Deck 12: Managing Uncertainty in a Supply Chain: Safety Inventory

Question 1

For the same safety inventory,an increase in lot size increases the fill rate but not the cycle service level.

Answer 1

True

Question 2

The coefficient of variation measures the size of the relative certainty of cycle inventory.

Answer 2

False

Question 3

The appropriate level of safety inventory is determined by the uncertainty of both demand and supply and the desired level of cycle inventory.

Answer 3

False

Question 4

Raising the level of safety inventory increases inventory holding costs.

Question 5

Safety inventory is carried because demand forecasts are accurate and a product shortage may result if the forecast demand exceeds the actual demand.

Question 6

Tracking order fill rates is important when customers place a high value on the entire order being filled simultaneously.

Question 7

Product availability reflects a firm's ability to fill a customer order out of available inventory.

Question 8

Raising the level of safety inventory increases product availability and thus the margin captured from customer purchases.

Question 9

Order fill rate is the fraction of product demand that is satisfied from product in inventory.

Question 10

Safety inventory is inventory carried for the purpose of satisfying demand that exceeds the amount forecasted for a given period.

Question 11

Lead time is the gap between when an order is placed and when it is received.

Question 12

As the uncertainty of supply or demand grows,the required level of safety inventories increases.

Question 13

The fill rate increases and the cycle service level decreases as the safety inventory is increased.

Question 14

The expected shortage per replenishment cycle (ESC)is the average units of demand that are satisfied from inventory in stock per replenishment cycle.

Question 15

The distinction between product fill rate and order fill rate is significant in a single product situation.

Question 16

As the desired level of product availability increases,the required level of safety inventory decreases.

Question 17

Carrying excessive inventory can help counter demand volatility when new products come on the market.

Question 18

With periodic review,inventory status is checked at regular intervals and an order is placed to raise the inventory level to a specified threshold.

Question 19

Shortage occurs in a replenishment cycle only if the demand during the lead time exceeds the ROP.

Question 20

Product fill rate is the fraction of product demand that is satisfied from product in inventory.

Question 21

Periodic review policies require more safety inventory than continuous review policies for the same level of product availability.

Question 22

Inventory carried for the purpose of satisfying demand that exceeds the amount forecasted for a given period is

A) cycle inventory.
B) demand inventory.
C) safety inventory.
D) security inventory.

Question 23

Manufacturer-driven substitution increases overall profitability for the manufacturer by allowing some aggregation of demand,which reduces the inventory requirements for the same level of availability.

Question 24

In most supply chains,the key to reducing the underlying forecast uncertainty is to link all forecasts throughout the supply chain to customer demand data.

Question 25

The issue of product availability and the level of safety inventory is particularly significant in industries where

A) product life cycles are short and demand is stable.
B) product life cycles are short and demand is very volatile.
C) product life cycles are long and demand is stable.
D) product life cycles are long and demand is very volatile.

Question 26

The required safety inventory grows rapidly with a decrease in the desired product availability.

Question 27

Postponement allows the supply chain to delay product differentiation,which results in disaggregating most of the inventories in the supply chain.

Question 28

If aggregation reduces the required safety inventory for a product by a small amount,it may be best to carry the product in multiple decentralized locations to reduce response time and transportation cost.

Question 29

Cycle inventory is inventory carried to satisfy demand that exceeds the amount forecasted for a given period.

Question 30

Aggregation reduces the standard deviation of demand only if demand across the regions being aggregated is not perfectly positively correlated.

Question 31

In case demand in different geographical regions is about the same size and independent,aggregation increases safety inventory by the square root of the number of areas aggregated.

Question 32

The trade-off that a supply chain manager must consider when planning safety inventory is

A) increasing product availability versus increasing inventory holding costs.
B) decreasing product availability versus decreasing inventory holding costs.
C) increasing product availability versus raising the level of safety inventory.
D) decreasing product availability versus decreasing the level of safety inventory.

Question 33

The required safety inventory increases with an increase in the lead time and the standard deviation of periodic demand.

Question 34

The lower the coefficient of variation of an item,the greater the reduction in safety inventories as a result of centralization.

Question 35

A reduction in supply can help dramatically reduce safety inventory required without hurting product availability.

Question 36

Safety inventory is carried because

A) demand forecasts are accurate.
B) demand forecasts are uncertain.
C) adequate supplies are available.
D) excess product was manufactured.

Question 37

A key to the success of any supply chain is to figure out ways to decrease the level of safety inventory carried without hurting the level of product availability.

Question 38

When using a continuous review policy,a manager has to account for the uncertainty of demand during the lead time and the review interval.

Question 39

Given the product variety and high demand uncertainty in most high-tech supply chains,a significant fraction of the inventory carried is safety inventory.

Question 40

A goal of any supply chain manager is to reduce the level of safety inventory required regardless of the affect product availability.

Question 41

The expected shortage per replenishment cycle (ESC)is

A) the units of demand that are not satisfied from inventory in stock in a given replenishment cycle.
B) the units of demand that are satisfied from inventory in stock in a given replenishment cycle.
C) the average units of demand that are not satisfied from inventory in stock per replenishment cycle.
D) the average units of demand that are satisfied from inventory in stock per replenishment cycle.

Question 42

What key question(s)need(s)to be considered when planning safety inventory for any supply chain?

A) What is the appropriate lead time to establish?
B) What is the appropriate level of safety inventory to carry?
C) What actions can be taken to improve product availability while reducing safety inventory?
D) B and C only

Question 43

Lead time is the gap between

A) when an order is placed and when it is received.
B) when an order is received and when it is put away.
C) when an order is received and when it is used.
D) when an order is acknowledged and when it is received.

Question 44

A company that tracks inventory and places an order for a lot size Q when the inventory declines to the reorder point (ROP)is using

A) continuous review.
B) daily review.
C) occasional review.
D) periodic review.

Question 45

A company that checks inventory status at regular periodic intervals and places an order to raise the inventory level to a specified threshold is using

A) continuous review.
B) daily review.
C) occasional review.
D) periodic review.

Question 46

The fraction of replenishment cycles that end with all the customer demand being met is the

A) customer fill rate.
B) product fill rate.
C) order fill rate.
D) cycle service level (CSL).

Question 47

A replenishment policy

A) consists of decisions regarding when to reorder and how much to reorder.
B) determines the cycle and safety inventories along with the fr and the CSL.
C) may take several forms.
D) All of the above are true.

Question 48

Which of the following is correct?

A) Average inventory = cycle inventory + safety inventory
B) Average inventory = cycle inventory - safety inventory
C) Average inventory = cycle inventory × safety inventory
D) Average inventory = cycle inventory / safety inventory

Question 49

If a customer order arrives when product is not available

A) a sale results.
B) the retailer allocates product to the customer.
C) a stockout results.
D) the order is filled from safety inventory.

Question 50

The fraction of orders that are filled from available inventory is the

A) customer fill rate.
B) product fill rate.
C) order fill rate.
D) cycle service level (CSL).

Question 51

The fraction of product demand that is satisfied from product in inventory is the

A) customer fill rate.
B) product fill rate.
C) order fill rate.
D) cycle service level (CSL).

Question 52

As the uncertainty of supply or demand grows,the required level of safety inventories

A) decreases.
B) increases.
C) remains stable.
D) both A and B

Question 53

As the safety inventory is increased

A) fill rate increases and cycle service level decreases.
B) fill rate decreases and cycle service level increases.
C) both fill rate and cycle service level increase.
D) both fill rate and cycle service level decrease.

Question 54

A key to success at which company has been its ability to provide a high level of product availability to customers while carrying very low levels of safety inventory in its supply chain?

A) Compaq
B) Hewlett-Packard
C) Dell
D) Packard-Bell

Question 55

The appropriate level of safety inventory is determined by

A) the uncertainty of both demand and supply.
B) the desired level of product availability.
C) the processes in a supply chain are divided into 2 categories depending on all of the above
D) A and B only

Question 56

The distinction between product fill rate and order fill rate is

A) not significant in a single product situation.
B) significant in a single product situation.
C) not significant when a firm is selling multiple products.
D) significant when a firm is selling multiple products.

Question 57

A shortage occurs in a replenishment cycle

A) only if the demand during the lead time exceeds the ROP.
B) only if the demand during the lead time is less than the ROP.
C) only if the demand during the lead time exceeds the average demand.
D) only if the demand during the lead time is less than the average demand.

Question 58

Which of the following is not a measure of product availability?

A) Customer fill rate
B) Product fill rate
C) Order fill rate
D) Cycle service level (CSL)

Question 59

The coefficient of variation measures

A) the accuracy of the demand forecast.
B) the size of the uncertainty relative to demand.
C) the relevance of cycle inventory to demand.
D) the relative certainty of the forecast.

Question 60

Given a lot size of Q (which is also the average demand in a replenishment cycle)

A) the fraction of demand lost is thus ESC + Q.
B) the fraction of demand lost is thus ESC - Q.
C) the fraction of demand lost is thus ESC/Q.
D) the fraction of demand lost is thus ESC × Q.

Question 61

Periodic review policies for inventory replenishment require safety inventory to cover demand during

A) lead time only.
B) the review interval only.
C) both lead time and the review interval.
D) neither lead time or the review interval.

Question 62

Which approach to aggregation requires an information system that allows access to current inventory records from each location?

A) Information centralization
B) Specialization
C) Product substitution
D) Component commonality

Question 63

The ability of a supply chain to delay product differentiation or customization until closer to the time the product is sold is

A) information centralization.
B) specialization.
C) product substitution.
D) postponement.

Question 64

A goal of any supply chain manager is to

A) increase the level of safety inventory required in a way that does not adversely affect product availability.
B) increase the level of safety inventory required regardless of the effect on product availability.
C) reduce the level of safety inventory required regardless of the effect on product availability.
D) reduce the level of safety inventory required in a way that does not adversely affect product availability.

Question 65

For the same safety inventory,an increase in lot size

A) decreases the fill rate but not the cycle service level.
B) increases the fill rate but not the cycle service level.
C) decreases both the fill rate and the cycle service level.
D) increases both the fill rate and the cycle service level.

Question 66

Which of the following is not a method by which a supply chain can extract the benefits of aggregation without having to physically centralize all inventories in one location?

A) Information centralization
B) Specialization
C) Product substitution
D) Component differentiation

Question 67

The required safety inventory

A) increases with an increase in the lead time and the standard deviation of periodic demand.
B) decreases with an increase in the lead time and the standard deviation of periodic demand.
C) remains stable with an increase in the lead time and the standard deviation of periodic demand.
D) increases with a decrease in the lead time and the standard deviation of periodic demand.

Question 68

The use of one product to satisfy demand for a different product is

A) information centralization.
B) specialization.
C) product substitution.
D) component commonality.

Question 69

Which approach to aggregation has the goal of moving product differentiation as close to the pull phase of the supply chain as possible?

A) Information centralization
B) Specialization
C) Product substitution
D) Postponement

Question 70

Which approach to aggregation would stock the fast-moving items at decentralized locations close to the customer and slow-moving items at a centralized location?

A) Information centralization
B) Specialization
C) Product substitution
D) Component commonality

Question 71

The required safety inventory

A) grows rapidly with a decrease in the desired product availability.
B) grows rapidly with an increase in the desired product availability.
C) decreases with an increase in the desired product availability.
D) remains stable with an increase in the desired product availability.

Question 72

A distributor should decide his safety inventory levels based on

A) the level of safety inventory carried by all retailers supplied by him.
B) the level of safety inventory carried by other distributors.
C) the level of safety inventory carried by manufacturers supplying him.
D) the level of cycle inventory carried by all retailers supplied by him.

Question 73

All inventory between a given stage in the supply chain and the final customer is called the

A) cycle inventory.
B) demand inventory.
C) echelon inventory.
D) safety inventory.

Question 74

Often,safety inventory calculations in practice

A) do not include any measure of supply uncertainty, resulting in levels that may be higher than required.
B) do not include any measure of supply uncertainty, resulting in levels that may be lower than required.
C) include measures of supply uncertainty, resulting in levels that may be higher than required.
D) include any measures of supply uncertainty, resulting in levels that may be lower than required.

Question 75

Aggregation reduces the standard deviation of demand

A) only if demand across the regions being aggregated is perfectly positively correlated.
B) only if demand across the regions being aggregated is not perfectly positively correlated.
C) even if demand across the regions being aggregated is not perfectly positively correlated.
D) whenever demand across the regions being aggregated is not perfectly positively correlated.

Question 76

Which of the following is not a major disadvantage of aggregating all inventory in one location?

A) Increase in forecast accuracy of customer demand.
B) Increase in response time to customer order.
C) Increase in transportation cost to customer.
D) All of the above are disadvantages.

Question 77

Which use of common components in a variety of products has been a very effective supply chain strategy to exploit aggregation and reduce component inventories?

A) Information centralization
B) Specialization
C) Product substitution
D) Component commonality

Question 78

Which of the following is not an approach to reduce the level of safety inventory required in a way that does not adversely affect product availability?

A) Reduce the supplier lead time.
B) Reduce the underlying uncertainty of demand.
C) Reduce the cost of material coming from suppliers.
D) All of the above are approaches.

Question 79

Periodic review policies require

A) more safety inventory than continuous review policies for the same level of product availability.
B) less safety inventory than continuous review policies for the same level of product availability.
C) the same safety inventory as continuous review policies for the same level of product availability.
D) no more safety inventory than continuous review policies for the same level of product availability.

Question 80

Continuous review policies for inventory replenishment require safety inventory to cover demand during

A) lead time only.
B) the review interval only.
C) both lead time and the review interval.
D) neither lead time or the review interval.