INVENTORY MANAGEMENT
In a supermarket, a vendor's restocking the shelves every Monday morning is an example of: A. safety stock replenishment. B. economic order quantities. C. reorder points. D. fixed order intervals. E. blanket ordering.
D. fixed order intervals.
If there are shipping cost economies that result from bundling orders for different items together, the __________ model becomes a relatively more attractive option. A. multi-period B. reorder-point C. fixed-order-quantity D. fixed-order-interval E. multi-item
D. fixed-order-interval
In the EOQ formula, holding costs under 10 percent are expressed as percentages, above 10 percent are expressed as annual unit costs.
FALSE Holding costs are expressed in monetary terms, whether as a set value or as a percentage of the per-unit cost.
Because price is not a factor in the EOQ formula, quantity discounts will not affect EOQ calculations.
FALSE If quantity discounts are offered, the EOQ might vary based on different holding costs
An inventory buffer adds value and lowers cost in all supply chains.
FALSE Many buffers increase costs across supply chains.
In the fixed-order-interval model, the order size is the same for each order.
FALSE Order size varies from order to order in a fixed-order-interval model.
ROP models assume that demand during lead time is composed of a series of dependent daily demands.
FALSE ROP models assume that demand during lead time is composed of a series of independent daily demands.
ROP models indicate to managers the time between orders.
FALSE ROP models indicate when, with regard to on-hand inventory, orders should be placed.
Reorder point models are primarily used for dependent-demand items.
FALSE Reorder point models are primarily used for independent-demand items.
Safety stock is held because we anticipate future demand.
FALSE Safety stock is held because we anticipate fluctuations in future demand or in lead time.
Safety stock eliminates all stockouts.
FALSE Safety stock only ensures a given likelihood of stockouts.
The A-B-C approach involves classifying inventory items by unit cost, with expensive items classified as A items and low-cost items classified as C items.
FALSE The A-B-C approach classifies inventory according to some measure of importance.
The average inventory level is inversely related to order size.
FALSE The average inventory level is positively related to order size.
The fixed-order-interval model requires a continuous monitoring of inventory levels.
FALSE The fixed-order-interval model leads to periodic monitoring of inventory levels.
Using the EOQ model, the higher an item's carrying costs, the more frequently it will be ordered.
TRUE As carrying costs increase, the optimal order quantity decreases.
The calculation of safety stock requires knowledge of demand and lead time variability.
TRUE Both of these play a role in the calculation of safety stock.
DVD recorders would be an example of independent-demand items.
TRUE Components of the DVD recorders would be dependent-demand items.
Cycle counting can be used in motorcycle inventory control.
TRUE Cycle counting can also be used in automobile inventory control.
One important use of inventories in manufacturing is to decouple operations through the use of work-in-process inventories.
TRUE Decoupling operations is an important use of inventories.
Monitoring inventory turns over time can be used as a measure of performance.
TRUE Greater turnover often implies better performance.
The EOQ should be regarded as an approximate quantity rather than an exact quantity. Thus, rounding the calculated value is acceptable.
TRUE The total cost function is relatively flat, so rounding costs little.
The inventory value of the supply chain exceeds the inventory value of the organization's work-in-process inventory.
TRUE There can be raw materials and finished goods inventory at the organization. Other organizations in the supply chain will have inventories, too.
Interest, insurance, and opportunity costs are all associated with holding costs.
TRUE These are holding costs
The average inventory level and the number of orders per year are inversely related: As one increases, the other decreases.
TRUE These are inversely related.
In an A-B-C system, the typical percentage of the number of items in inventory for A items is about: A. 10. B. 30. C. 50. D. 70. E. 90.
A. 10. Class A items represent a relatively small portion of items.
In the basic EOQ model, an annual demand of 40 units, an ordering cost of $5, and a holding cost of $1 per unit per year will result in an EOQ of: A. 20. B. square root of 200. C. 200. D. 400. E. 600.
A. 20. Use the base EOQ formula.
In the A-B-C classification system, items which account for 60 percent of the total dollar volume for few inventory items would be classified as: A. A items. B. B items. C. C items. D. A items plus B items. E. B items plus C items.
A. A items.
In a two-bin inventory system, the amount contained in the second bin is equal to the: A. ROP. B. EOQ. C. amount in the first bin. D. optimum stocking level. E. safety stock.
A. ROP.
Given the same demand, setup/ordering costs, and carrying costs, the EPQ calculated using incremental replenishment will be ____________ if instantaneous replenishment was assumed. A. greater than the EOQ B. equal to the EOQ C. smaller than the EOQ D. greater than or equal to the EOQ E. smaller than or equal to the EOQ
A. greater than the EOQ
Average demand for a particular item is 1,200 units per year. It costs $100 to place an order for this item, and it costs $24 to hold one unit of this item in inventory for one year. If the fixed-order-interval model is chosen in this instance, how often (on average) will this item be ordered? A. once a month B. once every other month C. twice a month D. twice every three months E. three times every two months
A. once a month The order interval is found by dividing the EOQ (in this case) 100 by the annual demand (1,200). In this case that leads to an optimal interval of 1/12th of a year (or one month).
Which of the following interactions with vendors would potentially lead to inventory reductions? A. reduced lead times B. increased safety stock C. less frequent purchases D. larger batch quantities E. longer order intervals
A. reduced lead times
In the basic EOQ model, if D = 60 per month, S = $12, and H = $10 per unit per month, EOQ is: A. 10. B. 12. C. 24. D. 72. E. 144.
B. 12. Use the base EOQ formula.
Weekly demand for a particular item averages 30 units, with a standard deviation of 4. This item is managed with a fixed-order-interval model. The order interval is three weeks, and this item has a certain lead time of one week. The desired service level is 97.5 percent. Assume that it is now time to place another order, and there are 43 units on hand. How many units should be ordered? A. 120 B. 93 C. 136 D. 46 E. 84
B. 93 Expected demand during protection interval [30*(3 + 1)] + safety stock [1.96*4*sqrt(3 + 1)] - on hand [43] = 120 + 15.68 - 43 ≈ 93.
In the quantity discount model, with carrying cost stated as a percentage of unit purchase price, in order for the EOQ of the lowest curve to be optimum, it must: A. have the lowest total cost. B. be in a feasible range. C. be to the left of the price break quantity for that price. D. have the largest quantity compared to other EOQs. E. have smaller ordering costs than the others.
B. be in a feasible range.
A fill rate is the percentage of _____ filled by stock on hand. A. shipments B. demand C. inventory D. safety stock E. lead time
B. demand
If no variations in demand or lead time exist, the ROP will equal: A. the EOQ. B. expected usage during lead time. C. safety stock. D. the service level. E. the EOQ plus safety stock.
B. expected usage during lead time.
A risk avoider would want ______ safety stock. A. less B. more C. the same D. zero E. 50 percent
B. more
Which of the following is typically the largest of all inventory costs? A. shortage cost B. purchase cost C. holding cost D. ordering cost E. pipeline cost
B. purchase cost
In the A-B-C classification system, items which account for 15 percent of the total dollar volume for a majority of the inventory items would be classified as: A. A items. B. B items. C. C items. D. A items plus B items. E. B items plus C items.
C. C items.
Which is not a true assumption in the EOQ model? A. Production rate is constant. B. Lead time does not vary. C. No more than three items are involved. D. Usage rate is constant. E. No quantity discounts.
C. No more than three items are involved.
Dairy items, fresh fruit, and newspapers are items that: A. do not require safety stocks. B. cannot be ordered in large quantities. C. are subject to deterioration and spoilage. D. require that prices be lowered every two days. E. have minimal holding costs.
C. are subject to deterioration and spoilage.
When carrying costs are stated as a percentage of unit price, the minimum points on the total cost curves: A. line up. B. equal zero. C. do not line up. D. cannot be calculated. E. depend on the percentage assigned.
C. do not line up.
The purpose of cycle counting is to: A. count all the items in inventory. B. count bicycles and motorcycles in inventory. C. reduce discrepancies between inventory records and actual quantities. D. reduce theft. E. count 10 percent of the items each month.
C. reduce discrepancies between inventory records and actual quantities.
Even though it is often the case that no cash outflows result when demand exceeds capacity, __________ can nevertheless be experienced in those circumstances. A. foreorder costs B. service costs C. shortage costs D. holding costs E. setup costs
C. shortage costs
In the basic EOQ model, if annual demand is 50, carrying cost is $2, and ordering cost is $15, EOQ is approximately: A. 11. B. 20. C. 24. D. 28. E. 375.
D. 28. Use the base EOQ formula.
Which of the following is not one of the assumptions of the basic EOQ model? A. Annual demand requirements are known and constant. B. Lead time does not vary. C. Each order is received in a single delivery. D. Quantity discounts are available. E. Ordering and holding costs have been estimated reasonably accurately.
D. Quantity discounts are available.
Which of the following is not true for the economic production quantity model? A. Usage rate is constant. B. Production rate exceeds usage rate. C. Run size exceeds maximum inventory. D. There are no ordering or setup costs. E. Average inventory is one-half maximum inventory.
D. There are no ordering or setup costs.
A nonlinear cost related to order size is the cost of: A. interest. B. insurance. C. taxes. D. receiving. E. space.
D. receiving.
In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will: A. double. B. increase, but not double. C. decrease by a factor of 2. D. remain the same. E. increase, but more information is needed to calculate exactly how much.
D. remain the same.
In the basic EOQ model, if annual demand doubles, the effect on the EOQ is: A. It doubles. B. It is four times its previous amount. C. It is half its previous amount. D. It is about 70 percent of its previous amount. E. It increases by about 40 percent.
E. It increases by about 40 percent.
The EOQ model is most relevant for which one of the following? A. ordering items with dependent demand B. determination of safety stock C. ordering perishable items D. determining fixed-interval order quantities E. determining fixed order quantities
E. determining fixed order quantities
A stock or store of goods is called a(n): A. bundler. B. servicer. C. retailer. D. supply chain. E. inventory.
E. inventory.
A cycle count program will usually require that A items be counted: A. daily. B. once a week. C. monthly. D. quarterly. E. more often than annually.
E. more often than annually.
Which one of the following is not generally a determinant of the reorder point? A. rate of demand B. length of lead time C. lead time variability D. stockout risk E. purchase cost
E. purchase cost
Which of the following is least likely to be included in order costs? A. processing vendor invoices for payment B. processing purchase order C. inspecting incoming goods for quantity D. taking an inventory to determine how much is needed E. temporary storage of delivered goods
E. temporary storage of delivered goods
The introduction of quantity discounts will cause the optimum order quantity to be: A. smaller. B. unchanged. C. greater. D. smaller or unchanged. E. unchanged or greater.
E. unchanged or greater.
It is critical that the exact quantity calculated in the EOQ model be ordered.
FALSE Because the total cost curve is flat, modest rounding of the EOQ is permissible.
In the A-B-C approach, C items typically represent about 15 percent of the number of items, but 60 percent of the dollar usage.
FALSE C items typically represent about 60 percent of the number of items and about 15 percent of the dollar usage.
Decoupling operations applies to the railroad industry.
FALSE Decoupling refers to buffering operations in manufacturing.
Discrete stocking levels are used when an organization does not want visibility of inventory levels.
FALSE Discrete stocking refers to having to stock a discrete number of units.
EOQ inventory models are basically concerned with the timing of orders
FALSE EOQ models are concerned with the size of orders.
Understocking an inventory item is a sure sign of inadequate inventory control.
FALSE Having an occasional stockout is not necessarily a sign of inadequate inventory control.
The objective of inventory management is to minimize the cost of holding inventory.
FALSE The objective of inventory management is to allow satisfactory customer service while keeping costs down.
In the quantity discount model, the optimum quantity will always be found on the lowest total cost curve.
FALSE The optimum quantity might actually be when the discount is passed up.
A quantity discount will lower the reorder point.
FALSE The reorder point is independent of quantity discounts.
A single-period model would be used mainly by organizations going out of business.
FALSE The single-period model applies to many regularly occurring circumstances.
The single-period model can be very helpful in determining when to order.
FALSE The single-period model helps determine how many to order.
A retail store that carries twice as much inventory as its competitor will provide twice the customer service level.
FALSE There is a limit to how high service level can go; if the competitor's service level is 90 percent, the retailer can't double that.
An example of inventory holding cost is the cost of moving goods to temporary storage after receipt from a supplier.
FALSE These are ordering costs.
In the quantity discount model, if holding costs are given as a percentage of unit price, a graph of the total cost curves will have the same EOQ for each curve.
FALSE Total cost curves will differ across the price levels.
Annual ordering cost is inversely related to order size.
TRUE Annual ordering cost decreases as order size increases.
The fixed-order-interval model requires a larger amount of safety stock than the ROP model for the same risk of a stockout.
TRUE Fixed order intervals typically carry more safety stock.
When the item is offered for resale, shortage costs in the single-period model can include a charge for loss of customer goodwill.
TRUE Greater loss of goodwill would equate with a higher shortage cost.
In the single-period model, the service level is the probability that demand will not exceed the stocking level in any period.
TRUE If demand exceeds the stocking level, a stockout has occurred.
Carrying cost is a function of order size; the larger the order, the higher the inventory carrying cost.
TRUE Larger order quantities lead to higher inventory carrying cost.
Solving quality problems can lead to lower inventory levels.
TRUE Leaning out the organization can be facilitated by solving quality problems.
The basic EOQ model ignores the purchasing cost.
TRUE Only if quantity discounts are offered does purchasing cost enter into EOQ analysis.
The two basic issues in inventory are how much to order and when to order.
TRUE Quantity and timing are the two basic issues in inventory management.
When to order can be calculated by the ROP and expressed as a quantity.
TRUE ROP models indicate when, with regard to on-hand inventory, orders should be placed.
Variability in demand and/or lead time can be compensated for by safety stock.
TRUE Safety stock can be used to accommodate these.
The rate of demand is an important factor in determining the ROP.
TRUE The demand rate multiplied by the lead time is a major part of the ROP.
The single-period model can be very helpful in determining how much to order.
TRUE The single-period model helps determine how many to order.
The two main concerns of inventory control relate to the costs and the level of customer service.
TRUE These are the essential facets of inventory control.
To provide satisfactory levels of customer service while keeping inventory costs within reasonable bounds, two fundamental decisions must be made about inventory: the timing and the size of orders.
TRUE These are the fundamental decisions regarding inventory control.
The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs reasonable.
TRUE This is the overall objective of inventory management.
Profit margins tend to be inversely related to inventory turns.
TRUE This is typically the case.
The total cost curve is relatively flat near the EOQ.
TRUE Thus approximating the EOQ can be a very good solution.