Deck 5: Inventory Management

Question 1

Pipeline inventory is inventory that is moved from point to point within the material flow system.

Answer 1

False

Question 2

Shutting down more frequently but for shorter periods of time for preventive maintenance will generally reduce the quantity of decoupling inventory needed.

Answer 2

True

Question 3

Protection interval is the time interval for which inventory must be planned when each new order is placed.

Answer 3

True

Question 4

Inventory is created when items,including materials,parts,or finished goods are disbursed faster than they are received.

Question 5

One of the ways that poorly managed inventory creates environmental waste is through scrapping of obsolescent inventory.

Question 6

Perpetual inventory is a system of inventory control in which the inventory records are obsolete.

Question 7

Inventory reduces the potential for stockouts and backorders.

Question 8

The degree at which all the work can be done is referred to as repeatability.

Question 9

The economic order quantity (EOQ),is the lot size that minimizes total annual inventory holding and ordering costs.

Question 10

One of the ways that the poorly managed inventory creates environmental waste is through products that have "best before date."

Question 11

Inventory used to increase predictable,uneven rates of demand or supply,which businesses often face,is called anticipation inventory.

Question 12

The primary reason for keeping inventories low is that inventory represents a temporary monetary investment in goods on which a firm must pay interest.

Question 13

One component of the ordering cost of inventory is shrinkage.

Question 14

Safety stock inventory is the portion of total inventory that varies directly with lot size.

Question 15

One component of the holding cost of inventory is interest.

Question 16

Customer orders waiting to be processed are called an order backlog.

Question 17

A stockout occurs when an item that is typically stocked is not available to satisfy a demand the moment it occurs.

Question 18

Inventory is a stock of items used to satisfy customer demand or support the production of goods or services.

Question 19

Setup cost is the cost involved in changing over a machine to produce a different component or item.

Question 20

A company is more likely to place its inventory close to customers as finished goods for standard items than it is for special items.

Question 21

The item fill rate measures how quickly orders arrive from suppliers.

Question 22

The EOQ is the lot size that minimizes total annual inventory holding and ordering costs.

Question 23

Service level is the desired probability of not running out of stock in any one order cycle.

Question 24

The reorder point is the measurement of an item's ability to satisfy demand.

Question 25

Reducing the lead times associated with purchasing or producing items has no impact on the level of safety stock inventory.

Question 26

Holding inventory towards the finished goods level supports lower costs but also results in longer delivery times.

Question 27

Dependent demand items are those items for which demand is influenced by market conditions and is not related to inventory decision for any other item held in stock.

Question 28

Holding inventory at the raw materials level rather than as finished goods reduces the cost of carrying inventory but also results in longer delivery times.

Question 29

A backorder is an order that cannot be filled at the time the customer places the order,resulting in a lost sale.

Question 30

ABC analysis is the process of dividing items into three classes according to their dollar usage.

Question 31

Typically,the cost of capital is not a significant component of the holding cost for inventory.

Question 32

For wholesale and retail businesses,maintaining high levels of customer service translates into pressures to maintain relatively low inventory levels.

Question 33

A perpetual inventory system is a system of inventory control in which the inventory records are always current.

Question 34

The two-bin inventory system is a type of visual system.

Question 35

A stockout is a customer order that cannot be filled when promised or demanded but is filled later.

Question 36

Cycle counting is an inventory control method whereby storeroom personnel physically count a small percent of the total number of items each day.

Question 37

When using ABC analysis,class C items should be reviewed frequently.

Question 38

A periodic review system is a system in which an item's inventory position is reviewed periodically rather than continuously.

Question 39

A continuous review system is sometimes called a reorder point system.

Question 40

Generally,the setup cost associated with producing a number of components to be held in inventory is independent of the order size.

Question 41

The secondary levers for decoupling inventory emphasize

A) finding more responsive suppliers and carriers for shipments between stocking locations.
B) level customer demand by offering seasonal pricing plans.
C) all aspects of uncertainty found in the demand, supply, delivery, and operations.
D) better coordination and adjusting the output rate of individual operations.

Question 42

An advantage of continuous review (Q)inventory systems relative to periodic review (P)inventory systems is that lower levels of safety stock provide savings in holding costs.

Question 43

For a given level of annual demand (D),as the lot size Q increases,inventory holding costs increase while ordering or setup costs decrease.

Question 44

Which one of the following reasons creates a pressure for reducing inventories?

A) high interest or opportunity cost
B) on-time delivery requests from customers
C) need for better labor or equipment utilization
D) need for reduction in total payments to suppliers

Question 45

As the holding cost (H)decreases,the economic order quantity (EOQ)increases.

Question 46

For a company that manufactures most of its products as standards,more inventory should be placed

A) closer to the customer.
B) within the plant as work-in-process.
C) close to suppliers.
D) equally distributed between the plants and warehouses.

Question 47

For a continuous review (Q)inventory system,with uncertain demand the time between orders (TBO)is the same for each cycle.

Question 48

Assuming equivalent lead times,the period that stockout protection is needed because of demand uncertainty is longer in a periodic review (P)inventory system than in a continuous review (Q)inventory system.

Question 49

Which one of the following statements about anticipation inventory is TRUE?

A) It is a portion of inventory that is reserved for the best customer.
B) It is a portion of inventory that is used to absorb only the variation in demand.
C) It is a portion of inventory that is used to absorb only the variation in supply.
D) It is a portion of inventory that is used to absorb variation in demand or supply.

Question 50

One of the secondary levers for reducing safety stock inventory is to reduce

A) supply uncertainties.
B) setup cost.
C) capacity cushions.
D) delivery size.

Question 51

In a periodic review (P)inventory system,the lot size ordered may change from one order to the next but the time between orders is fixed.

Question 52

As the setup cost (S)increases,the economic order quantity (EOQ)decreases.

Question 53

One of the secondary levers for reducing anticipation inventory is to

A) keep nonperishable product.
B) reduce holding cost.
C) add products with alternating demand cycles.
D) accept only large orders.

Question 54

For a given level of annual demand (D),as the lot size Q decreases,both inventory holding costs and ordering or setup costs decrease.

Question 55

Pipeline inventory is a type of inventory that is usually maintained by

A) gasoline suppliers only.
B) electrical utilities only.
C) any manufacturer moving materials from point to point.
D) a trucking company making emergency shipments.

Question 56

For a given level of annual demand (D),as lot sizes (Q)increase there is a trade off between higher holding costs and lower ordering or setup costs.

Question 57

For continuous review (Q)inventory systems,fixed quantities of items are ordered each time inventory levels reach the reorder point (R).

Question 58

One of the secondary levers for reducing pipeline inventory is to

A) offer seasonal pricing plans.
B) increase capacity cushions.
C) accept only large orders.
D) select more responsive suppliers.

Question 59

For a continuous review (Q)inventory system,with uncertain demand a company is only at risk of running out of stock over the lead time (L)required to receive an order.

Question 60

Safety stock is only used in continuous review (Q)inventory systems,not in periodic review (P)inventory systems.

Question 61

Even though the economic order quantity (EOQ)is optimal only when five assumptions are satisfied,it serves as a reasonable first approximation even when these assumptions do not quite apply.Which one of the following is NOT an assumption of the EOQ?

A) Decisions for one item can be made independently of decisions made for other items.
B) There is no uncertainty in lead time.
C) The amount of an order received is exactly equal to what was ordered, without any "short shipments" from a supplier or scrap losses in the shop.
D) Quantity discounts can be taken advantage of for large lot sizes.

Question 62

Which one of the following statements is best?

A) A P system requires more safety stock than a Q system.
B) A P system lends itself more to quantity discounts than does a Q system.
C) A P system requires more administrative control and computer support than does a Q system.
D) In a periodic review system, the value of Q is kept the same from one cycle to another.

Question 63

Which one of the following is NOT a method for tracking inventory and assuring accurate records?

A) assign responsibility to specific employees for issuing and receiving materials
B) updating the reorder points to minimize safety stock
C) cycle counting
D) logic error checks

Question 64

Which one of the following descriptions best defines the cycle-service level as a measure of customer service?

A) The preferred proportion of annual demand instantaneously filled from stock
B) The number of stockouts tolerated per year
C) The preferred proportion of days in the year when an item is in stock
D) The desired probability of not running out of stock in any one inventory cycle

Question 65

An inventory system answers two important questions: when to order and how much to order.Which of the following statements correctly explains how a Q system (continuous review system)or a P system (periodic review system)answers these questions?

A) Under a Q system, a fixed quantity is ordered every P time period.
B) Under a Q system, an order is placed to replenish the inventory position up to the target level T when the inventory position reaches the reorder point R.
C) Under a P system, a fixed quantity Q is ordered when the inventory position reaches the reorder point R.
D) Under a P system, an order is placed to replenish the inventory position up to the target level T every P time period.

Question 66

Which one of the following descriptions of a base-stock system is best?

A) It is particularly attractive when review and ordering cost are both significant.
B) It can be seen as a way to minimize cycle inventory.
C) Examples include gasoline storage tanks at a service station.
D) An item's inventory is stored at two different locations or "bins."

Question 67

Sensitivity analysis on the economic order quantity (EOQ)formula can help the operations manager answer several questions on how to manage inventories.Which one of the following questions is NOT answered by EOQ sensitivity analysis?

A) How critical are errors in estimating demand (D), inventory holding cost (H), and setup cost (S)?
B) What should happen to lot sizes if interest rates drop?
C) What should happen to cycle inventory if the demand rate increases?
D) What should happen to lot sizes if supply and lead-time uncertainty increase?

Question 68

What is generally true about the class A items in ABC analysis? They represent

A) about 20 percent of all items.
B) about 30 percent of all items.
C) about 20 percent of the dollar usage.
D) about 50 percent of the dollar usage.

Question 69

The goal of ABC analysis is to

A) determine the profitability of items.
B) estimate average volume per dollar value.
C) estimate dollar value per pound.
D) to identify the A items for better inventory control.

Question 70

Which one of the following statements concerning the economic order quantity (EOQ)is TRUE?

A) The EOQ is the order quantity that minimizes annual inventory holding costs.
B) An increase in demand will increase the EOQ value.
C) The time between orders
D) The EOQ formula assumes that there are only three relevant costs: holding, transportation, and setup.

Question 71

Which one of the following statements regarding the economic order quantity (EOQ)is TRUE?

A) The EOQ model combines several different item orders to the same supplier.
B) If an order quantity is larger than the EOQ, the annual holding cost for cycle inventory exceeds the annual ordering cost.
C) The EOQ model assumes a variable demand pattern.
D) When the interest rate drops, the inventory holding cost decreases and the EOQ decreases.

Question 72

Which one of the following statements about inventory control systems is best?

A) A single-bin system is essentially a P system, with the target inventory and current inventory position established visually.
B) A base-stock system minimizes ordering and setup costs by placing orders more infrequently.
C) The base-stock system is mostly used for inexpensive items since it maximizes cycle inventory costs.
D) Visual systems are intended for use with high-value items like jet engines, that don't experience a steady demand.

Question 73

Which one of the following statements about inventory control systems is TRUE?

A) A two-bin inventory system is essentially a P system because the inventory is reviewed only on a periodic basis.
B) An optional replenishment system is particularly attractive when both review and ordering costs are significant.
C) Visual systems are difficult to administer because records on current inventory position have to be kept for every item.
D) Overstocking is quite common for those items that are managed by using the base-stock system.

Question 74

Which one of the following statements concerning a continuous review system is best?

A) The inventory position (IP) of an item measures the item's ability to satisfy future demand, relying only on the on-hand inventory.
B) An item's inventory position under a continuous review system increases by Q units as soon as an order is received.
C) An item's on-hand inventory increases by Q units as soon as an order is placed.
D) Under a continuous review system, an item's inventory position corresponds to the on-hand inventory unless there are backorders or one or more scheduled receipts.

Question 75

Which one of the following statements is best?

A) The level of safety stock maintained decreases when the desired cycle-service level increases.
B) The level of safety stock maintained decreases when the standard deviation of demand during lead time increases.
C) When no safety stock is maintained, stockouts will occur during approximately 50 percent of the cycles.
D) The level of safety stock maintained is greater if mean absolute deviation (MAD) is used rather than standard deviation in estimating forecast errors.

Question 76

Which one of the following statements represents an advantage of the P system over the Q system?

A) Less safety stock is carried to achieve the same service level.
B) The replenishment intervals can be more easily individualized for items.
C) Orders can be more easily combined to the same supplier.
D) A P system is more suitable for quantity discounts and capacity limitations.

Question 77

Which one of the following statements concerning the economic order quantity (EOQ)model is TRUE?

A) An increase in holding cost will increase the EOQ value.
B) A decrease in demand will increase the EOQ value.
C) A decrease in holding cost will increase the EOQ value.
D) None of the above are true.

Question 78

Which one of the following statements represents an advantage of a Q system over the P system?

A) A perpetual inventory system is not mandatory.
B) Orders for multiple items from the same supplier can be combined more easily.
C) Fixed replenishment intervals are possible, which can be, administratively, quite convenient.
D) The Q system is more suited for quantity discounts and physical limitations.

Question 79

The Lemma Company manufactures and sells 10 products.Ways have been found to cut both the setup and inventory holding costs in half.What effect will this have on the economic order quantities of the 10 products?

A) They will be reduced by a factor of 1.41.
B) They will not change.
C) They will be reduced by a factor of 2.00.
D) They will be increased by a factor of 1.41.

Question 80

Which statement regarding special items is FALSE?

A) more likely than a standard item to have finished goods inventory
B) less likely than a standard item to have finished goods inventory
C) just enough of the item is ordered or processed to cover the latest customer request
D) an item that is made to order or, if purchased, bought to order