Logistics 8: Basic Inventory Managment

An increase in inventory holding costs per unit, all else equal, will result in which of the following? • Higher optimal order quantities and, thus, lower average inventories • Lower order placement costs • Lower customer demand None of the above

None of the above

Which of the following will result if a firm orders a given product in quantities lower than the EOQ? A. Its annual order placement costs will be lower than in the optimum. B. Its annual inventory holding costs will be higher than in the optimum. C. Customer demand will be lower than in the optimum. D. Total logistics costs will be higher than in the optimum.

D. Total logistics costs will be higher than in the optimum.

A good inventory manager will strive to minimize inventory holdings. T/F

False

A reduction in inventory holdings will always result in greater firm profitability. True False

False

According to the square root law of cycle stocks, an increase in sales should result in an increase in inventory-to-sales ratios. T/F

False

DRP is used to plan the distribution requirements of raw materials, while MRP is used to plan the distribution requirements of finished goods. T/F

False

If the order placement cost (K) decreases, the optimal order quantity will increase. T/F

False

In any given time period, total usage at the DC level is equal to the sum of store-level demands T/F

False

The acronym RFID stands for which of the following? Remote flow inspection design Random fault investigation duty Radio frequency identification Residual factory inventory designation

Radio frequency identification

For a given product, the order placement cost is $5, the holding cost per unit per year is $10, and annual demand is 1,600 units. If the EOQ is used, total annual logistics costs will amount to which of the following? • $100 • $200 • $400 • $800 None of the above

$400

Consider the following lead times: Central warehouse to regional DC1: 6 days Central warehouse to regional DC2: 8 days Regional DC1 to store A: 3 days Regional DC2 to store B: 2 days. Based on the information above, the distribution manager must plan shipments from the central warehouse at least ____ days in advance. 10 8 19 9 11

10

A distribution system comprises 2 central distribution centers (which are both replenished from a single plant), 8 regional warehouses, and 56 stores. The replenishment lead times are as follows: plant (2 weeks), DC (1 week), regional warehouse (1 week), store (1 week). What is the minimum planning horizon? 5 weeks 4 weeks 1 week 3 weeks

5 weeks

Which of the following does the basic EOQ model helps inventory managers accomplish? Maximize revenues Maximize total logistics costs Minimize inventories Minimize the sum of inventory holding and order placement costs

Minimize the sum of inventory holding and order

According to the square root law of cycle stocks, larger warehouses should have greater inventory turns (all else equal). True False

True

According to the square root law of cycle stocks, the throughput volume in a warehouse quadruples (all else equal), its average inventory levels will double. True False

True

An increase in customer demand uncertainty, all else equal, will result in greater lead time demand uncertainty. T/F

True

Better inventory management can contribute to increased sales. True False

True

Which of the following information is needed to complete a DRP table? I. Store-level demand forecast II. Economic order quantities III. Current inventory levels IV. Lead time information a. All four types of information are needed b. Only items I, III and IV are needed c. Only items II, III and IV are needed d. None of the above

a. All four types of information are needed

The square root law of cycle stocks is rooted in the recognition of what? a. In the EOQ formula, demand (D) is under the square root b. Cycle stocks are equal to two times the EOQ c. The sum of holding costs and order placement cost should be minimized d. The EOQ will always be greater than zero

a. In the EOQ formula, demand (D) is under the square root

Greater fill rates . . .? a. Indicate better customer service b. Require longer dwell times c. Require lower in-stock rates d. None of the above

a. Indicate better customer service

_________ is a measure of how often inventories are depleted and replenished over the course of a given time period (e.g., year). a. Inventory turnover b. Dwell time c. In-stock rate d. Fill rate

a. Inventory turnover

Compared to a larger warehouse, a smaller warehouse should have __________ inventory turns. (assume all else is equal.) a. Lower b. Identical c. Similar d. Higher

a. Lower

What does the distribution requirements planning tool do? a. The EOQ increases b. Forecast store-level demand c. Design a distribution system d. None of the above

a. The EOQ increases

Which of the following occurs as the order placement cost (K) increases? (Assume that nothing else changes.) a. The EOQ increases b. Annual demand increases c. The holding cost per unit per year increases d. None of the above

a. The EOQ increases

Which of the following is true if annual demand for a given product is 1800 units and the EOQ is 300 units? a. an order will be placed every two months b. there will be three order placements a year c. an order will be placed once per quarter d. the avg lenth of an order cycle will be five months

a. an order will be placed every two months

Using data from your company's warehouse, you fit an inventory turnover curve that is defined by the following function: I = 1.32 * D^.78; R-squared = .94. Which of the following statements is correct? a. on average, warehouses with lower demand volumes have lower inventory turns b. the R-squared value is statistically insignificant c. an increase in inventories will result in a less-than-proportionate increase in demand. inventories are equal to 1.32 times the demand volume of each warehouse

a. on average, warehouses with lower demand volumes have lower inventory turns

According to the strategic profit model, a decrease in purchase costs (all else equal) will result in which of the following?

an increase in profit margins and an increase in asset turnover

For a given store, ending inventory in Week 12 is 500, and demand in Week 13 is 700. When will an order need to be released (planned) and how many units will need to be ordered to satisfy all demand in Week 13 if the lead time is three weeks?

an order of 200 units will need to be released in Week 10

If, for a given product, average annual demand is 1,200 units and the average lead time is 4 months, then average lead time demand will be ________? a. 300 units b. 400 units c. 4,800 units d. None of the above

b. 400 units

If, in a given scenario, the EOQ is 100, then what will be the average amount of cycle stock? a. 0 b. 50 c. 100 d. 200

b. 50

All else equal, greater inventories result in which of the following?• a. Greater fixed assets b. Greater current assets c. Greater profits e. Greater accounts receivable

b. Greater current assets

The strategic profit model is useful to illustrate which of the following? a. How firms can minimize inventory holdings b. How inventory management affects overall firm profitability c. How increased worker compensation would enhance inventory management efficiency d. That the ROA is calculated as the ratio of net profits and total assets

b. How inventory management affects overall firm profitability

The key objective of Walmart's Must-Arrive-By-Date policy is to do which of the following? • a. Reduce average lead times • b. Reduce lead time variability • c. Reduce average demand d. Reduce demand variability

b. Reduce lead time variability

For a given store, demand in Week 5 is 375, and on-hand inventory at the end of Week 4 is 450. If the manufacturing lead time for this particular item is two weeks, which of the following statements will be true? a. The order release for Week 2 will be 450 b. The order release for Week 3 will be 0 c. The order release for Week 3 will be 375 d. The order release for Week 4 will be 0

b. The order release for Week 3 will be 0

In the context of the EOQ model, the term "sawtooth" refers to which of the following? a. How aggressively managers are able to cut inventory levels b. The pattern of inventory consumption and replenishment over time c. The particular item that can be managed using the EOQ approach d. The basic tool used to build storage facilities e. All of the above f. Only C and D

b. The pattern of inventory consumption and replenishment over time

Lead time uncertainty refers to which of the following? a. The uncertainty surrounding new product development projects b. The variability in lead times across multiple order cycles c. The average amount of time that elapses between order placement and order receipt d. The number of different transportation options (with different lead times) a firm considers

b. The variability in lead times across multiple order cycles

What do inventory holding costs typically amount to? a. $0.10 to $1.50 per unit b. about 15%-40% of the unit value per year c. between $25 and $45 per unit per year d. 100% of the value of a good

b. about 15%-40% of the unit value per year

Which of the following is NOT a typical consequence of excess inventory? a. unnecessary physical warehousing costs b. increase in stockout costs c. costly inventory write-downs d. greater financial carrying charges

b. increase in stockout costs

An increase in inventory holding costs per unit, all else equal, will result in which of the following? a. lower order placement costs b. lower average inventories c. high optimal order quantities and, thus, lower average inventories d. lower customer demand

b. lower average inventories

Which of the following information is NOT needed to complete a DRP table? a. store-level demand forecast b. unit costs c. lead time information d. economic order quantities e. current inventory levels

b. unit costs

As demand for a given product increases nine fold from one year to the next, all else equal, cycle stocks for this particular product should grow by what factor? a. 1 b. 2 c. 3 d. 4

c. 3

Customer demand uncertainty refers to which of the following? a. The difficulty of predicting which particular customers will purchase a product b. Customers' struggles of choosing between different products c. The challenge associated with anticipating how much of a product customers will buy in a specific time period d. None of the above

c. The challenge associated with anticipating how much of a product customers will buy in a specific time period

In the context of DRP, what is the minimum planning horizon? a. A measure of supply chain visibility b. A forecasting technique used in the retail industry c. The cumulative lead time of the critical path in a distribution system d. A gathering of top logistics executives where new distribution strategies are discussed

c. The cumulative lead time of the critical path in a distribution system

What does the EOQ model helps managers determine? a. Annual demand b. The magnitude of inventory holding costs (per unit, per year) c. The size of an individual order d. Overall firm profitability e. Both A and B

c. The size of an individual order

If the in-stock rate is 95%, which of the following is true? a. Stockouts are observed in 95% of all order cycles a. 95% of total consumer demand is filled from on-hand inventory c. There will be no stockout occurrences in 95 out of 100 order cycles d. The dwell time will be 95 days

c. There will be no stockout occurrences in 95 out of 100 order cycles

What are stockout costs? a. They are equal to inventory holding costs per unit per year b. They are trivial in most cases c. They are difficult to estimate precisely d. They are the same for every product

c. They are difficult to estimate precisely

When should distribution requirements planning be used? a. When the EOQ formula is not readily available b. To verify that the EOQ has been correctly determined c. To determine total requirements in a distribution system d. To determine a retailer's optimal order quantities

c. To determine total requirements in a distribution system

If, in a given scenario, the EOQ is 400, then what will be the average amount of cycle stock? a. 0 b. 50 c. 100 d. 200

d. 200

According to the square root law of cycle stocks, inventory turns in a stocking facility will decrease by ______ when demand levels drop by 75% a. 25% b. 75% c. 100% d. 50%

d. 50%

What does the square root law of cycle stocks suggest? a. Demand increases as the square root of cycle stocks b. The power of the law increases with cycle stocks c. The square root of cycle stocks is equal to demand d. Cycle stocks increase as the square root of demand

d. Cycle stocks increase as the square root of demand

What does the distribution requirements planning tool do? a. Decide which materials should be used in production b. Forecast store-level demand c. Design a distribution system d. None of the above e. Both A and B

d. None of the above

Excess inventory . . .• a. leads to costly inventory write-downs. b. incurs unnecessary physical warehousing costs. c. causes an increase in stockout costs. d. ties up capital in inventory that is not needed. e. All of the above f. Only A, B, and D

f. Only A, B, and D

The primary objective of inventory management is warehouse utilization. inventory minimization. total cost minimization. warehouse expansion.

total cost minimization.

When an aggregate inventory analysis is performed using data from a company's warehouses, which warehouses will most likely be the best performing? • Those that have the lowest absolute amount of inventory. • Those for which inventories fall on or close to the turnover curve. • Those that have the highest sales volume. None of the above

• Those for which inventories fall on or close to the turnover curve.