SCM Final: Chapter 12: Inventory Management

The reorder point is the inventory level at which action is taken to replenish the stocked item. T/F?

True

ABC analysis is based on the presumption that carefully controlling all items is necessary to produce important inventory savings. T/F?

False

According to the global company profile, Amazon.com's advantage in inventory management comes from its almost fanatical use of economic order quantity and safety stock calculations. T/F?

False

Cycle counting is an inventory control technique exclusively used for cyclical items. T/F?

False

In the simple EOQ model, if annual demand were to increase, the EOQ would increase proportionately. T/F?

False

The EOQ model is best suited for items whose demand is dependent on other products. T/F?

False

Which item to order and with which supplier the order should be placed are the two fundamental issues in inventory management. T/F?

False

In the basic EOQ model, if D = 6000 per year, S = $100, and holding cost = $5 per unit per month, what is the economic order quantity? A) 24 B) 100 C) 141 D) 490 E) 600

C

Most inventory models attempt to minimize: A) the likelihood of a stockout. B) the number of items ordered. C) total inventory-based costs. D) the number of orders placed. E) the safety stock.

C

The two most basic inventory questions answered by the typical inventory model are: A) timing of orders and cost of orders. B) order quantity and cost of orders. C) timing of orders and order quantity. D) order quantity and service level. E) ordering cost and carrying cost.

C

The demand for automobiles would be considered as independent demand. T/F?

True

________ is extra stock that is carried to serve as a buffer.

Safety stock

A specific product has demand during lead time of 100 units, with a standard deviation during lead time of 25 units. What safety stock (approximately) provides a 95% service level? A) 41 B) 55 C) 133 D) 140 E) 165

A

In the basic EOQ model, if the cost of placing an order doubles, and all other values remain constant, the EOQ will: A) increase by about 41%. B) increase by 100%. C) increase by 200%. D) increase, but more data is needed to say by how much. E) either increase or decrease.

A

What is a reorder point?

A reorder point is the inventory level (point) at which action is taken (an order placed) to replenish the stocked item.

A product whose EOQ is 400 units experiences a 50% increase in demand. The new EOQ is: A) unchanged. B) increased by less than 50%. C) increased by 50%. D) increased by more than 50%. E) cannot be determined

B

ABC analysis is based upon the principle that: A) all items in inventory must be monitored very closely. B) there are usually a few critical items, and many items that are less critical. C) an item is critical if its usage is high. D) more time should be spent on class "C" items because there are many more of them. E) as with grade distributions in many MBA courses, there should be more medium-level "B" items than either "A" or "C" items.

B

An inventory decision rule states, "When the inventory level goes down to 14 gearboxes, 100 gearboxes will be ordered." Which of the following statements is TRUE? A) One hundred is the reorder point, and 14 is the order quantity. B) Fourteen is the reorder point, and 100 is the order quantity. C) The number 100 is a function of demand during lead time. D) Fourteen is the safety stock, and 100 is the reorder point. E) None of the above is true.

B

Cycle counting: A) is a process by which inventory records are verified once a year. B) eliminates annual inventory adjustments. C) provides a measure of inventory turnover. D) assumes that all inventory records must be verified with the same frequency. E) assumes that the most frequently used items must be counted more frequently.

B

A certain type of computer costs $1,000, and the annual holding cost is 25% of the value of the item. Annual demand is 10,000 units, and the order cost is $150 per order. What is the approximate economic order quantity? A) 16 B) 70 C) 110 D) 183 E) 600

C

If daily demand is constant at 10 units per day, and lead time averages 12 days with a standard deviation of 3 days, 95 percent service requires how much safety stock? A) 28 units B) 30 units C) 49 units D) 59 units E) 114 units

C

If daily demand is normally distributed with a mean of 15 and standard deviation of 5, and lead time is constant at 4 days, a 90 percent service level will require how much safety stock? A) 7 units B) 10 units C) 13 units D) 16 units E) 26 units

C

The purpose of safety stock is to: A) replace failed units with good ones. B) eliminate the possibility of a stockout. C) eliminate the likelihood of a stockout due to erroneous inventory tally. D) control the likelihood of a stockout due to variable demand and/or lead time. E) protect the firm from a sudden decrease in demand.

D

Which of the following is NOT one of the four main types of inventory? A) raw material inventory B) work-in-process inventory C) maintenance/repair/operating supply inventory D) safety stock inventory E) finished-goods inventory

D

Which of the following statements about ABC analysis is FALSE? A) ABC analysis is based on the presumption that controlling the few most important items produces the vast majority of inventory savings. B) In ABC analysis, "A" items should have tighter physical inventory control than "B" or "C" items have. C) In ABC analysis, forecasting methods for "C" items may be less sophisticated than for "A" items. D) ABC analysis is based on the presumption that all items must be tightly controlled to produce important cost savings. E) Criteria other than annual dollar volume, such as high holding cost or delivery problems, can determine item classification in ABC analysis.

D

Which of the following statements about the basic EOQ model is FALSE? A) If the setup cost were to decrease, the EOQ would fall. B) If annual demand were to double, the number of orders per year would increase. C) If the ordering cost were to increase, the EOQ would rise. D) If annual demand were to double, the EOQ would also double. E) All of the above statements are true.

D

ABC analysis divides on-hand inventory into three classes, generally based upon which of the following? A) item quality B) unit price C) the number of units on hand D) annual demand E) annual dollar volume

E

Demand for dishwasher water pumps is 8 per day. The standard deviation of demand is 3 per day, and the order lead time is four days. The service level is 95%. What should the reorder point be? A) about 18 B) about 24 C) about 32 D) about 38 E) more than 40

E

If the standard deviation of demand is six per week, demand is 50 per week, and the desired service level is 95%, approximately what is the statistical safety stock? A) 8 units B) 10 units C) 16 units D) 64 units E) Cannot be determined without lead time data.

E

Which of the following is a function of inventory? A) to decouple various parts of the production process B) to provide a selection of goods for anticipated customer demand and to separate the firm from fluctuations in that demand C) to take advantage of quantity discounts D) to hedge against inflation E) All of the above are functions of inventory.

E

Which of the following is an element of inventory holding costs? A) housing costs B) material handling costs C) investment costs D) pilferage, scrap, and obsolescence E) All of the above are elements of inventory holding costs.

E

Which of the following statements about the basic EOQ model is TRUE? A) If the ordering cost were to double, the EOQ would rise. B) If annual demand were to double, the EOQ would increase. C) If the carrying cost were to increase, the EOQ would fall. D) If annual demand were to double, the number of orders per year would increase. E) All of the above statements are true.

E

ABC analysis classifies inventoried items into three groups, usually based on annual units or quantities used. T/F?

False

Which of the following statements regarding the reorder point is TRUE? A) The reorder point is that quantity that triggers an action to restock an item. B) There is a reorder point even if lead time and demand during lead time are constant. C) The reorder point is larger than d × L if safety stock is present. D) A shorter lead time implies a smaller reorder point. E) All of the above are true.

E

Several inventory models assume "independent demand." Explain what that term means and why the assumption is important.

Independent demand means that demand for one particular item does not affect, and is not affected by, demand for a different item. When item demands are dependent, such as when wheels are demanded for assembly onto lawnmowers quantities need to be considered more closely

________ is the time between placement and receipt of an order.

Lead Time

Lead time for one of Montegut Manufacturing's fastest moving products is 4 days. Demand during this period averages 100 units per day. What would be an appropriate re-order point?

Re-order point = demand during lead time = 100 units/day × 4 days = 400 units.

A major challenge in inventory management is to maintain a balance between inventory investment and customer service. T/F?

True

In ABC analysis, "A" items are the most tightly controlled. T/F?

True

In the production order quantity (POQ) model, inventory does not arrive in a single moment but flows in at a steady rate, resulting in a larger production/order quantity than in an otherwise identical EOQ problem. T/F?

True

What is the primary purpose of the EOQ model?

to minimize the sum of setup cost and holding cost