Chapter 12: Inventory Management

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?

14 is the reorder point, and 100 is the order quantity.

Which of the following should be higher in P systems than Q systems?

Safety stock

Extra units that are held in inventory to reduce stockouts are called __________.

safety stock

Generally, inventory types are divided into four main categories. Which of the following is not one of the four main categories of inventory?

Safety stock inventory

A company wishes to determine the EOQ for an item that has an annual demand of 2,000 units, a cost per order of $75, and annual carrying cost of 7.50 per unit. What is the EOQ?

The EOQ is 200. Using the basic EOQ formula: Q* = Economic Order Quantity D = Annual Demand (in this case 2,000 units) S = Fixed cost per order (in this case $75) H = Holding or Carrying cost (7.50 per unit) Step 1: Calculate 2*D (Annual Demand)*S(Cost per Order) 2*2,000*75 = 300,000 Step 2: Divide 2*D (Annual Demand)*S(Cost per Order)/H 300,000/7.50 = 40,000 Step 3: Take square root of 40,000 Square root of 40,000 = 200

A production facility is trying to determine the best batch size for an item that is produced intermittently. This item has an annual demand of 1,000 units, an annual carrying cost of $10 per unit, and a setup cost of $400. They operate 50 weeks per year, and can produce 40 units per week. What is the best batch size for this item?

The best batch size for this item is 400. The answer to this problem is determined by using the production order quantity equation for annual demand and production rates. Where, D= Annual Demand (1,000 units) S= Setup Cost ($400) H= Holding Cost ($10 per unit) d= demand rate (1,000 units/50 weeks per year = 20 units per week) p= production rate (40 units per week)

A store wants to ensure a shelf full of marshmallow peeps as the holiday season approaches. Daily demand for peeps is normally distributed with a mean of 25 and a standard deviation of 5. Lead time is 3 days and the store intends a 98% service level. What is the appropriate reorder point?

The correct reorder point is 93. The reorder point reflects the amount of safety stock needed to cover the lead time for an order plus any random variation in demand. In other words, the business must place the order before running out of inventory so that new units arrive before they are needed. This problem presents a situation with demand variance (average daily demand of 25 with a standard deviation of 5) and a constant lead time (3 days). The following formula is used to calculate the reorder point when a specific service level is expected, demand variance exists, and there is a constant lead time: ROP = demand during lead time plus ZσdLT Demand during lead time is calculated by multiplying daily demand (25 marshmallow peeps) by lead time (3 days). 25 x 3 = 75. In this case, we also need to take into account the amount of safety stock necessary to cover any random variance in demand using the equation ZσdLT, where: Z - standard z-score from normal distribution table (in this case z for 98% service level is 2.055) σd = standard deviation of demand rate (in this case standard deviation of demand is 5) LT = standard deviation of lead time (in this case √3 = 1.732) Thus, ZσdLT = 2.055*(1.732*5) = 2.055*8.66 = 17.8, which would be rounded to 18. The necessary safety stock is 18 marshmallow peeps. Remember, ROP = demand during lead time plus ZσdLT ROP = 25(3) + 18 ROP = 75 + 18 ROP = 93

Which of these conditions is not necessary for the economic order quantity model to be valid?

The item has a constant purchase price.

A specific product has expected 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?

The safety stock required to provide a 95% service level is 41. The necessary level of safety stock for a given service level is calculated by using the following formula: ZσdLT Where: Z - standard z-score from normal distribution table (in this case z for 95% service level is 1.65) σdLT = standard deviation of demand during lead time (in this case standard deviation of demand is 25) 1.65*25 = 41.25, which would be rounded to 41.

A system that triggers ordering on a uniform time basis is called a _______.

a fixed-period system

A system that keeps track of each withdrawal or addition to inventory continuously is __________.

a perpetual inventory system

A disadvantage of the fixed-period inventory system is that

a stockout is possible.

If demand is not uniform and constant, the stockout risks can be controlled by __________.

adding safety stock

ABC analysis generally divides on-hand inventory into three classes based upon ______.

annual dollar volume.

The appropriate level of safety stock is typically determined by _________.

choosing the level of safety stock that assures a given service level

In the probabilistic model, increasing the service level will __________.

increase the cost of the inventory policy

Inventory record accuracy would be decreased by __________.

increasing stockroom accessibility

Cycle counting __________.

is a process by which inventory records are verified for accuracy

The production order quantity model _______.

is appropriate when units are produced and sold simultaneously

Inventory management policies based on ABC analysis might include investing _______.

more in supplier development for A items

The difference between the basic Economic Order Quantity (EOQ) model and the production order quantity model is that _______.

the production order quantity model does not require the assumption of instantaneous delivery

The primary purpose of the basic economic order quantity model is ________.

to minimize the sum of setup cost and holding cost

One use of inventory is __________.

to provide a hedge against inflation

Most inventory models attempt to minimize __________.

total inventory based costs

The two most important inventory-based questions answered by the typical inventory model are ______.

when to place an order and how many of an item to order