MOTORCROSS CORPORATION

Motorcross Corporation (MC), located in a major southwestern city, is a

wholesale distributor of bicycle parts. Its primary retail outlets are located in eight
cities within a 200 km radius of the distribution center. These retail outlets generally
depend on receiving orders for additional stock within two days after notifying the
distribution center (if the stock is available). The company’s management feels this
is a valuable tool that aids survival in highly competitive industry.

MC distributes a wide variety of finished bicycles, but these are all based on
five different frame designs. Table 1 gives the breakdown of the product options
available to the retail outlets.

MC receives these different styles from a single manufacturer overseas and

shipments may take as long as four weeks from the time an order is made by
telephone or email. With the cost of communication, paperwork and customs
clearance included, MC estimates that each time an order is placed, it incurs a cost
of $65. the cost per bicycle is roughly 60% of the suggested list price for any of the
styles available.

Demand for the bicycles is somewhat seasonal in nature, heavier in the

spring and early summer and tapering off through the fall and winter seasons
(except for a heavy surge in the six weeks prior to Christmas). A breakdown of the
previous year’s business with the retail outlets usually forms the basis for MC’s
yearly operations plan. A growth factor (either positive or negative) is used to refine
further the demand estimate by reflecting the upcoming yearly market for bicycle
sales. By developing a yearly plan and updating it when appropriate, MC can
establish some reasonable basis for obtaining any necessary financing from the
bank. Last year’s monthly demand for the different bicycle styles MC distributes is
shown in Table 2.

Owing to the increasing popularity of bicycles for recreational purposes and

for supplanting some automobile usage, MC believe that its market may grow by as
much as 25% in the upcoming year. However, because there have been years
when the full amount of expected growth did not materialized, MC decided to base
its plan on a more conservative 15% growth factor to allow for variations kin
consumer buying habits and to ensure that it is not excessively overstocked it the full
market does not occur. Holding cost associated with inventory of any bicycle style is
estimated to be about 0.75% of the unit cost of a bicycle per month.

Questions:

Develop an inventory control plan for MC to use as the basis for its upcoming
year plan. Be sure to justify your reason for choosing a particular type (or
combination of types) of inventory system. On the basis of your particular plan,
specify the safety stock requirement if MC institute a policy of maintaining 95%
service level.
 TABLE 1
BICYCLE STOCKED

FRAME SUGGESTED
STYLE LIST PRICE

A $ 99.95
B 124.95
C 169.95
D 219.95
E 349.95

TABLE 2
MONTHLY DEMAND

F R A M E S T Y L E
MONTH A B C D E TOTAL
January 0 3 5 2 0 10
February 2 8 10 3 1 24
March 4 15 21 12 2 54
April 4 35 40 21 3 103
May 3 43 65 37 3 151
June 3 17 41 18 2 91
July 2 13 26 11 1 53
August 1 10 16 9 1 37
Septembe 1 9 11 7 1 29
r
October 1 8 10 7 2 28
November 2 15 19 12 3 51
December 3 30 35 19 4 89
Total 26 216 297 158 23 720