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 firm’s 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 .

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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.

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 ROP’s 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 company’s 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.