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

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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 6

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

Question 7

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 8

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

Question 9

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

Question 10

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 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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

Question 19

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 20

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 21

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

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

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 24

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 25

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)order fill rates tend to be higher than product fill rates.

Question 26

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

A)Home Depot
B)Michael Kors
C)Nordstrom
D)Sears

Question 27

Echelon inventory at the retailer is just the inventory that is physically present at the retailer.

Question 28

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 29

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 30

Under a periodic review policy,the OUL and the time are both fixed,but the replenishment lot size is variable.

Question 31

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 32

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 33

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 34

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 35

Periodic replenishment policies require more safety inventory than continuous review policies.

Question 36

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 37

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 38

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 39

For a small retail enterprise,a continuous review policy is easier to implement that a periodic review policy.

Question 40

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 41

Scenario 12.1 - Charm City
Avon Barksdale's operation uses large quantities of prepaid cell phones,on average 500 per week with a standard deviation of 45.The lead time for their own brand of prepaid cell phones is two weeks and they have a lot size of 125 phones.
What is the standard deviation of demand during their lead time?

A)45 phones
B)64 phones
C)90 phones
D)109 phones

Question 42

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 fill rate under this policy?

A)0.9398
B)0.9833
C)0.9921
D)0.9938

Question 43

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 standard deviation of demand during lead time?

A)251 phones
B)2187 phones
C)4500 phones
D)4751 phones

Question 44

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 safety stock should be held to put the expected shortage per cycle at 5 phones?

A)418 phones
B)433 phones
C)462 phones
D)487 phones

Question 45

What is an explanation offered for why firms have not historically tracked stockouts very well?

A)There is no agreed upon definition of stockouts.
B)There is no way to track stockouts.
C)Stockouts occur after the fact.
D)Stockouts are difficult to track.

Question 46

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

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

Question 47

What is the descriptive term for demand that occurs not in a steady stream of single units but in periodic large lots?

A)Batch
B)Bulky
C)Lumpy
D)Polled

Question 48

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 safety stock should be held to put the fill rate at 0.99?

A)251 phones
B)145 phones
C)454 phones
D)100 phones

Question 49

The expected shortage per replenishment cycle (ESC)is

A)the units of demand that are satisfied from inventory out of 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 50

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 51

The ________ is the average units of demand that are not satisfied from inventory in stock per replenishment cycle.

A)ROP
B)ESC
C)EOQ
D)CSL

Question 52

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

A)grows;increases
B)increases;decreases
C)decreases;grows
D)decreases;increases

Question 53

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 carry 8 days of demand as their safety inventory.What service level would they achieve?

A)93.9%
B)100%
C)95.2%
D)95.7%

Question 54

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%.How many days of safety inventory they should carry?

A)4.77 days
B)5.12 days
C)5.33 days
D)5.67 days

Question 55

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 56

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 57

Scenario 12.1 - Charm City
Avon Barksdale's operation uses large quantities of prepaid cell phones,on average 500 per week with a standard deviation of 45.The lead time for their own brand of prepaid cell phones is two weeks and they have a lot size of 125 phones.
Suppose Mr.Barksdale sets his reorder point at 1100 phones.What is his average cell phone inventory?

A)87.5 phones
B)105 phones
C)162.5 phones
D)257.5 phones

Question 58

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?

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

Question 59

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?

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

Question 60

Scenario 12.1 - Charm City
Avon Barksdale's operation uses large quantities of prepaid cell phones,on average 500 per week with a standard deviation of 45.The lead time for their own brand of prepaid cell phones is two weeks and they have a lot size of 125 phones.
What is the average flow time of a phone if the reorder point used by Mr.Barksdale is 2000 phones?

A)1.74 weeks
B)1.87 weeks
C)2.00 weeks
D)2.13 weeks

Question 61

A(n)________ in supply uncertainty can help ________ safety inventory required without hurting product availability.

A)reduction;increase
B)increase;reduce
C)reduction;reduce
D)reduction;cancel

Question 62

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 63

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 64

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.

Question 65

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 66

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 67

A continuous review policy dictates that

A)Q + σD units are ordered when the inventory drops to ROP.
B)Q units are ordered when the inventory drops to ROP.
C)Q + σD units are ordered at time T.
D)Q + σD units are ordered at time T + L.

Question 68

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 69

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 70

Figure 1: Inventory Profile for Periodic Review Policy

What does the letter E represent in Figure 1?

A)Order up to level
B)Safety inventory
C)Warehouse inventory
D)Pipeline inventory

Question 71

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 72

Figure 1: Inventory Profile for Periodic Review Policy

What does the letter F represent in Figure 1?

A)Order up to level
B)Safety inventory
C)Warehouse inventory
D)Pipeline inventory

Question 73

In a periodic review system,the order up to level

A)equals the current inventory level plus the lot size ordered.
B)equals the current inventory level minus the lot size ordered.
C)equals the current inventory level plus the anticipated demand during lead time.
D)equals the current inventory level plus the anticipated demand during lead time plus the lot size ordered.

Question 74

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 75

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

A)Specialization
B)Centralization
C)Postponement
D)Aggregation

Question 76

A manager using continuous review has to account only for

A)demand variability.
B)lead time variability.
C)demand during lead time.
D)cycle service level.

Question 77

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 78

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 uncorrelated.

Question 79

Typically,in continuous review policies,the lot size to order

A)is not known until after the order is placed.
B)is the same as in a periodic review policy.
C)varies with the square root of demand.
D)is kept fixed between replenishment cycles.

Question 80

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.