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
firms 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 4 weeks 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 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 as inventory plan for 2006. The firm wants to maintain a
9.5% 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 2006 has been developed and will be used to make an inventory
plan for ZBC.

DEMAND FOR AIRWING MODEL

FORECAST FOR
MONTH 2004 2005 2006

JANUARY 6 7 8
FEBRUARY 12 14 15
MARCH 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
343 391 439
Questions/Computations that need to be answered/solved:
Need to show computations that lead to the recommendations made for each question
listed below, based on the above case study. Also need to see a simple EOQ model with
computations of reorder point, safety stock and total annual inventory cost from the case
study.

1) Develop an inventory plan to help ZBC.

My recommendation from the inventory perspective would be to maintain a larger
inventory than what might be currently being considered. Case in point, instead of
ensuring an inventory is available from a monthly perspective; I would look at the entire
projected sales for the year, and make sure to maintain a 10% inventory in addition to the
project yearly sales. My rational for this is based on the fact that the bikes are being
shipped from China and the time and cost associated with getting the bicycles imported to
Washington State. Once a 10% inventory is obtained, I would maintain this inventory
with the purchase of extra bicycles, in my monthly purchase from China as bicycles
within the inventory that are sold.

2) Discuss ROPs and total costs.

The initial costs to create the inventory may be significant when initially reviewing. Yet,
over time to include, the loss of sales to other distributors along with the reduction in the
cost process of bringing bicycles into the country; Over the long term, the total costs will
decrease and an increase in profits will be achieved. The main objective is to consolidate
the processing of new bicycle imports which enables the company to focus on the core
business, thus ensuring the companys customers being satisfied.

3) How can you address demand that is not at the level of the planning horizon?
As mentioned previously above, the projected overall sales for the year should be taken
into account, and not on a month to month basis, but instead from an entire year
perspective. Taking a long term strategic viewpoint will ensure that the bikes are in stock
for customers, thus prevent customers from going to other distributors, and ultimately
increasing sales and reducing overall costs associated with the importing of the bicycles.