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Zhou Bicycle Company, located in Seattle, is a wholesale distributor of bicycles and bicycle parts. Formed in 1981 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 orders from ZBC within 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 bicycles. The most popular model, and the major source of revenue to the company, is the AirWing. ZBC receives all models from a single manufacturer in China, and shipment takes as long as 4 weeks from the time an order is placed. With the cost of communication, paperwork, and customs clearance included, ZBC estimates that each time an order is placed, 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 interested in making an inventory plan for 2016. 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 2 years are summarized in the following table. A forecast for AirWing model sales in 2016 has been developed and will be used to make an inventory plan for ZBC.

| Month | 2014 | 2015 | Forecast for 2016 |
|-----------|------|------|-------------------|
| 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 |
| **Total** | 343 | 391 | 439 |

**Discussion Questions:**

1. You need to develop an inventory plan to assist ZBC.
2. Discuss your Reorder Points (ROPs) and total cost results.
3. How can a demand that is not at the level of the planning horizon be addressed?

Answer :

To develop an inventory plan for ZBC, we need to calculate the ROP by considering the demand during the lead time and the safety stock level. The Total Cost includes the costs of placing an order, carrying inventory, and losing business due to stockouts. A demand that is not at the level of the planning horizon can be addressed by using forecasting techniques.

To develop an inventory plan for Zhou Bicycle Company (ZBC), we need to determine the Reorder Point (ROP) and the Total Cost. The ROP is the inventory level at which ZBC needs to place a new order to ensure that they do not run out of stock. The Total Cost includes the costs of placing an order, carrying inventory, and losing business due to stockouts.

To calculate the ROP, we need to consider the lead time (4 weeks) and the demand during that lead time. The demand during the lead time can be calculated by multiplying the forecasted sales for the AirWing model in 2016 by the lead time. For example, in January, the forecasted sales for AirWing are 8, so the demand during the lead time would be 8 * 4 = 32 bicycles.

The ROP can be calculated by adding the demand during the lead time to a safety stock level, which is used to account for uncertainties in demand and lead time. The safety stock level can be determined based on the desired service level of 95%. For example, if the standard deviation of demand during the lead time is 5 bicycles, and we want to achieve a service level of 95%, we can use the Z-score to calculate the safety stock level.

To calculate the Total Cost, we need to consider the costs of placing an order, carrying inventory, and losing business due to stockouts. The cost of placing an order is $65 per order. The carrying cost is 1% per month (12% per year) of the purchase price paid by ZBC, which is 60% of the suggested retail price. The cost of losing business due to stockouts can be calculated by multiplying the number of lost orders by the retail price per bicycle.

A demand that is not at the level of the planning horizon can be addressed by using forecasting techniques. ZBC can analyze historical data to identify patterns and trends in demand and then use statistical methods, such as moving averages or exponential smoothing, to forecast future demand. This forecast can then be used to make inventory plans and determine the ROP and Total Cost.

In summary, to develop an inventory plan for ZBC, we need to calculate the ROP by considering the demand during the lead time and the safety stock level. The Total Cost includes the costs of placing an order, carrying inventory, and losing business due to stockouts. A demand that is not at the level of the planning horizon can be addressed by using forecasting techniques.

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