Deck 12: Inventory Management

Question 1

To provide satisfactory levels of customer service while keeping inventory costs within reasonable bounds, two fundamental decisions must be made about inventory: when to order and how much to order.

Answer 1

True

Question 2

The average inventory level is inversely related to order size.

Answer 2

False

Question 3

Understocking an inventory item is a sure sign of inadequate inventory control.

Answer 3

False

Question 4

The EOQ should be regarded as an approximate quantity rather than an exact quantity. Thus, rounding the calculated value is acceptable.

Question 5

One important use of inventories in manufacturing is to decouple operations through the use of work-in-process inventories.

Question 6

DVD recorders would be an example of independent-demand items.

Question 7

A retail store that carries twice as much inventory as its competitor will provide twice the customer service level.

Question 8

An inventory buffer adds value and lowers cost in all supply chains.

Question 9

The A-B-C approach involves classifying inventory items based on their name.

Question 10

The objective of inventory management is to minimize the cost of holding inventory.

Question 11

Reorder point models are primarily used for dependent-demand items.

Question 12

The average inventory level and the number of orders per year are inversely related: As one increases, the other decreases.

Question 13

The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs reasonable.

Question 14

Interest, insurance, and opportunity costs are all associated with holding costs.

Question 15

Decoupling operations means to break the linkage between two sequential operations.

Question 16

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.

Question 17

An example of inventory holding cost is the cost of moving goods to temporary storage after receipt from a supplier.

Question 18

In the EOQ formula, holding costs under 10 percent are expressed as percentages, above 10 percent are expressed as annual unit costs.

Question 19

Carrying cost is a function of order size; the larger the order quantity, the higher the inventory carrying cost.

Question 20

EOQ inventory models are basically concerned with the timing of orders.

Question 21

Safety stock is held because we anticipate future demand.

Question 22

Discrete stocking levels are used when an organization does not want visibility of inventory levels.

Question 23

The rate of demand is an important factor in determining the ROP.

Question 24

In the quantity discount model, the optimum quantity will always be found on the lowest total cost curve.

Question 25

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.

Question 26

In the fixed-order-interval model, the order size is the same for each order.

Question 27

Profit margins tend to be inversely related to inventory turns.

Question 28

Annual ordering cost is inversely related to order size.

Question 29

ROP models assume that demand during lead time is composed of a series of dependent daily demands.

Question 30

The single-period model can be very helpful in determining when to order.

Question 31

ROP models indicate to managers the time between orders.

Question 32

The inventory value of the supply chain exceeds the inventory value of the organization's work-in-process inventory.

Question 33

The fixed-order-interval model requires a larger amount of safety stock than the ROP model for the same risk of a stockout.

Question 34

Solving quality problems can lead to lower inventory levels.

Question 35

The total cost curve is relatively flat near the EOQ.

Question 36

The fixed-order-interval model requires a continuous monitoring of inventory levels.

Question 37

Variability in demand and/or lead time can be compensated for by safety stock.

Question 38

When to order can be calculated by the ROP and expressed as a quantity.

Question 39

The single-period model can be very helpful in determining how much to order.

Question 40

Because price is not a factor in the EOQ formula, quantity discounts will not affect EOQ calculations.

Question 41

The two basic issues in inventory are how much to order and when to order.

Question 42

Cycle counting can be used in motorcycle inventory control.

Question 43

A nonlinear cost related to order size is the cost of

A)interest.
B)insurance.
C)taxes.
D)ordering.
E)space.

Question 44

A quantity discount will lower the reorder point.

Question 45

A single-period model would be used mainly by organizations going out of business.

Question 46

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

Question 47

When the item is offered for resale, shortage costs in the single-period model can include a charge for loss of customer goodwill.

Question 48

The basic EOQ model ignores the purchasing cost.

Question 49

In the single-period model, the service level is the probability that demand will not exceed the stocking level in any period.

Question 50

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

Question 51

Safety stock eliminates all stockouts.

Question 52

Using the EOQ model, the higher an item's carrying costs, the more frequently it will be ordered.

Question 53

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.

Question 54

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

Question 55

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

Question 56

It is critical that the exact quantity calculated in the EOQ model be ordered.

Question 57

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

Question 58

The calculation of safety stock requires knowledge of demand and lead time variability.

Question 59

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

Question 60

Monitoring inventory turns over time can be used as a measure of performance.

Question 61

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.

Question 62

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.

Question 63

Which of the following is least likely to be included in order costs?

A)processing vendor invoices for payment
B)processing purchase orders
C)inspecting incoming goods for quantity
D)taking an inventory to determine how much is needed
E)temporary storage of delivered goods

Question 64

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.

Question 65

In the A-B-C classification system, items which account for about 60 percent of the annual dollar value, but only about 10 to 15 percent of the items in inventory, 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.

Question 66

In an A-B-C system, the typical percentage of the number of items in inventory that is classified as A items is about

A)10.
B)30.
C)50.
D)70.
E)90.

Question 67

Which is not a true assumption in the basic EOQ model?

A)Each order is received in a single delivery.
B)Lead time does not vary.
C)No more than three items are involved.
D)Usage rate is constant.
E)No quantity discounts.

Question 68

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.

Question 69

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

Question 70

In the A-B-C classification system, items which account for about 15 percent of the annual dollar value, but which account 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.

Question 71

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.

Question 72

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.

Question 73

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

Question 74

A cycle count program will usually require that Class A items be counted

A)daily.
B)once a week.
C)monthly.
D)quarterly.
E)more often than annually.

Question 75

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.

Question 76

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.

Question 77

A risk avoider would want ______ safety stock.

A)less
B)more
C)the same
D)zero
E)50 percent

Question 78

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.

Question 79

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.

Question 80

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.