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Zhou Bicycle Company JULIANA BRUDIU 7049687 GESMINE NGOUMENE 7082423 Inventory Management CASE REPORT – OPERATIONS MANAGEMENT

Zhou Bicycle Company ppf

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Page 1: Zhou Bicycle Company ppf

Zhou Bicycle Company

JULIANA BRUDIU 7049687

GESMINE NGOUMENE 7082423

Inventory Management

CASE REPORT – OPERATIONS MANAGEMENT

Page 2: Zhou Bicycle Company ppf

Agenda• Case Overview

• Primary Issue

• Relevant Data

• Qualitative Approaches – Models

• Assumptions

• Quantitative Approaches

• Recommendations

• Implementation Plan

• Conclusion

• Questions

Page 3: Zhou Bicycle Company ppf

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

Page 4: Zhou Bicycle Company ppf

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

Page 5: Zhou Bicycle Company ppf

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

Page 6: Zhou Bicycle Company ppf

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

Page 7: Zhou Bicycle Company ppf

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

Page 8: Zhou Bicycle Company ppf

Quantitative ApproachFIND:

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

Page 9: Zhou Bicycle Company ppf

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

Page 10: Zhou Bicycle Company ppf

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

Page 11: Zhou Bicycle Company ppf

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

Page 12: Zhou Bicycle Company ppf

Questions?

???

Page 13: Zhou Bicycle Company ppf

THANK YOU!