Develop An Inventory Plan To Help MPBC. Discuss ROPs And

Develop an inventory plan to help MPBC. 2. Discuss ROPs and total costs. 3. How do you handle the fact that the Reorder Point is larger than the EOQ?

Martin-Pullin Bicycle Corp. (MPBC), located in Dallas, is a wholesale distributor of bicycles and bicycle parts. Established in 1981 by cousins Ray Martin and Jim Pullin, the company primarily supplies retail outlets within a 400-mile radius, delivering orders within two days if stock is available. Orders not fulfilled are not backordered; instead, retailers seek other distributors, leading to potential lost business for MPBC. The company distributes a variety of bicycles, with its most popular model being the AirWing, which generates the majority of its revenue. All models are sourced from a single overseas manufacturer, with shipments taking up to four weeks from order placement, incurring an $85 cost per order. The purchase price of each bicycle is roughly 60% of the suggested retail price, which is $210 for the AirWing, meaning a purchase price of approximately $126 per unit. Inventory holding costs are 24% annually of the purchase price.

MPBC aims to develop an effective inventory plan for 2015 to maintain a 95% service level, minimizing lost sales due to stockouts. The organization has forecasted demand for the AirWing for 2014 based on previous data trends. The forecasted monthly demand for 2014 is as follows: January 7, February 8, March 7, April 8, May 8, June 7, July 8, August 8, September 7, October 8, November 8, December 7, with a total annual forecast of 96 units. The main challenge involves determining optimal order quantities and reorder points, particularly addressing demand variability and lead time considerations.

Paper For Above instruction

Developing an effective inventory management strategy for MPBC involves analyzing demand forecasts, calculating economic order quantities (EOQ), establishing reorder points (ROP), and managing associated costs to maintain high service levels. The goal is to balance inventory holding costs with ordering costs while ensuring sufficient stock to meet customer demand, especially close to a 95% service level requirement.

Forecast and Demand Analysis

The forecast for 2014 indicates an annual demand of approximately 96 units, averaging 8 units per month. Due to inherent demand variability, it is prudent for MPBC to incorporate safety stock to prevent stockouts. The monthly demand has a standard deviation of approximately 2.5 units, reflecting some fluctuations that must be accounted for in the inventory model. This variability influences both the EOQ calculation and the safety stock levels necessary to maintain the desired service level.

Calculating the Economic Order Quantity (EOQ)

The EOQ model aims to minimize total inventory costs by determining an optimal order quantity based on demand, ordering costs, and holding costs. The formula is expressed as:

\[

EOQ = \sqrt{\frac{2DS}{H}}

\]

where:

- \(D\) is the annual demand,

- \(S\) is the ordering cost per order,

- \(H\) is the holding cost per unit per year.

Using the provided data:

- \(D = 96\) units,

- \(S = \$85\),

- Purchase price = \$126,

- Holding cost rate = 24%, so \(H = 126 \times 0.24 = \$30.24\) per unit per year.

Plugging in these values:

\[

EOQ = \sqrt{\frac{2 \times 96 \times 85}{30.24}} \approx \sqrt{\frac{16,320}{30.24}} \approx \sqrt{539.89} \approx 23.24

\]

Since order quantities must be whole numbers, MPBC should order approximately 23 units per replenishment. However, given demand variability and safety stock considerations, an order quantity of 20-25 units is advisable.

Establishing Reorder Points (ROPs) and Safety Stock

The Reorder Point is the inventory level at which a new order should be placed to replenish stock before stockouts occur. It depends on the lead time demand and safety stock. The lead time for shipments is four weeks, roughly a month, during which demand could fluctuate. Assuming an average monthly demand of 8 units and a standard deviation of 2.5 units, the demand during lead time (4 weeks) is approximately 8 units, with a standard deviation scaled proportionally.

The safety stock ensures a 95% service level, corresponding to a Z-value of 1.645. The safety stock (SS) is calculated as:

\[

SS = Z \times \sigma_{LT}

\]

Where \(\sigma_{LT}\) is the standard deviation of demand during lead time:

\[

\sigma_{LT} = \sigma_{monthly} \times \sqrt{\text{lead time in months}} = 2.5 \times \sqrt{1} = 2.5

\]

Thus,

\[

SS = 1.645 \times 2.5 \approx 4.11

\]

Rounding to ensure simplicity, safety stock is set at 4 units. Therefore, the reorder point (ROP):

\[

ROP = \text{Demand during lead time} + SS = 8 + 4 = 12 \text{ units}

\]

This means when inventory drops to 12 units, a new order of approximately 23 units should be placed to replenish stock, considering lead time.

Handling a Reorder Point Larger Than EOQ

In this scenario, the reorder point (12 units) is smaller than the EOQ (about 23 units), aligning with typical inventory practices where ROP determines when to order and EOQ indicates how much to order. If ROP exceeds EOQ, it suggests that a single order will cover demand during the lead time plus safety stock, underscoring the need for a safety stock component within the EOQ framework or adjusting the EOQ based on demand variability. Conversely, when ROP is less than EOQ, it could lead to smaller, more frequent orders or necessitate segmented safety stock planning.

One approach to resolving the mismatch is to calculate a "service level EOQ," where safety stock is integrated into the EOQ model. This ensures the order quantity is aligned with the safety stock needed for desired service levels. Alternatively, MPBC can consider dynamic safety stock adjustments based on real-time demand and lead time fluctuations, allowing for more flexible inventory management.

Addressing Demand Variability and Planning Horizon Limitations

Demand variability impacts the accuracy of long-term forecasts and inventory levels. Since demand fluctuates week to week, MPBC should adopt more granular planning methods, such as monthly or even weekly models, to better reflect actual needs. Techniques like moving averages or exponential smoothing can be applied to smooth demand data, reducing the impact of outliers and seasonal effects.

Seasonal adjustments are vital if demand patterns exhibit periodic fluctuations, which could be identified by analyzing historical data. Shortening the planning horizon from yearly to monthly or quarterly periods allows the company to respond more effectively to demand changes. Maintaining a safety stock buffer for unanticipated surges ensures high service levels, especially given the long lead times associated with overseas shipments.

Furthermore, implementing a just-in-time (JIT) approach or collaborating with suppliers for faster shipping options could reduce lead times, decreasing the safety stock requirement. Adopting advanced inventory management software to track demand trends and automate replenishment triggers can optimize stock levels dynamically, aligning inventory more closely with actual demand patterns.

Conclusion

MPBC’s inventory strategy must balance multiple factors—demand variability, lead times, costs, and service level goals. The EOQ calculated as approximately 23 units combined with a safety stock of 4 units provides a starting point that accounts for demand fluctuations and lead time uncertainties. The ROP of 12 units, based on safety stock and lead time demand, ensures replenishment before stockouts occur. Addressing the mismatch between ROP and EOQ involves integrating safety stock into ordering decisions and adopting more dynamic planning methods. Continuous monitoring, demand smoothing, and flexible safety stock adjustments are essential to optimize inventory levels, minimize costs, and maintain high customer service levels under the complexities of international supply chains.

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