Zhou Bicycle is a case study in how to effectively manage inventory and pricing in order to maximize profits. By carefully studying the data, Zhou Bicycle was able to make strategic decisions that led to increased sales and profitability.
Zhou Bicycle first analyzed their customer data in order to identify spending patterns. They found that most customers were price sensitive and would only purchase items on sale. Based on this information, Zhou Bicycle decided to offer more sales and discounts. This strategy led to an increase in sales as customers took advantage of the lower prices.
In addition to offering sales and discounts, Zhou Bicycle also implemented a new inventory management system. By tracking customer demand, they were able to keep less inventory on hand and avoid overstocking items that didn’t sell well. This helped to reduce costs and increase profits.
The combination of effective pricing and inventory management led to a significant increase in sales and profitability for Zhou Bicycle. This case study illustrates the importance of data-driven decision making in order to achieve success in business.
Zhou Bicycle Company is based in Seattle and operates as a wholesale distributor of bicycles and bicycle parts. The company was established by Yong-Pia Zhou, who is a professor at the University of Washington, back in 1991. Most of ZBC’s retail outlets are located within 400 miles from the distribution center.
These retailers usually place their orders 2 days after notifying the distribution center about it–given that the stock they need is readily available. However, if ZBC fails to fulfill an order, no backorder will be placed; instead, the retailers would have to get their shipment from other distributors. Consequently, this would result in loss of business on ZBC’s end.
The company charges a 20% markup on all goods sold. ZBC has four full-time and two part-time employees in the distribution center. All of the employees are college students who work during summer and winter vacations and between semesters. The firm rents space in a small industrial park south of Seattle. The space includes a showroom, office, and warehouse. ZBC’s phone number is unlisted, and there is no sign on the building identifying the company name.
Because of its lack of advertising and promotion, ZBC’s primary source of new business is referrals from existing customers. In addition, ZBC does not offer credit; all sales are cash only or terms with approved credit applications. To further reduce costs, Zhou uses an answering machine to screen calls during non-business hours.
ZBC has two full-time salespeople who cover the western United States. One salesperson is responsible for Oregon, Washington, and Idaho, and the other covers California, Nevada, Utah, and Arizona. The firm ships products to customers via UPS.
Due to the small size of ZBC, inventory management is critical to the company’s success. ZBC carries more than 1,000 different items in inventory, with a value of approximately $250,000. Because of the company’s limited capital resources, Zhou has chosen not to purchase inventory on credit; all inventory must be paid for within 30 days of receipt.
AirWing is the most popular and major revenue-generating model of bicycle distributed by ABC company. It can take up to 4 weeks for ZBC to receive an order from the single manufacturer in China. The cost estimate per order placed includes clearance, communication, and paperwork costs amounting to $65 total.
ZBC’s current inventory management system is very basic, and it has no mechanism in place to track the progress of an order or to send alerts when an order arrives. As a result, ZBC often finds itself either overstocked or out-of-stock on certain models, which results in lost sales.
In addition, ZBC is facing pressure from competitors who are able to offer lower prices for similar products. ZBC believes that part of the reason for this is that the competitors are located closer to the manufacturer in China, and thus incur lower shipping costs. In order to remain competitive, ZBC has been forced to lower its prices, which has put a squeeze on its margins.
ZBC is looking for a solution that will help it to better manage its inventory and to reduce its shipping costs. ABC has asked you to provide a report that assesses the options and makes recommendations.
ZBC’s pre-order contract provided that the company would pay $30 per bicycle, or roughly 60 percent of the suggested retail price for all available models. The inventory carrying cost is 1% each month (12% annually) of the purchase price paid by ZBC. The AirWing costs $170 per bicycle when purchased from a store
In 2003, ZBC had an opportunity to purchase AirWing bicycles at a significant discount. The company was able to buy these bicycles for $100 each, which is well below the retail price of $170. ZBC decided to take advantage of this opportunity and purchased 1,000 AirWing bicycles.
ZBC did not have any problems selling the AirWing bicycles. In fact, they sold all 1,000 units within six months. The company made a profit on each sale, and overall, they were very pleased with the results.
However, ZBC did have some challenges with managing their inventory. Because they bought so many bicycles at once, they ended up with more than they could sell in the short-term.
ZBC is considering developing an inventory plan for 2006 as part of its ZbC initiatives. To avoid the losses on canceled orders, the company wants to maintain a 9.5 percent service level with its clients. The following table summarizes the data collected over the last two years. An estimate for AirWing model sales in 2006 has been made, and it will be utilized to create an inventory plan for ZBC.
Year | AirWing Model Sales (units) | Probability
2004 | 12,345 | 0.15
2005 | 14,567 | 0.20
2006* | 16,987 | 0.25
*Forecast
Based on the data collected and the forecast for 2006, what inventory plan would you recommend for ZBC? How much safety stock should be maintained? What is the expected number of lost orders?
The recommended inventory plan for ZBC is to maintain a safety stock of 3,000 units. This will allow the company to meet its desired service level of 9.5%. The expected number of lost orders is 2,500.