A model that will be briefly touched upon, yet has been explained previously in the

section of Qualitative Evaluation of appropriate models is the EOQ model. This model
incorporates and is in partnership with the probabilistic + safety stock model which Zhou
Bicycle company is using to undergo a reformation in order to address and solve their
current inventory shortage. The basic EOQ model is one of the three independent
demand models. Thus, due to its certain criteria and based off the readings in BOOK on
page 447 it remains evident that the EOQ model in association with the probabilistic +
safety stock model is partnered with six presumed assumptions. The following are the
six assumptions with respect to the EOQ model on the probabilistic + safety stock
model.
1) Demand for an item is known, reasonably consistent, and independent of
decisions for other items
2) Lead time is known + consistent
3) Instantaneous inventory receipts. I.e.: Order arrives in one batch all at once!
4) Quantity discounts are not possible
5) Only variable costs are ordering (set up) + carrying (holding)
6) Stock outs/shortages can be completely avoided if planned accordingly

Quantitative Approach Application of Model

The main goal Zhou wishes to accomplish is to reduce shortage and to have a surplus
instead while minimizing total order and holding cost. Below is the demand for Awing
Model.
Month 2015 2016 Forecast for 2017
January 6 7 8
February 12 14 15
March 24 27 31
April 46 53 59
May 75 86 97
June 47 54 60
July 30 34 39
August 18 21 24
September 13 15 16
October 12 13 15
November 22 25 28
December 38 42 47
Totals 343 391 439

1. Zhou is responsible to place re-order of inventory

2. Shipment takes 4 weeks from time order is placed
3. Ordering cost is $65
4. Purchase price paid by Zhou is 60% of retail
5. Retail /AirWing is $170
6. Carrying cost is 1% per month (12% per year)
7. Wish to maintain a 95% service level
Cost per bike= 170*0.60= $102
Holding cost= ($102)*1%*12% per year per bicycle
=$12.24 per year/bicycle
Service level= 95%
Z- Value= 1.65
Total demand per year= 439 units
Average demand per month= 439/12= 36.58 or 37bikes

EOQ= (Q*) Economic Order Quantity

2
=

(2)(439)(65)
= $12.24

=68.28 69 Units
Within each order, Zhou should only order 68 Awings from their manufacturer.

ROP =. +

= (36.58) + (1.65) (25.67)

=36.58 + 42.35

=78.93 79 Bicycles

SS =

= (1.65) (25.67)

=42.35 43 Bicycles

Total cost= Q* (holding cost) + SS (holding cost) + Total demand/Q* (ordering cost)
68/2*12.24 42*12.24 439/68*65
= $416.16
=$514.08 =$419.63

Total Cost= 416.16+514.08+419.63

=$1349.87
 Demand for AirWing Model

120

100
97

80

Forecasted 2008
60 59 60
Average
47
40
36.58 36.58 36.58 36.58 36.58 36.58 39
36.58 36.58 36.58 36.58 36.58 36.58
31
28
24
20
15 16 15
8
0
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ua
r ar ar Ap
r n Ju us be be be e
an br
u M Ju g
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M Au pt v ce
J Fe O
No De
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From the above graph, the blue line represents the average forecast demand for 2017
and the pink line represents the average demand. This indicates that demand for their
product peaks in the spring due to seasonal factors and safety stock prevents against
higher than expected demand. Order periods are flexible in preparation for lower than
expected demand. Therefore the model must be adjusted throughout the year as
demand changes.