Martin-Pullin Bicycle Corp. (MPBC), located in Dallas, is a wholesale distributor of bicycles and bicycle parts. Formed in 1981 by cousins Ray Martin and Jim Pullin, the firm’s primary retail outlets are located within a 400-mile radius of the distribution center. These retail outlets receive the order from Martin-Pullin within two 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 MPBC loses that amount of business. The company distributes a wide variety of bicycles. The most popular model, and the major source of revenue to the company, is the AirWing. MPBC receives all the models from a single manufacturer overseas, and shipment takes as long as four weeks from the time an order is placed. With the cost of communication, paperwork, and customs clearance included, MPBC estimates that each time an order is placed, it incurs a cost of $65. The purchase price paid by MPBC, per bicycle, is roughly 60% of the suggested retail price for all the styles available, and the inventory carrying cost is I % per month (12% per year) of the purchase price paid by MPBC. The retail price (paid by the customers) for the AirWing is $170 per bicycle. MPBC is interested in making an inventory plan for 2011. The firm wants to maintain a 95% service level with its customers to minimize the losses on the lost orders. The data collected for the past two years are summarized in the following table (Table 1). A forecast for AirWing model sales in the upcoming year 2011 has been developed and will be used to make an inventory plan for MPBC.

Figure 1. QM output for given data.

To keep the total costs as low as possible, the optimal order quantity should be maintained. This means an average inventory of 34.14. The Annual Setup cost and Annual Holding cost would both be $417,89. As a result, the total annual inventory cost is $835.78 (2 x 417.89).

Discuss ROPs and total costs

To determine the Reorder Point (ROP), the demand and the demand standard deviation must be known. The demand is determined by dividing the total of the 2011 forecast by the number of months and the standard deviation is determined using Microsoft Excel.

Figure 2. QM output for ROP

As a result of the sum of the Demand standard deviation and the safety stock, the ROP is 76.89 which the inventory position at which an order should be placed. The total costs can be found in Figure 1. Annual inventory holding cost plus annual setup cost plus purchase cost gives the total cost of $45613.79.

How can you address demand that is not at the level of the planning horizon According to the sample date, the determined demand shows there is not a so called level demand over the planning horizon. Therefore, the EOQ for an entire year should not be used due to seasonal sales. A planning horizon to use might be a quarterly planned horizon because this would be more evenly distributed and help make a plan for each segment.

Reference

Render, B., Stair, R. M., & Hanna, M. E. (2012). Quantitative analysis for management (11th edition). Pearson/Prentice Hall.