Opp & supply ch 12

T/f 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.

F

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

False

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

False

T/f At the economic order quantity, holding costs are equal to purchasing costs.

False

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

False

T/f In the quantity discount model, the cost of acquiring goods (product cost) is not a factor in determining lot size.

False

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

False

T/f In the simple EOQ model, if the carrying cost were to double, the EOQ would also double.

False

T/f Insurance and taxes on inventory are part of the costs known as setup or ordering costs.

False

T/f Safety stock in inventory systems depends only on the average demand during the lead time.

False

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

False

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

False

T/f Work-in-process inventory is devoted to maintenance, repair, and operations.

False

_____________ inventory is material that is usually purchased, but has yet to enter the manufacturing process.

Raw material

In a quantity discount problem, if the savings in product cost is smaller than the increase in the sum of setup cost and holding cost, the discount should be _____________.

Rejected or refused

A(n) __________ model gives satisfactory answers even with substantial variations in its parameters.

Robust

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

Safety stock

List the typical components that constitute inventory holding or carrying costs.

Typical components of inventory holding or carrying costs include housing costs, material handling costs, labor cost from extra handling, investment costs, pilferage, scrap, and obsolescence.

T/f The fixed-period inventory model can have a stockout during the review period as well as during the reorder period, which is why fixed-period models require more safety stock than fixed-quantity models.

True

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

True

T/f Units of safety stock are additions to the reorder point that allow for variability in the rate of demand, the length of lead time, or both.

True

List the typical cost components that constitute ordering costs in inventory systems.

Typical components of ordering costs include cost of supplies, forms, order processing, clerical support, and so forth.

A specific product has demand during lead time of 100 units, with a standard deviation 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

The fixed-period inventory model requires more safety stock than the fixed-quantity models because a.a stockout can occur during the review period as well as during the lead time b.this model is used for products that have large standard deviations of demand c.this model is used for products that require very high service levels d.replenishment is not instantaneous e.setup costs and holding costs are large

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 has demand of 4000 units per year. Ordering cost is $20 and holding cost is $4 per unit per year. The EOQ model is appropriate. The cost-minimizing solution for this product will cost _____ per year in total annual inventory costs. a.$400 b.$800 c.$1200 d.zero; this is a class C item e.cannot be determined because unit price is not known

B

______________ is a method for dividing on-hand inventory into three classifications based on annual dollar volume.

ABC analysis

Describe ABC inventory analysis in one sentence. What are some policies that may be based upon the results of an ABC analysis?

ABC inventory analysis is a method for dividing on-hand inventory into three classifications based on annual dollar volume. Some policies include: purchasing resources expended on supplier development should be higher for individual A items than for C items; A items should have tighter physical inventory control, and forecasting A items may warrant more care.

Compare the assumptions of the production order quantity model to those of the basic EOQ model.

All are the same, except the assumption that receipt of inventory is instantaneous, which holds for EOQ, but not POQ.

A product has demand of 4000 units per year. Ordering cost is $20 and holding cost is $4 per unit per year. The cost-minimizing solution for this product is to order a.all 4000 units at one time b.200 units per order c.every 20 days d.10 times per year e.none of the above

B

A product whose EOQ is 40 experiences a decrease in ordering cost from $90 per order to $10. The revised EOQ is a.three times as large b.one-third as large c.nine times as large d.one-ninth as large e.cannot be determined

B

A product whose EOQ is 400 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

A production order quantity problem has daily demand rate = 10 and daily production rate = 50. The production order quantity for this problem is approximately 612 units. The average inventory for this problem is approximately a.61 b.245 c.300 d.306 e.490

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 which 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 more of them e.an item is critical if its unit price is high

B

An advantage of the fixed-period inventory system is that a.the supplier will be more cooperative b.there is no physical count of inventory items when an item is withdrawn c.no inventory records are required d.orders usually are for smaller order quantities e.the average inventory level is reduced

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.provides a measure of inventory accuracy 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

Which of the following statements regarding Amazon.com is false? a.The company was opened by Jeff Bezos in 1995. b.The company was founded as, and still is, a "virtual retailer" with no inventory. c.The company is now a world-class leader in warehouse management and automation. d.The company uses both United Parcel Service and the U.S. Postal Service as shippers. e.Amazon obtains its competitive advantage through inventory management.

B

Which of the following statements regarding the production order quantity model is true? a.It applies only to items produced in the firm's own production departments. b.It relaxes the assumption that all the order quantity is received at one time. c.It relaxes the assumption that the demand rate is constant. d.It minimizes the total production costs. e.It minimizes inventory.

B

In the production order quantity model, the fraction of inventory that is used immediately and not stored is represented by the ratio of_____________.

Demand rate to production rate

A certain type of computer costs $1,000, and the annual holding cost is 25%. 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

For a certain item, the cost-minimizing order quantity obtained with the basic EOQ model was 200 units and the total annual inventory (carrying and setup) cost was $600. The inventory carrying cost per unit per year for this item is a.$1.50 b.$2.00 c.$3.00 d.$150.00 e.not enough data to determine

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 a safety stock of approximately 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, 90 percent service level will require safety stock of approximately a.7 units b.10 units c.13 units d.16 units e.26 units

C

If the actual order quantity is the economic order quantity in a problem that meets the assumptions of the economic order quantity model shown below, the average amount of inventory on hand Q* = 2 D S H a.is smaller the smaller is the holding cost per unit b.is zero c.is one-half of the economic order quantity d.is affected by the amount of product cost e.All of the above are true.

C

In a safety stock problem where both demand and lead time are variable, demand averages 150 units per day with a daily standard deviation of 16, and lead time averages 5 days with a standard deviation of 1 day. The standard deviation of demand during lead time is approximately a.15 units b.100 units c.154 units d.500 units e.13,125 units

C

In the basic EOQ model, if D=6000 per year, S=$100, H=$5 per unit per month, the economic order quantity is approximately 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 assumptions of the production order quantity model are met in a situation where annual demand is 3650 units, setup cost is $50, holding cost is $12 per unit per year, the daily demand rate is 10 and the daily production rate is 100. The production order quantity for this problem is approximately a.139 b.174 c.184 d.365 e.548

C

The two most basic inventory questions answered by the typical inventory model are a.timing and cost of orders b.quantity and cost of orders c.timing and quantity of orders d.order quantity and service level e.ordering cost and carrying cost

C

Which of the following statements regarding control of service inventories is true? a.Service inventory is a fictional concept, because services are intangible. b.Service inventory needs no safety stock, because there's no such thing as a service stockout. c.Effective control of all goods leaving the facility is one applicable technique. d.Service inventory has carrying costs but not setup costs. e.All of the above are true.

C

If a safety stock problem includes parameters for average daily demand, standard deviation of demand, and lead time, then _____________ is variable and ___________ is constant.

Demand, lead time

Describe the costs associated with ordering and maintaining inventory.

Costs that are associated with ordering and maintaining inventory include initial purchase cost of the item, holding cost (insurance, space, heat, light, security, warehouse personnel, etc.), obsolescence or deterioration cost (particularly important in perishable goods or in a product that is undergoing rapid technological evolution), and ordering or setup cost (cost of forms, clerical processing, etc., or cost of machine setup).

_____________ is a continuing reconciliation of inventory with inventory records.

Cycle counting

What is cycle counting?

Cycle counting is an audit to reconcile inventory with inventory records.

A disadvantage of the fixed-period inventory system is that a.it involves higher ordering costs than the fixed quantity inventory system b.additional inventory records are required c.the average inventory level is decreased d.since there is no count of inventory during the review period, a stockout is possible e.orders usually are for larger quantities

D

All of the following statements about ABC analysis are true except a.inventory may be categorized by measures other than dollar volume b.it categorizes on-hand inventory into three groups based on annual dollar volume c.it is an application of the Pareto principle d.it states that all items require the same degree of control e.it states that there are the critical few and the trivial many inventory items

D

Among the advantages of cycle counting is that it a.makes the annual physical inventory more acceptable to management b.does not require the detailed records necessary when annual physical inventory is used c.does not require highly trained people d.allows more rapid identification of errors and consequent remedial action than is possible with annual physical inventory e.does not need to be performed for less expensive items

D

If demand is not uniform and constant, then stockout risks can be controlled by a.increasing the EOQ b.placing an extra order c.raising the selling price to reduce demand d.adding safety stock e.reducing the reorder point

D

The EOQ model with quantity discounts attempts to determine a.what is the lowest amount of inventory necessary to satisfy a certain service level b.what is the lowest purchasing price c.whether to use fixed-quantity or fixed-period order policy d.how many units should be ordered e.what is the shortest lead time

D

The primary purpose of the basic economic order quantity model shown below is Q* = 2 D S H a.to calculate the reorder point, so that replenishments take place at the proper time b.to minimize the sum of carrying cost and holding cost c.to maximize the customer service level d.to minimize the sum of setup cost and holding cost e.to calculate the optimum safety stock

D

The proper quantity of safety stock is typically determined by a.minimizing an expected stockout cost b.carrying sufficient safety stock so as to eliminate all stockouts c.meeting 95% of all demands d.setting the level of safety stock so that a given stockout risk is not exceeded e.minimizing total costs

D

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 the variability of demand during lead time e.protect the firm from a sudden decrease in demand

D

Which of the following is not an assumption of the economic order quantity model shown below? Q* = 2 D S H a.Demand is known, constant, and independent. b.Lead time is known and constant. c.Quantity discounts are not possible. d.Production and use can occur simultaneously. e.The only variable costs are setup cost and holding (or carrying) cost.

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.All of these are main types of 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 are tightly controlled, have accurate records, and receive regular review by major decision makers. c.In ABC analysis, "C" Items have minimal records, periodic review, and simple controls. d.ABC analysis is based on the presumption that all items must be tightly controlled to produce important cost savings. e.All of the above statements are true.

D

Which of the following statements about quantity discounts is false? a.The cost-minimizing solution may or may not be where annual holding costs equal annual ordering costs. b.In inventory management, item cost becomes relevant to inventory decisions only when a quantity discount is available. c.If carrying costs are expressed as a percentage of value, EOQ is larger at each lower price in the discount schedule. d.The larger annual demand, the less attractive a discount schedule will be. e.The smaller the ordering cost, the less attractive a discount schedule will be.

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 increase, the EOQ 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

Which of the following would not generally be a motive for a firm to hold inventories? a.to decouple or separate parts of the production process b.to provide a stock of goods that will provide a selection for customers c.to take advantage of quantity discounts d.to minimize holding costs e.All of the above are functions of inventory.

D

Which of these statements about the production order quantity model is false? a.The production order quantity model is appropriate when the assumptions of the basic EOQ model are met, except that receipt is noninstantaneous. b.Because receipt is noninstantaneous, some units are used immediately, not stored in inventory. c.Average inventory is less than one-half of the production order quantity. d.All else equal, the smaller the ratio of demand rate to production rate, the larger is the production order quantity. e.None of the above is false.

D

ABC analysis divides on-hand inventory into three classes, generally based upon a.item quality b.unit price c.the number of units on hand d.annual demand e.annual dollar volume

E

When demand is constant and lead time is variable, safety stock computation requires three inputs: the value of z, _____________, and the standard deviation of lead time.

Daily demand

Inventory that separates various parts of the production process performs a ___________ function

Decoupling

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

When quantity discounts are allowed, the cost-minimizing order quantity a.is always an EOQ quantity b.minimizes the sum of holding and ordering costs c.minimizes the unit purchase price d.may be a quantity below that at which one qualifies for that price e.minimizes the sum of holding, ordering, and product costs

E

Which category of inventory holding costs is much higher than average for rapid-change industries such as PCs and cell phones? a.housing costs b.material handling costs c.labor cost d.parts cost e.pilferage, scrap, and obsolescence

E

Which of the following are elements 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 cost.

E

Which of the following is a function of inventory? a.to decouple or separate parts of the production process b.to decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers 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 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

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 x L if safety stock is present. d.The fixed-period model has no reorder point. e.All of the above are true.

E

A(n) ____________ system triggers inventory ordering on a uniform time frequency.

Fixed period

Describe the difference between a fixed-quantity and a fixed-period inventory system?

In a fixed-quantity inventory system, when the quantity on hand reaches the reorder point, an order is placed for the specified quantity. In a fixed-period inventory system, an order is placed at the end of the period. The quantity ordered is that needed to bring on-hand inventory up to a specified level.

When is a good time for cycle-counting personnel to audit a particular item?

In deciding when to verify inventory through cycle counting, the important considerations are (a) the verification takes place according to a formal schedule, and (b) inventory records of particularly important items are verified more often, those of less important items, less often. As the text suggests, the schedule can be weekly, monthly, or any other criteria, such as when an item goes to zero or when the item is to be ordered.

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, independent ordering with EOQ may not be appropriate.

What is a fixed-period system?

It is a system in which inventory orders are made at regular time intervals.

For a given level of demand, annual holding cost is larger as the order quantity is _____________.

Larger

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

Lead time

What is MRO an acronym for? What is the function of MRO inventories?

MRO inventories are devoted to maintenance/repair/operating supplies. They exist because the need and timing for maintenance and repair of some equipment are unknown.

In an economic order quantity problem, the total annual cost curve is at its _____________ where holding costs equal setup costs.

Minimum

____________ is the complement of the probability of a stockout.

Service level

How would a firm go about determining service level?

Service level is a difficult parameter to determine. Basically, the firm uses its subjective judgment to balance the cost of additional inventory against the cost of lost goodwill due to stockouts or shortages.

Define shrinkage. List three or more examples of shrinkage.

Shrinkage is retail inventory that is unaccounted for between receipt and sale. Examples will vary, but may include inventory damaged prior to sale, stolen prior to sale, and inventory "lost" due to sloppy paperwork.

What are the techniques to control service inventories?

Techniques to control service inventories include good personnel selection, training, and discipline; tight control of incoming shipments; and effective control of all goods leaving the facility.

How sensitive is the EOQ to variations in demand or costs?

The EOQ is relatively insensitive to small changes in demand or setup or carrying costs because the cost curve is relatively flat around the EOQ. For example, if demand increases by 10%, EOQ will increase by approximately 5%.

What happens to the cost of the inventory policy when the service level increases?

The cost of the inventory policy increases dramatically with increases in service level.

List the four types of inventory.

The four types of inventory are raw material, work-in-process, maintenance/repair/operating supply (MRO), and finished goods.

What are the assumptions of the EOQ model?

The more important assumptions of the basic EOQ model are demand is known and constant over time, the lead time, that is, the time between the placement of the order and the receipt of the goods, is known and constant, the receipt of the inventory is instantaneous; i.e., the goods arrive in a single batch, at one instant in time, quantity discounts are not possible, the only variable costs are the cost of setting up or placing an order and the cost of holding or storing inventory over time, and if orders are placed at the right time, stockouts or shortages can be completely avoided.

Assume two inventory problems with identical demand, holding cost, and setup cost. In one, goods arrive instantly, but in the other goods arrive at a measurable rate. Which of these problems will have the larger optimal order quantity? Why?

The problem with instantaneous delivery is an EOQ problem, and its optimal order quantity is Q*. The problem with noninstantaneous delivery is a POQ problem, with optimal order quantity Q*P. The POQ problem will yield a higher order quantity than the basic model, other things equal, because the maximum inventory level (and thus the effective carrying charge) is less. Maximum inventory is less because some items are used immediately and never enter inventory.

Define service level.

The service level is the percentage of demand met by available stock; it is the complement of the probability of a stockout.

In the basic economic order quantity model and in the production order quantity model, optimal behavior occurs where annual setup costs equal annual holding costs. Is this a coincidence, or a fundamental element of these models? Answer in a well-constructed paragraph.

This equality is not a coincidence. It follows from the objective of both models, which is the minimization of total inventory costs for that product. In both of these models, total cost minimization occurs where the setup cost and holding cost elements intersect. The formulas for Q* and Q*P follow from that point of equality.

In some inventory models, the optimal behavior occurs where ordering costs and carrying costs are equal to one another. Provide an example of a model where this "rule" does not hold; explain how the model's results are optimal anyway.

This rule will not hold in all instances of quantity discount models. In order to take advantage of a discount, it may be cheaper to order a quantity that is not an EOQ. The goal in quantity discount models is to minimize the sum of ordering, carrying, and purchase costs.

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

True

T/f If setup costs are reduced by substantial reductions in setup time, the production order quantity is also reduced

True

T/f In ABC analysis, "A" Items are the most tightly controlled.

True

T/f In cycle counting, the frequency of item counting and stock verification usually varies from item to item depending upon the item's classification.

True

T/f 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 lot size than in an otherwise identical EOQ problem.

True

T/f In the quantity discount model, it is possible to have a cost-minimizing solution where annual ordering costs do not equal annual carrying costs.

True

T/f One advantage of cycle counting is that it maintains accurate inventory records.

True

T/f One function of inventory is to take advantage of quantity discounts.

True

T/f Retail inventory that is unaccounted for between receipt and time of sale is known as shrinkage.

True

T/f Service level is the complement of the probability of a stockout.

True

T/f The demand for automobiles would be considered an independent demand.

True

Amazon's original concept of operating without inventory has given way to a model in which Amazon is a world-class leader in _______________.

warehouse management and automation