Deck 12: Managing Inventories

Question 1

Lead time is the time it takes to prepare an order for shipping to a customer.

Answer 1

False

Question 2

Costs associated with maintaining storage facilities such as gas and electricity, taxes, and insurance are associated with fixed ordering costs.

Answer 2

False

Question 3

Airline flights to ski areas near Denver, Colorado, probably have different means and variances throughout the year. This is an example of dynamic demand.

Answer 3

True

Question 4

Work in process inventory is completed products ready for distribution or sale to customers.

Question 5

Setup costs depend on the number of items manufactured.

Question 6

Airline seats and call center phone lines are examples of inventory in service organizations.

Question 7

When a customer is unwilling to wait for an item that is not in stock and purchases the item elsewhere, a backorder has occurred.

Question 8

RFID tags are often used to track stock keeping units in supply chains.

Question 9

Inventory holding costs can be accurately measured by accounting departments.

Question 10

Overnight shipping for emergency orders and compensation for overbooking at a hotel are examples of ordering costs.

Question 11

A stock-keeping unit is the same no matter at which location the item is found.

Question 12

Safety stock inventory is an additional amount of inventory kept over and above the average amount required to meet demand during the lead time.

Question 13

Stochastic demand inventory models are easier to analyze and solve than deterministic models.

Question 14

Larger orders result in higher total holding cost but lower total ordering cost.

Question 15

An example of stochastic demand might be: "The daily demand for milk is normally distributed with a mean of 150 gallons and a standard deviation of 15 gallons."

Question 16

An airline seat is an example of an asset held for future use or sale.

Question 17

Dependent demand, unlike independent demand, needs to be forecasted.

Question 18

Safety stock inventory is an additional amount of inventory kept over and above the average amount required to meet demand.

Question 19

Marketing and operations generally prefer high inventory levels while finance would prefer small inventories.

Question 20

Maintaining large stocks of inventory is a requirement in today's supply chains in order to improve profitability.

Question 21

Inventory that represents partially completed products waiting further processing is called ____ inventory.

A)Raw materials
B)Work-in-process
C)Cycle
D)Safety stock

Question 22

Which one of the following statements is true?

A)The EOQ is most accurate when both inventory and order costs are estimated on a full cost basis.
B)The EOQ is most accurate when both inventory and order costs are estimated on a pure variable cost basis.
C)The EOQ is most accurate when inventory costs are estimated on a full cost basis while order costs are estimated on a pure variable cost basis.
D)The EOQ is most accurate when inventory costs are estimated on a pure variable cost basis while order costs are estimated on a full cost basis.

Question 23

In a single-period inventory situation, the only inventory decision is when to trigger an order.

Question 24

In ABC inventory analysis, which of the following is true for "C" items?

A)Tighter control of "C" items (than for "A" or "B" items) is appropriate.
B)"C" items are critical items that must be monitored with a fixed period system.
C)"C" items make up a lower percentage of total inventory value ($) than either "A" or "B" items.
D)"C" items make up 10-20 percent of inventory items.

Question 25

Which of the following is not a component of holding cost?

A)Taxes
B)Insurance
C)Material handling
D)Order processing

Question 26

Many practical inventory situations include backorders and quantity discounts.

Question 27

Because the fixed quantity system orders the same amount each time, time between orders will be constant, even with variable demand.

Question 28

In a fixed quantity inventory system with certain demand, the reorder point is chosen to be the average demand during the lead time.

Question 29

In the fixed-period system, managers must make two key decisions: the time interval between reviews, and the replenishment level.

Question 30

"C" items are the critical few that must be closely managed in an inventory system.

Question 31

Inventory position refers to the physical quantity of items on hand in an inventory system.

Question 32

Additional inventory kept over and above the average amount required to meet demand is called ____ inventory.

A)Seasonal
B)Work-in-process
C)Finished goods
D)Safety stock

Question 33

"A" items typically comprise a high percentage of total dollar usage but a low percentage of unit volume.

Question 34

Costs associated with backordering a product are called ____ costs.

A)Holding
B)Shortage
C)Ordering
D)Setup

Question 35

The decision of how many fruit baskets to make for the holiday season would be analyzed using a single-period inventory model.

Question 36

Costs associated with inspecting, unpacking and putting into storage incoming inventory are components of ____ cost.

A)Ordering or setup
B)Holding
C)Shortage
D)Unit

Question 37

In general, total ordering costs are equal to total inventory holding cost for the optimal solution to the EOQ model.

Question 38

The Economic Order Quantity model (EOQ) allows for variable lead-time.

Question 39

Because of demanding customers, organizations must always maintain a 100% service level.

Question 40

Inventory that acts as a buffer between workstations in flow shops or departments in job shops is called ____ inventory.

A)Raw materials
B)Work-in-process
C)Cycle stock
D)Safety stock

Question 41

Which of the following is incorrect regarding inventory management?

A)The two fundamental inventory decisions are when to order and what to order
B)Inventory management applies to goods and to services
C)Different types of inventory characteristics require different approaches for control
D)SKUs are often aggregated or partitioned into groups with similar characteristics or dollar value

Question 42

Which of the following is not a key input to a single period inventory model?

A)Probability distribution of demand
B)Probability that demand is less than the optimal order quantity
C)Cost per item of overestimating demand
D)Cost per item of underestimating demand

Question 43

For the single-period inventory model, solving for the optimal order quantity involves using

A)marginal economic analysis
B)total cost analysis
C)ABC analysis
D)reorder point analysis

Question 44

Using a fixed quantity system (FQS), as the reorder point increases

A)safety stock increases
B)safety stock decreases
C)the number of orders increases
D)the number of orders decreases

Question 45

Average inventory in the EOQ model is defined as

A)The order quantity divided by the number of inventory cycles per year
B)Annual usage divided by the number of inventory cycles per year
C)One-half the order quantity
D)One-half the annual usage

Question 46

Demand that incorporates uncertainty is called ____.

A)Static
B)Dynamic
C)Stochastic
D)Deterministic

Question 47

Independent demand

A)can be derived/calculated
B)is related to other SKUs
C)is also called finished goods inventory
D)needs to be forecasted

Question 48

Which one of the following statements is true?

A)Inventory is any physical asset held for future use or sale.
B)When using ABC analysis, "C" items should be reviewed most frequently.
C)Dependent demand is directly related to the demand of other stock-keeping units and can be calculated without needing to be forecast.
D)Stockouts occur in a Fixed Quantity System (FQS) whenever the lead-time demand exceeds the replenishment level (M).

Question 49

Which one of the following is not true regarding the Fixed Period System (FPS)?

A)The time between orders is constant, but the order quantity might vary.
B)An order is time-triggered, not inventory-triggered.
C)The optimal replenishment level includes the demand during the review period plus any desired safety stock.
D)When demand is not certain, the FPS requires more safety stock than the equivalent FQS.

Question 50

Two fundamental inventory decisions are when to order and how much to order. Which of the following statement is true with respect to Fixed Quantity (FQS) and Fixed Period (FPS) inventory systems?

A)A FPS orders a fixed period quantity when the inventory position reaches or drops below the reorder point (r).
B)A FPS must cover a time period of T + L to cover the risk of a stock out.
C)A FPS places an order for the economic order quantity every T time units.
D)A FQS places an order to replenish the inventory position up to a target level (M) when the inventory position reaches the reorder point (r).

Question 51

Demand that is stable over time is called ____.

A)Static
B)Dynamic
C)Stochastic
D)Deterministic

Question 52

Which one of the following statements concerning the economic order quantity (EOQ) model is not true when the unit holding cost increases?

A)the economic order quantity will decrease
B)the number of orders per year will decrease
C)total ordering cost will increase
D)average inventory will decrease

Question 53

Which one of the following statements is true?

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)In a fixed period inventory system, the value of Q is kept the same from one cycle to another.
D)When demand is uncertain and no safety stock is maintained, stock outs will occur during approximately 50 percent of the cycles.

Question 54

Inventory position is computed using all the following except

A)On-hand
B)Scheduled receipts
C)Backorders
D)Lead time demand

Question 55

Which is not an advantage of the periodic review system?

A)Helps to control "A" items
B)Inventory need not be monitored continually
C)Useful when a large number of items is ordered from the same supplier
D)Consolidated shipments lower freight costs

Question 56

Using ABC analysis, continuous monitoring and accurate record keeping relates best to ____ items.

A)A
B)B
C)C
D)B and C

Question 57

"The inability to satisfy the demand for an item" is the definition of a

A)reorder point
B)stockout
C)lost sale
D)backorder

Question 58

Which of the following is not a key assumption underlining the classic economic order quantity (EOQ) model?

A)The entire order quantity arrives in the inventory at one time
B)There are only two types of relevant costs: order/setup and inventory-holding
C)Demand is assumed to be stochastic
D)Stockouts are not allowed

Question 59

Backorders ____.

A)Result from lost sales
B)Have little financial impact
C)May occur as a result of a stockout
D)Force a customer to purchase elsewhere

Question 60

Demand that varies over time is called ____.

A)Static
B)Dynamic
C)Stochastic
D)Deterministic

Question 61

Given the information below, conduct an ABC analysis and determine which items should be classified as A, B and C.

Question 62

A bookstore must decide on how many calendars to order for the next year. Each calendar costs $2 and is sold for $4.50. After January 1, any unsold calendars are returned to the publisher for a refund of $0.75 each. The distribution of demand is uniform between 100 and 300. How many calendars should the bookstore order?

Question 63

Discuss two types of stockouts.

Question 64

A merchant wants to stock Christmas trees. She can place only one order per season. The merchant pays $30 for each tree and sells them for $80 each. She will incur an additional cost of $6 each for unsold trees that must be hauled to the landfill. If demand for Christmas trees is normally distributed with a mean of 365 trees and a standard deviation of 46 trees, how many trees should she order?

Question 65

Explain the different types of inventories maintained throughout a value chain.

Question 66

Provide some examples of when the single period inventory model is applicable.

Question 67

Explain the difference between a fixed quantity system and a fixed period system.

Question 68

A 4th of July celebration T-shirt for this year will cost festival organizers $12 each and will sell for $25 before and on July 4th. Any unsold T-shirts can usually be disposed of at a discount after the festival for $5 each. If demand is normally distributed with a mean of 1,800 T-shirts and a standard deviation of 75, how many T-shirts should be ordered?

Question 69

Explain the ABC inventory classification.

Question 70

Using the data below, find the EOQ, the total annual cost associated with the economic order quantity, and the reorder point.

Question 71

Explain the difference between independent demand and dependent demand.

Question 72

Using the data below, find the EOQ, the total annual cost associated with the economic order quantity, and the reorder point.

Question 73

The owner of a garden supply store was wondering if they could manage their inventory better. She decided to develop an ABC classification system to help manage the inventory. The company's inventory consists of the following items:
a.Compute the total dollar value of each of the ten inventory items. What is the total value of all the inventory items?
b.Which items should be declared "A" items? What percentage of total inventory value does your "A" group represent? What percentage of the total number of inventory items does your "A" group represent?
c.Which items should be declared "B" items? What percentage of total inventory value does your "B" group represent? What percentage of the total number of inventory items does your "B" group represent?
d.Which items should be declared "C" items? What percentage of total inventory value does your "C" group represent? What percentage of the total number of inventory items does your "C" group represent?

Question 74

Given the information below, conduct an ABC analysis and suggest which items should be classified as A, B and C.

Question 75

Discuss the concept of safety stock in a fixed order quantity system with uncertain demand.

Question 76

Summarize the characteristics of the inventory environment that management considers when developing an inventory management system.

Question 77

Define the EOQ model and explain its major assumptions.

Question 78

A hotel purchases 8,000 gallons of a cleaning product. Each gallon costs $10 and the cost of holding one gallon for a year is estimated to be $3. Ordering cost amounts to $30 per order.
a.If the hotel orders in lots of 500 gallons, how many orders does it place each year?
b.What are the ordering and holding costs, and total annual cost?
c.If the economic ordering quantity is used, how much improvement in cost will result?

Question 79

What are the four categories of inventory costs?

Question 80

What is inventory management and why is it important?