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 materialize, 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.

TABLE 1

BICYCLE STOCKED

FRAME SUGGESTED STYLE LIST PRICE

A $ 99.95

B 124.95

C 169.95

D 219.95

E 349.95
Step by Step Solution

Step 1

In the given case there is a company that is a wholesale distributor of bicycles.

The company distributes the bicycle through its eight primary retail outlets. The

company has a wide variety of bicycles that are dependent on five different frame sizes.

The table given below gives the list price of five different frames:

Frame Style List Price

A $99.95

B 124.85

C 169.95

D 219.95

E 349.95

Step 2

The company receives the different styles of bicycles from a single manufacturer. The

cost of placing the order of bicycles with the manufacturer is $65. The cost price per

cycle is roughly around 60 % of the list price.

The holding cost of the bicycles is around 0.75 % of cost price of bicycles per month.

The table given below gives the monthly demand of bicycles of various frames
 FRAME STYLE

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 27 41 18 2 91

JULY 2 13 26 11 1 53

AUGUST 1 10 16 9 1 37

SEPTEMBER 1 9 11 7 1 29

OCTOBER 1 8 10 7 2 28

NOVEMEBER 2 15 19 12 3 51

DECEMBER 3 30 33 19 4 89

TOTAL 26 216 297 158 23 720

Step 3

An Economic Order Quantity (EQ) model is used in cases where the demand is

constant and there are no stock outs. The EOQ model gives very accurate results

related with the quantity that must be ordered.

The ability to supply additional stocks to the retail outlet gives the company a

competitive edge over its rivals. Thus, the company must, maintain additional stock at
its distribution center in order to cater to the demand and that there should be no stock

out at the center.

Thus, an economic order quantity model could be used to determine the exact stock

levels for each month at the center.

Step 4

The formula of the economic order quantity is given below

E0Q = square root of 2DS/H ...... (1)

Here,

D= Demand in units per year.

H= Holding cost in dollars per unit per year.

S = Cost of placing an order in dollars per order.

Q= Order quantity in units

Step 5

The demand of different types of frames for each month is given in table 1.2. The

holding cost is 0.75% of the list price. The list price for each type of frame is given in

table 1.1. The holding cost for each frame type can be calculated and is shown in the

table given below:

 Frame Style List Price Holding Cost

A $99.95 $0.75

B 124.85 $0.94

C 169.95 $1.27

D 219.95 $1.65

E 349.95 $2.62

Thus, the table given above gives the holding cost of five different types of

frames. The cost of placing an order is given out to be $65.

Step 6

Thus, by using the formula as given in equation (1), the quantity that must be order in

the month of January for the frame of type A can be calculated as given below:

E0Q = square root of 2D5/H

= square root of 2x0x65/0.75

=0

Thus, by using the same formula and the given quantities the quantity to be ordered

could be calculated for the rest of the months and in similar manner the quantity to be

ordered for other frame types and for the given months could be calculated.
The table given below shows the quantity to be maintained for the frame types A, B and

C.

MONTH A Quantity A B Quantity B C Quantity C

JANUARY 0 0.00 3 20.37 5 22.62

FEBRUARY 2 18.62 8 33.26 10 31.99

MARCH 4 26.33 15 45.55 21 46.36

APRIL 4 26.33 35 69.57 40 63.99

MAY 3 22.80 43 77.12 65 81.57

JUNE 3 22.80 27 61.11 41 64,78

JULY 2 18.62 13 42.40 26 51.59

AUGUST 1 13.17 10 37.19 16 40.47

SEPTEMBER 1 13.17 9 35.28 11 33.56

OCTOBER 1 13.17 8 33.26 10 31.99

NOVEMEBER 2 18.62 15 45.55 19 44.10

DECEMBER 3 22.80 30 64.41 33 58.12

TOTAL 26 216.43 216 565.06 297 571.15

Step 7

The formulas that are used in the excel sheet in order to calculate the values as

obtained in the table given above are shown below:

 MONTH A Quantity A B Quantity B C Quantity C

JANUARY 0 =SQRT(2*K7*65)(0.75) 3 =SQRT(2*M7*65)(0.94) 5 =SQRT(2*O7*65)(1.27)

FEBRUARY 2 =SQRT(2*K8*65)(0.75) 8 =SQRT(2*M8*65)(0.94) 10 =SQRT(2*O8*65) (1.27)

MARCH 4 =SQRT(2*K9*65)(0.75) 15 =SQRT(2*M9*65)(0.94) 21 =SQRT(2*O9*65)(1.27)

APRIL 4 =SQRT(2*K10*65)(0.75) 35 =SQRT(2*M10*65)(0.94) 40 =SQRT(2*O10*65)(1.27)

MAY 3 =SQRT(2*K11*65)(0.75) 43 =SQRT(2*M11*65)(0.94) 65 =SQRT(2*O11*65)(1.27)

JUNE 3 =SQRT(2*K12*65)(0.75) 27 =SQRT(2*M12*65)(0.94) 41 =SQRT(2*O12*65)(1.27)

JULY 2 =SQRT(2*K13*65)(0.75) 13 =SQRT(2*M13*65)(0.94) 26 =SQRT(2*O13*65)(1.27)

AUGUST 1 =SQRT(2*K14*65)(0.75) 10 =SQRT(2*M14*65)(0.94) 16 =SQRT(2*O14*65)(1.27)

SEPTEMBER 1 =SQRT(2*K15*65)(0.75) 9 =SQRT(2*M15*65)(0.94) 11 =SQRT(2*O15*65)(1.27)

OCTOBER 1 =SQRT(2*K16*65)(0.75) 8 =SQRT(2*M16*65)(0.94) 10 =SQRT(2*O16*65)(1.27)

NOVEMEBER 2 =SQRT(2*K17*65)(0.75) 15 =SQRT(2*M17*65)(0.94) 19 =SQRT(2*O17*65)(1.27)

DECEMBER 3 =SQRT(2*K18*65)(0.75) 30 =SQRT(2*M18*65)(0.94) 33 =SQRT(2*O18*65)(1.27)

TOTAL 26 =SUM(L7:L18) 216 =SUM(N7:N18) 297 =SUM(P7:P18)

Step 8

Similarly, the quantities of frame type D and E that are required to be maintained at the

distribution centers can be calculated and are shown in the table given below.

MONTH D Quantity D E Quantity E

 JANUARY 2 12.55 0 0.00

FEBRUARY 3 15.37 1 7.04

MARCH 12 30.75 2 9.96

APRIL 21 40.68 3 12.20

MAY 37 53.99 3 12.20

JUNE 18 37.66 2 9.96

JULY 11 29.44 1 7.04

AUGUST 9 26.63 1 7.04

SEPTEMBER 7 23.48 1 7.04

OCTOBER 7 23.48 2 9.96

NOVEMEBER 12 30.75 3 12.20

DECEMBER 19 38.69 4 14.09

TOTAL 158 363.48 23 108.75

Step 9

The formulas that are used in the excel sheet in order to calculate the values as

obtained in the table given above are shown below:

MONTH D Quantity D E Quantity E

JANUARY 2 =SQRT(2*S7*65)(1.65) 0 =SQRT(2*U7*65)(2.62)

FEBRUARY 3 =SQRT(2*S8*65)(1.65) 1 =SQRT(2*U8*65)(2.62)

MARCH 12 =SQRT(2*S9*65)(1.65) 2 =SQRT(2*U9*65)(2.62)

 APRIL 21 =SQRT(2*S10*65)(1.65) 3 =SQRT(2*U10*65)(2.62)

MAY 37 =SQRT(2*S11*65)(1.65) 3 =SQRT(2*U11*65)(2.62)

JUNE 18 =SQRT(2*S12*65)(1.65) 2 =SQRT(2*U12*65)(2.62)

JULY 11 =SQRT(2*S13*65)(1.65) 1 =SQRT(2*U13*65)(2.62)

AUGUST 9 =SQRT(2*S14*65)(1.65) 1 =SQRT(2*U14*65)(2.62)

SEPTEMBER 7 =SQRT(2*S15*65)(1.65) 1 =SQRT(2*U15*65)(2.62)

OCTOBER 7 =SQRT(2*S16*65)(1.65) 2 =SQRT(2*U16*65)(2.62)

NOVEMEBER 12 =SQRT(2*S17*65)(1.65) 3 =SQRT(2*U17*65)(2.62)

DECEMBER 19 =SQRT(2*S18*65)(1.65) 4 =SQRT(2*U18*65)(2.62)

TOTAL 158 =SUM(T7:T18) 23 =SUM(V7:V18)

Step 10

Thus, the quantities of frames A, B, C, D and E to be maintained at the distribution

center can be summarized in the table given below:

MONTH Qunatity A Quantity B Quantity C Quantity D Quantity E

JANUARY 0.00 20.37 22.62 12.55 0.00

FEBRUARY 18.62 33.26 31.99 15.37 7.04

MARCH 26.33 45.55 46.36 30.75 9.96

APRIL 26.33 69.57 63.99 40.68 12.20

MAY 22.80 77.12 81.57 53.99 12.20

JUNE 22.80 61.11 64,78 37.66 9.96

 JULY 18.62 42.40 51.59 29.44 7.04

AUGUST 13.17 37.19 40.47 26.63 7.04

SEPTEMBER 13.17 35.28 33.56 23.48 7.04

OCTOBER 13.17 33.26 31.99 23.48 9.96

NOVEMEBER 18.62 45.55 44.10 30.75 12.20

DECEMBER 22.80 64.41 58.12 38.69 14.09

TOTAL 216.43 565.06 571.15 363.48 108.75

Thus, the table as shown above gives the quantities of frames A. B, C, D, and E

that needs to be maintained at the distribution center.

Step 11

A service level of 95 percent is required to be maintained at the company. The lead time

is 4 weeks. The standard deviation for each frame type could be calculated by

calculating the variance for each frame type as shown in the table given below:

Thus, the table as shown above gives the quantities of frames A. B, C, D, and E that

needs to be maintained at the distribution center

Step 12

Thus, standard deviation for each frame type can be calculated by using the formula for

standard deviation as shown below:

Standard deviation = square root of variance ……(2)

Therefore, standard deviation for frame A will be,

Standard deviation, = square root of variance

= square root of 17.67

= 4.2

Similarly, the standard deviation of other frames types could also be calculated and are shown

in the table given below:

Frame Variance Standard Deviation

A 17.67 4.20

B 1752 41.86

C 3324.25 57.66

D 1015.67 31.87

E 379.08 19.47

Step 13
The formula used for calculating the safety stock is given below.

SS=zo square root of LT …… (3)

Here

SS = Safety stock.

Z = Normal distribution value for a given-service level.

0 = Standard deviation.

LT= Lead time

Thus, for a service level of 95 percent the value of z is 1.645 the lead time is of 4 days

and the values of standard deviation for various frame types are given in table 1.10. Thus, the

value of safety stock can be calculated by using formula as given in equation (3).

Step 14

SS = 20 square root of LT

= 1.645 x4.2 x square root of 4

=13.818

Thus, similarly, the safety stock for other frame types can also be calculated and are

given in table as shown below:

Frame Standard Deviation Safety Stock

 A 4.20 13.83

B 41.86 137.71

C 57.66 189.69

D 31.87 104.85

E 19.47 64.06

Thus, the safety stock calculated for various frames are shown in the table given above.