Case Study 3: ELYSIAN CYCLES

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 companys 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 is available in several sizes. Table 1 gives a breakdown of product options that are available to the retail outlets.

Table 1. Prices and Options of Available Bicycles

Frame Style	Available Sizes, in.	Number of Gears	Suggested List Price
A	16, 20, 24	10	$ 99.95
B	16, 20, 24	15	124.95
C	16, 20, 24, 26	15	169.95
D	20, 24, 26	15	219.95
E	20, 24, 26	21	349.95

EC receives these different styles from a single manufacturer overseas, and shipments can take as long as four weeks from the time an order is made by telephone or Internet. Including the costs of communication, paperwork, and customs clearance, 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 years business with the retail outlets usually forms the basis for ECs 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 years monthly demand for the different bicycle styles that EC distributes is shown in Table 2

Table 2. Monthly Bicycle Demand

Frame Style
Month	A	B	C	D	E	Total
January	0	3	5	2	0	10
February	2	8	10	3	1	24
March	4	15	21	12	2	54
April	4	35	40	21	3	103
May	3	43	65	37	3	151
June	3	27	41	18	2	91
July	2	13	26	11	1	53
August	1	10	16	9	1	37
September	1	9	11	7	1	29
October	1	8	10	7	2	28
November	2	15	19	12	3	51
December	3	30	33	19	4	89
Total	26	216	297	158	23	720

Because of the increasing popularity of bicycles for recreational purposes and for supplanting some automobile usage, EC believes that its market might 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 overstocked excessively 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.

Develop an inventory control plan for EC to use as the basis for its upcoming annual plan. Justify your reason for choosing a particular type (or combination of types) of inventory system(s). For your particular plan, specify the safety stock requirement if EC institutes a policy of maintaining a 95 percent service level.