Located in a major southwestern U.S. city, Elysian Cycles (EC) is a wholesale distributor of bicycles and bicycle parts. Its primary retail outlets are located in eight cities within a 400-mile radius of the distribution center. These retail outlets generally depend on receiving orders for additional stock within two days after notifying the distribution center (if the stock is available). The company's management feels this is a valuable marketing tool that aids its survival in a highly competitive industry.
EC distributes a wide variety of finished bicycles, but all are based on five different frame designs, each of which may be available in several sizes. Table 1 gives a breakdown of product options that are available to the retail outlets.
EC receives these different styles from a single manufacturer overseas, and shipments may take as long as four weeks from the time an order is made by telephone or telex. Including the costs of communication, paperwork, and customs clearance, Elysian Cycles4 CASE 18.3 EC estimates that it incurs a cost of $65 each time an order is placed. The cost per bicycle is roughly 60 percent of the suggested list price for any of the styles available.
Demand for these bicycles is somewhat seasonal in nature, being heavier in spring and early summer and tapering off through fall and winter (except for a heavy surge in the six weeks before Christmas). A breakdown of the previous year's business with the retail outlets usually forms the basis for EC's yearly operations plan. A growth factor (either positive or negative) is used to refine further the demand estimate by reflecting the upcoming yearly market. By developing a yearly plan and updating it when appropriate, EC can establish a reasonable basis for obtaining any necessary financing from the bank. Last year's monthly demand for the different bicycle styles that EC distributes is shown in Table 2.
Because of the increasing popularity of bicycles for recreational purposes and for supplanting some automobile usage, EC believes that its market may grow by as much as 25 percent in the upcoming year. There have been years when the full amount of expected growth did not materialize, however, so EC has decided to base its plan on a more conservative 15 percent growth factor to allow for variations in consumer buying habits and to ensure that it is not excessively overstocked if the expected market does not occur. Holding costs that are associated with inventory of any bicycle style are estimated to be about 0.75 percent of the unit cost of a bicycle per month.
Assignment
Develop an inventory control plan for EC to use as the basis for its upcoming annual plan. Justify your reasons for choosing a particular type (or combination of types) of inventory system(s). On the basis of your particular plan, specify the safety stock requirements if EC institutes a policy of maintaining a 95 percent service level.