Question 1

Explain the impact of aggregation on safety inventory.

Accepted Answer

Aggregation reduces the standard deviation of demand only if demand across the regions being aggregated is not perfectly positively correlated. Demand for most products does not show perfect positive correlation across different geographical regions. In case demand in different geographical regions is about the same size and independent, aggregation reduces safety inventory by the square root of the number of areas aggregated. In other words, if the number of independent stocking locations decreases by a factor of n, the average safety inventory is expected to decrease by a factor of n.
There are two major disadvantages of aggregating all inventory in one location:
1.	Increase in response time to customer order
2.	Increase in transportation cost to customer
Both disadvantages result because the average distance between the inventory and the customer increases with aggregation. With this situation, either the customer has to travel more to reach the product or the product has to be shipped over longer distances to reach the customer. However, there are clear benefits to aggregating safety inventory.

Question 2

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

Accepted Answer

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. A

Question 3

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

Accepted Answer

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. B

Question 4

Scenario 12.3 - The Cat Café
Daily demand for cat litter at the Cat Café in Jones is 1500 ounces with a standard deviation of 300 ounces. The proprietor orders the best cat litter money can buy online, and the average shipping time is 5 days. Of course, if the order is placed at the end of the week, then it may take a while longer to receive the shipment, so the standard deviation of lead time is 2 days. The state health department keeps a close eye on the condition of the Cat Café; a cat-loving inspector visits at least twice a week, ostensibly to inspect, but mostly to pet his favorite Scottish Fold cat named Groundskeeper Willie.
-Suppose the café wishes to erase any hint of impropriety and wants to peg their service level at 99.5%. What is the level of safety inventory they should carry?

Accepted Answer

A)   7500 ounces
B)   3074 ounces
C)   19350 ounces
D)   7918 ounces

Question 5

The coefficient of variation measures

Accepted Answer

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 6

As the safety inventory is increased,

Accepted Answer

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 7

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

Accepted Answer

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

Question 8

Periodic review policies require

Accepted Answer

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 9

The distinction between product fill rate and order fill rate is:

Accepted Answer

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 10

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

Accepted Answer

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

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Discuss the various measures of product availability.

Accepted Answer

The answer of Discuss the various measures of product availability....

Question 14

Scenario 12.2 - Hamsterdam
Marlo Stanfield's operation also uses large quantities of prepaid cell phones, on average 1500 per week with a standard deviation of 145. The lead time for their own brand of prepaid cell phones is three weeks and they have a lot size of 350 phones. To ensure they never run out, they keep a safety stock of 500 phones with Proposition Joe.
-What is the expected shortage per cycle under this policy?

Accepted Answer

A)   1 phone
B)   2.2 phones
C)   4.5 phones
D)   9.8 phones

Question 15

Often, safety inventory calculations in practice

Accepted Answer

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 16

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

Accepted Answer

A) True 
 B)False

Question 17

Both ________ and ________ increase as the safety inventory is increased.

Accepted Answer

A)   fill rate, cycle service level
B)   lead time, cycle service level
C)   fill rate, lead time
D)   reorder point, lead time

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

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

Explain the impact of aggregation on safety inventory.

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

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

The coefficient of variation measures

As the safety inventory is increased,

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

Periodic review policies require

The distinction between product fill rate and order fill rate is:

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

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

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

Discuss the various measures of product availability.

Often, safety inventory calculations in practice

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

Both and increase as the safety inventory is increased.

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

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.

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