1. Zhou Bicycle Company
JULIANA BRUDIU 7049687
GESMINE NGOUMENE 7082423
Inventory Management
CASE REPORT – OPERATIONS MANAGEMENT
2. Agenda
• Case Overview
• Primary Issue
• Relevant Data
• Qualitative Approaches – Models
• Assumptions
• Quantitative Approaches
• Recommendations
• Implementation Plan
• Conclusion
• Questions
3. Case Overview – Zhou Bicycle Company
• Young – Ping Zhou created the
business in 1981
• Zhou is a bicycle company located in
Vancouver
• Firm’s primary outlets are within 650
km radius of distribution centre
• Zhou distributes bicycles as well as
individual parts
• Distributors will go else where is
Zhou does not have the inventory
• AirWing is most popular model and
used for the case
• Retail price per bicycle is $170
4. Primary Issue
• Zhou Bicycle company is losing sales and distributers due to inventory shortage
• No efficient inventory system: no re-stock no SS, etc.
• Suppliers have no problem getting their product from someone else
• As long as it is on time and of quality
• Zhou is losing their cliental due to their lack of a back–order strategy
• This is costing the company revenue as well
• Secondary issue:
• Ruining PR + losing cliental
5. Relevant Data
• Zhou is responsible to place re-order of inventory
• Shipment takes 4 weeks from time order is placed
• Ordering cost is $65
• Purchase price paid by Zhou is 60% of retail
• Which works out to $102
• Retail /AirWing is $170
• Carrying cost is 1% per month (12% per year)
• Wish to maintain a 95% service level
6. Qualitative Approach – Models
• Single Period
• Items with little to no value at end of
period
• Fixed Period (P)
• Consistent number of/per order
• Quantity Discount
• Assume price reduces as quantity
increases
• ABC
• Requires 3 categories to generate answer
• Production Order Quality (POQ)
• Inv. constantly builds over time
• Probabilistic + Safety Stock (SS)
• Unknown variable that can be solved by
probability distribution
• (SS) Extra inventory kept on hand in case of
shortage
• Basic EOQ
• Aim to minimize total holding + carrying cost
APPROPRIATE MODELS
7. Assumptions
• Demand for an item is known, reasonably consistent, and independent of
decisions for other items
• Lead time is known + consistent
• Instantaneous inventory receipts
• Order arrives in one batch all at once!
• Quantity discounts are not possible
• Only variable costs are ordering(set up) + carrying(holding)
• Stock outs/shortages can be completely avoided if planned accordingly
8. Quantitative Approach
FIND:
EOQ
ROP
SS
EOQ=(Q*) Economic Order Quantity
=
2𝐷𝑆
𝐻
=
(2)(439)(65)
$12.24
=68.28 ~ 69 Units
TOTAL COSTS
ROP =𝑑. ℓ + 𝑧𝜎𝑑ℓ𝑡
=(36.58) + (1.65)(25.67)
=36.58 + 42.35
=78.93 ~ 79 Bicycles
SS = 𝑧𝜎𝑑ℓ𝑡
=(1.65)(25.67)
=42.35 ~ 43 Bicycles
𝑑. ℓ = Average demand during lead time
=
𝐷𝑒𝑚𝑎𝑛𝑑
# 𝑜𝑓 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑
=
439
12
= 36.58
9. Recommendations
DO THIS
• 1) Concept of Safety Stock to be implemented
• 2) Have an accurate forecasting method
• 3) Establish inventory storage for safety stock
• 4) Computer system designed for assessing safety
stock, EOQ, ROP
• Aim for 6 sigma outcome
• 5) Documentation of progress
WHY
• 1) Back order is set in place and no more
inventory shortages
• 2) Allows for analyzation and estimated
projection of future figures
• 3) Have a designed storage layout for safety
stock
• 4) Eliminate human error
• 5) Provide reference of history, projections, or
trends
10. Implementation Plan
• 1) Documentation + Historical data
• Allows for records and permanent storage
• Useful in case needed to validate an executed
prior action or plan
• Show future projections, trends, and provide
reference.
• 2) Computerized System
• Show future projections, trends, and provide
reference.
• Remove human error: Pre-set automatic control
• 3) 95% service level or higher
• Why is it only 95%? Should be 99%
• High quality = High Expectations
• 4) Forecasting Methods
• Allows to project into the future
• Welcome surprises: NOT be surprised
• Moving Average
• Weighted Moving Average
• Exponential Smoothing
11. Conclusion
PREVIOUS METHOD
• No back-order policy
• Inventory shortage
• Results in loss of cliental and
revenue
• No strategic plan in place
NEW METHOD
• Probabilistic + safety stock model
• Inventory surplus (safety stock)
• Build PR, gain cliental back
• Able to meet + conquer demand
• Strategic plan in place
