Question

CYCLOTRON BIKES, INC.*

Cyclotron Bikes, Inc. was established in 1959 by a passionate entrepreneur that wanted people to enjoy the nature as well as to stay healthy by making use of the bike. The founder of the company, Byron Funmaker, manufactured these bicycles in a small garage in rural Wisconsin. After manufacturing these bicycles, he used to haul them to a rented shop in a town close by, to sell. Gradually, the reputation of the Cyclotron Bikes rose due to the attention to quality and details Byron paid to this small scale operation. Simultaneously, there were interesting developments occurring in the U.S. to help Byron fuel his passion in manufacturing bicycles. In the 60s, the President’s Council of Physical Fitness promoted bicycle for recreation and fitness. This gave a major fillip to bicycle industry in general, and to Cyclotron Bikes, in particular.

Year	Quarter	Actual	Year		Quarter	Actual
		Revenue				Revenue
		Generated				Generated
		(in $million)				(in $million)
2013	Q1 (Jan.-March)	$29.00	2016	Q1 (Jan.-March)			$25.80
	Q2 (Apr. - June)	$35.00		Q2 (Apr.-June)			$31.40
	Q3 (July-Sept.)	$25.20		Q3 (July—Sept.)			$29.00
	Q4 (Oct.-Dec.)	$21.60		Q4 (Oct.-Dec.)			$25.95
2014	Q1 (Jan.-March)	$27.60	2017	Q1 (Jan.-March)			$30.00
	Q2 (Apr. - June)	$36.20		Q2 (Apr.-June)			$37.00
	Q3 (July-Sept.)	$30.60		Q3 (July-Sept.)			$38.60
	Q4 (Oct.-Dec.)	$24.20		Q4 (Oct.-Dec.)			$21.20
2015	Q1 (Jan.-March)	$31.60	2018	Q1 (Jan.-March)			$31.50
	Q2 (Apr. - June)	$32.80		Q2 (Apr.-June)			$39.00
	Q3 (July-Sept.)	$26.60		Q3 (July-Sept.)			$30.00
	Q4 (Oct.-Dec.)	$20.00	Estimate	Q4 (Oct.-Dec.)			$25.20

The hobby of bicycle riding that was dominated by male until that time got a major boost and proliferated to female riders after Audrey McElmury won the Road Cycling Championship in Brno, Czechoslovakia. This opened the door for the American women to take bicycle as a serious hobby to stay fit and enjoy outdoors. The oil embargo of 1970s coupled with the increasing awareness of conserving environment encouraged bicycle commuting in the U.S.

While all the above interesting events were unfolding, Cyclotron Bikes, Inc. was transitioning from a job order shop to a mass production environment to cater to the demand placed on it. Byron’s two children, Beth and Bart, joined the Bike Company after completing their business degrees. With them, they brought the acumen to take Cyclotron Bikes to the next level because they saw immense future in the bicycle industries worldwide.

In order to bring their ambition to fruition, they have hired a consulting company, i.e., your group, and have provided the company (you) with the data for the past 6 years, 2012-2017. As you can see from the data, the financial year of Cyclotron Bikes corresponds to January through December.   

Cyclotron Bikes’ management has asked your group (consulting company) to provide you the following as part of the management report.

(1) Introduction: Compare similar businesses worldwide and give an outlook of the bike market and future that awaits Cyclotron. (10 points)

(2) Analysis:

(a) Based upon Cyclotron’s data on page #1, compute 4, 5, 6 quarter moving averages and find which moving average will be used if Cyclotron has to forecast for Q1 (April-June) of 2018. Make sure to provide your rationale by using the forecasting error calculation such as MAD, MSE, MAPE, and Tracking Signal. (15 points)

(b) If you have the option of using only the single exponential smoothing method to project for Q1 of 2018, which value of α will be appropriate based upon your calculation of MAD, MSE, MAPE? (15 points)

(c) Calculate the forecast for the next 2 years (8 consecutive quarters) using the Classical Decomposition Method. If Cyclotron is contemplating investing $9m in facility upgrades now and would like to have the Payback period of this new investment as 2 years, do you think this threshold of Payback period can be met if Cyclotron uses 2017 revenue as its baseline? (50 points)

(3) Recommendation:

Based upon your analysis in (2) and your study of bike market in general, provide recommendations for Cyclotron on or before November 21 in terms of the operations/manufacturing tasks the company should undertake to emerge as a market leader in the manufacturing and selling of quality bikes. (10 points)

Answer 1

(1) Introduction: Compare similar businesses worldwide and give an outlook of the bike market and future that awaits Cyclotron. (10 points)

As can be seen from the given data, Cyclotron's revenue was quite stable from 2013-2016 i.e. between $110 M - $118 M. Only in the last two years (2017, 18), it has reached $125 - $126 M range. So, overall we see a growth of apprx 3% on average between the years 2013 - 2018

Comparison with some similar businesses:

1. Merida Company - 'No. 1 bike manufacturer in Taiwan' (https://youtu.be/tMFf7doul38). Established in 1971, Merida has become a world-renowned bike manufacturers. They manufacture an entire range of bikes - recreational, sports, kids, e-bikes etc. They seem to have grown phenomenally during this time as they have branches in over 25 countries in the world, have a well recognized brand (due to involvement in international sports championships) and exemplary products that combine German design with Taiwanese manufacturing.

2. Ridley Bikes (https://www.ridley-bikes.com/) - Ridley is based in Flanders, Belgium - the heartland of cycling. Even their core focus is racing and recreational bikes, they have branched out into bikes for kids and Women as well. Ridley was founded in 1997 by Jochim Aerts. He grew up in the small town of Balen, located in Flanders, Belgium. With a passion for bike racing, he started off with creation of sports bikes which has more recently diversified into other areas as well, but the commitment to making world class bikes, remains. Hence, Ridley has seen good growth since inception and is poised to tap into the emerging broad based trend of enthusiasm for bikes amongst common folks for everyday transportation.

Here are some key findings from research on global outlook for the bike market (per https://www.persistencemarketresearch.com/market-research/bicycle-market.asp, https://www.researchandmarkets.com/reports/4463455/global-bicycle-market-2018-2022)

Bicycle Sales to Surge Up Steadily Between 2018 and 2026

Intensifying traffic congestion issue and elevating fuel prices are foreseen to remain the key factors driving the need for cycling, and raising the demand for bicycles thereby. Growing health concerns among consumers, in addition to surging acceptance of green transportation in an effort to reduce carbon footprint, will play a pivotal role in the growth of global bicycle market in next eight years. Moreover, increasing government support encouraging adoption of bicycles and rapid development of dedicated cycling infrastructure in developed as well as developing economies will reportedly push the sales of bicycles in upcoming years. A growing application base of bicycles in trekking and recreational activities, coupled with a soaring number of cycling events will specifically uplift the demand for sports bicycles in near future.

Bicycle Market to Reach Nearly US$ 80 Bn by 2026 End

As sharing and rental services are currently gaining higher traction in the global bicycle market, stakeholders are increasingly striving to adapt to this trend. Moreover, a large number of corporate embracing cycling as a sustainable alternative to commute will be a significant factor impacting the sales of bicycles in next few years. At a moderate CAGR of 4.2%, the global market for bicycle will attain the revenue approaching US$ 80 Bn during 2018-2026. The market was valued at around US$ 55 Bn in 2017 and holds optimistic growth prospects over the assessment period.

Key report findings:

• Sports bicycles are expected to emerge at a rapid pace, taking over hybrid bicycles in terms of growth rate. Mountain bicycles are poised to witness moderate traction in coming years.
• Electric bicycles continue to win over conventional bicycles, in terms of both supply and demand. China is foreseen to be the global leader and the dominant hub for supply and demand of e-bicycles.
• Europe and South East Asia Pacific will also retain the key market positions, whereas North American market is anticipated to experience sluggish growth during 2018-2026.
• While SEAP and Europe are projected to exhibit the highest growth rate values through 2026, Latin America is identified to unravel a heap of opportunities for stakeholders, especially in the electric bicycle segment.
• Evolving consumer demographics in developing economies will predominantly drive sales of mid-range bicycles, followed by premium priced cycles.
• Bikes for the Kids segment will see dramatic growth in emerging markets such as India, Brazil etc

Given above scenario, for an entrepreneur driven company such as Cyclotron, the following recommendations can be made to drive future growth:

1. It needs to expand its reach to include the fast growing markets of Europe and China since demand in US is considered to be sluggish over the next decade

2. It needs to branch out from being just recreational bikes to include additional segments - Convenient bikes for the masses which would cost less and have fewer features, Kids bikes etc

3. With the increase in world wide cycling competitions and awareness, Cyclotron would do well to position itself in the 'Racing' segment as well. That will bring brand recognition and enhance sales in new markets.

4.