Cost per unit, 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, HC = EOQ*h/2

HC = 83.45*4.76/2 =$198.62

Annual Ordering Cost, SC = D*S/EOQ

SC = 255*65/83.45

SC = $198.62

Annual Inventory Cost = Annual Carrying Cost + Annual Ordering Cost

Annual Inventory Cost = $198.62 + $198.62 = $397.23

Mean of monthly demand, μ = 63.75

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

Reorder point, R = μ*L + Zα*σ*√L

R = 63.75*1 + 1.88*20.94*√1

R = 103.14

Safety Stock, SS = Zα*σ*√L

SS = 1.88*20.94*√1

SS = 39.39

Annual cost of holding the safety stock = SS*h = 39.39*4.76

= $187.51

Total Annual inventory cost = 397.23 + 187.51 = $584.74

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

Total Period Demand, D = 24 + 16 + 15 + 28 + 47 = 130

S = $65 per order

P = $170

C = $119

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

EOQ = √(2*D*S/h)

EOQ = √(2*130*65/5.95)

EOQ = 53.29 ~ 53 units

Annual Carrying Cost, HC = EOQ*h/2

HC = 53.29*4.76/2 =$158.55

Annual Ordering Cost, SC = D*S/EOQ

SC = 130*65/53.29

SC = $158.55

Annual Inventory Cost = Annual Carrying Cost + Annual Ordering Cost

Annual Inventory Cost = $158.55+ $158.55 = $317.1

Mean of monthly demand, μ = 26

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

Reorder point, R = μ*L + Zα*σ*√L

R = 26*1 + 1.88*11.58*√1

R = 41.77

Safety Stock, SS = Zα*σ*√L

SS = 1.88*11.58*√1

SS = 21.77

Annual cost of holding the safety stock = SS*h = 21.77*5.95

= $129.54

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

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

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

Later approach is better as we have divided the periods 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).

Thus, avoiding ordering of large quantities(EOQ = 63 units) in the low(EOQ = 44 units) and medium demand period (EOQ = 53 units)