Deck 11: Managing Economies of Scale in the Supply Chain: Cycle Inventory

Question 1

Lot sizes and cycle inventory do not affect the flow time of material within the supply chain.

Answer 1

FALSE

Question 2

Although a forward buy is often the retailer's appropriate response and increases their own profits, it usually increases demand variability with a resulting increase in inventory and flow times within the supply chain.

Answer 2

TRUE

Question 3

Price discrimination is the practice where a firm charges differential prices to maximize profits.

Answer 3

TRUE

Question 4

Cycle inventory is the physical inventory in the supply chain due to either production or purchases demanded by the customer.

Question 5

The costs considered in lot sizing decisions include material cost, fixed ordering cost, and manufacturing cost.

Question 6

Aggregating across products, retailers, or suppliers in a single order allows for a reduction in lot size for individual products because fixed ordering and transportation costs are now spread across multiple products, retailers, or suppliers.

Question 7

A discount is volume-based if the pricing schedule offers discounts based on the quantity ordered in a single lot.

Question 8

Cycle inventory exists in a supply chain because different stages exploit economies of scale to lower total cost.

Question 9

Cycle inventory exists because producing or purchasing in large lots allows a stage of the supply chain to exploit economies of scale and increase cost.

Question 10

For commodity products where price is set by the market, manufacturers can use lot size based quantity discounts to achieve coordination in the supply chain and decrease supply chain cost.

Question 11

A firm is often better served by ordering a convenient lot size close to the economic order quantity rather than the precise EOQ.

Question 12

Cycle inventory is primarily held to take advantage of economies of scale and reduce profit within the supply chain.

Question 13

The supply chain profit is higher if each stage of the supply chain independently makes its pricing decisions with the objective of maximizing its own profit.

Question 14

To reduce the optimal lot size by a factor of k, the fixed order cost S must be reduced by a factor of k.

Question 15

Pricing schedules with all unit quantity discounts encourage retailers to increase the size of their lots, which reduces the average inventory and flow time in a supply chain.

Question 16

For products where the firm has market power, two-part tariffs can be used to achieve coordination in the supply chain and maximize supply chain profits.

Question 17

Reduction of fixed cost may be achieved by aggregating lots across multiple products, customers, or suppliers.

Question 18

Marginal unit quantity discounts have also been referred to as multi-block tariffs.

Question 19

Average flow time resulting from cycle inventory = Cycle Inventory/Demand = Q/2D.

Question 20

A key to reducing cycle inventory is the reduction of lot size.

Question 21

Average flow time resulting from cycle inventory is equal to

A) Cycle Inventory/Demand = Q/2.
B) Cycle Inventory/Demand = Q/2D.
C) Cycle Inventory = Q/2.
D) Cycle Inventory = Lot Size = Q.

Question 22

Ordering costs would include which of the following?

A) Cost from theft
B) Transportation cost
C) Security cost
D) Damage cost

Question 23

The cost of carrying one unit in inventory for a specified period of time, usually one year, is referred to as

A) the material cost and is denoted by C.
B) the fixed ordering cost and is denoted by S.
C) the holding cost and is denoted by H.
D) the purchase price and is denoted by P.

Question 24

When demand is steady, cycle inventory and lot size are related as

A) Cycle Inventory = Lot Size × 2.
B) Cycle Inventory = Q*2.
C) Cycle Inventory = Q/2.
D) Cycle Inventory = Lot Size = Q.

Question 25

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas. Over the course of the past week, 457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas. It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!). It takes two weeks to ship a container from England loaded with peas.
What is the cost of the inventory policy (excluding cost of goods) if the diner orders at the economic order quantity?

A) $53.40
B) $106.80
C) $26.70
D) $80.10

Question 26

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas. Over the course of the past week, 457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas. It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!). It takes two weeks to ship a container from England loaded with peas.
How many orders per year does the diner place if they order at the economic order quantity?

A) 18
B) 9
C) 5
D) 14

Question 27

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas. Over the course of the past week, 457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas. It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!). It takes two weeks to ship a container from England loaded with peas.
What is the average inventory if they order at the optimal order quantity?

A) 2670 cups
B) 2000 cups
C) 1335 cups
D) 667 cups

Question 28

Cycle inventory exists because producing or purchasing in large lots allows a stage of the supply chain to

A) exploit economies of scale and raise cost.
B) exploit economies of scale and lower cost.
C) exploit customers and lower cost.
D) exploit customers and raise cost.

Question 29

Inventory holding costs would include which of the following?

A) Transportation cost
B) Buyer time
C) Obsolescence cost
D) Receiving cost

Question 30

The price paid per unit is referred to as

A) the material cost and is denoted by C.
B) the fixed ordering cost and is denoted by S.
C) the holding cost and is denoted by H.
D) the purchase price and is denoted by P.

Question 31

Total ordering and holding costs

A) are relatively stable.
B) are relatively stable around the economic order quantity.
C) are relatively unstable around the economic order quantity.
D) are unstable.

Question 32

All costs that do not vary with the size of the order but are incurred each time an order is placed are referred to as

A) the material cost and are denoted by C.
B) the fixed ordering cost and are denoted by S.
C) the holding cost and are denoted by H.
D) the purchase price and are denoted by P.

Question 33

The primary role of cycle inventory is to allow different stages in the supply chain to

A) purchase product in lot sizes that maximize the sum of the material, ordering, and holding cost.
B) purchase product in lot sizes that minimize the sum of the material, ordering, and holding cost.
C) sell product in lot sizes that maximize the sum of the material, ordering, and holding cost.
D) sell product in lot sizes that minimize the sum of the material, ordering, and holding cost.

Question 34

A graphical plot depicting the level of inventory over time is

A) an inventory graph.
B) a distribution inventory.
C) an inventory drawing.
D) an inventory profile.

Question 35

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas. Over the course of the past week, 457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas. It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!). It takes two weeks to ship a container from England loaded with peas.
What is the optimal order quantity?

A) 2670 cups
B) 17.8 cups
C) 1335 cups
D) 8.9 cups

Question 36

Cycle inventory is primarily held to

A) take advantage of diseconomies of scale and increase cost within the supply chain.
B) take advantage of diseconomies of scale and reduce cost within the supply chain.
C) take advantage of economies of scale and increase cost within the supply chain.
D) take advantage of economies of scale and reduce cost within the supply chain.

Question 37

The average inventory in the supply chain due to either production or purchases in lot sizes that are larger than those demanded by the customer is

A) annual inventory.
B) distribution inventory.
C) cycle inventory.
D) physical inventory.

Question 38

Economies of scale in purchasing and ordering motivate a manager to

A) increase the lot size and cycle inventory.
B) decrease the lot size and cycle inventory.
C) eliminate inventory.
D) increase the lot size and reduce cycle inventory.

Question 39

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas. Over the course of the past week, 457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas. It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!). It takes two weeks to ship a container from England loaded with peas.
What is the average flow time of a half cup of peas if the diner orders at the economic order quantity?

A) 8.76 weeks
B) 5.84 weeks
C) 2.92 weeks
D) 11.68 weeks

Question 40

The quantity of inventory that a stage of the supply chain either produces or purchases at a given time is

A) an order.
B) a job.
C) a shipment.
D) a lot or batch.

Question 41

________ is the practice whereby a firm charges differential prices to maximize profits.

A) Optimal lot sizing
B) Fixed pricing
C) Nonperishable pricing
D) Price discrimination

Question 42

Aggregating across products, retailers, or suppliers in a single order allows for a reduction in lot size for individual products because

A) fixed ordering and transportation costs are now charged to retailers.
B) fixed ordering and transportation costs are now charged to suppliers.
C) fixed ordering and transportation costs are now spread across multiple products, retailers, or suppliers.
D) holding costs are now charged to retailers or suppliers.

Question 43

Scenario 11.2 - S&H Mercantile
The S&H Mercantile in Luther is the only game in town for a number of items, and tries valiantly to use only the storage space needed to display items since there is no stock room in the back of the store. One popular item, a 16-ounce can of dehydrated water, takes up 20 square inches of shelf space. The shelf space available for this item measures five feet by four feet. The store manager would like to order a quantity that can fill the shelf space without stacking and without needing to store cans elsewhere in the store. The amount ordered should all be on display once the S&H runs out and ideally would arrive just as the last can is purchased.
Aggregating across products, retailers, or suppliers in a single order allows for

A) an increase in lot size for individual products.
B) an increase in customer demand.
C) a reduction in holding cost per unit.
D) a reduction in lot size for individual products.

Question 44

Scenario 11.3 - Sammy's Sammwiches
Sammy's is the hot new lunch spot among the hipsters, who flock there at noon for their artisanal peanut butter and jelly sandwiches, which sell for $12.95. The sandwiches are made from two slices of their own artisanal bread, which they bake continuously throughout the day at a rate of seven loaves an hour (each loaf contains twenty slices). The actual cost of a loaf of bread is $1 and the cost to hold a loaf is 80%, since freshness is important in baking as well as to hipsters. The cost to run a new batch of a dough is $3 per loaf. Sammy's sells their sandwiches at a rate of fifty per hour.
What is the optimal batch size to produce?

A) 8.36 loaves
B) 1.8 loaves
C) 5.56 slices
D) 8.36 slices

Question 45

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas. Over the course of the past week, 457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas. It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!). It takes two weeks to ship a container from England loaded with peas.
The diner orders at the economic order quantity but an analysis of dates on the cans of peas revealed that the flow time was actually 5 weeks. A quick check revealed that the computer had automatically adjusted up the economic order quantity as demand had risen during the past few months. What is the new weekly demand for English peas?

A) 234 half cups
B) 78 half cups
C) 312 half cups
D) 156 half cups

Question 46

For products where the firm has market power, coordination in the supply chain can be achieved and supply chain profits maximized through the use of

A) two-part tariffs or volume based quantity discounts.
B) marginal unit quantity discounts.
C) all unit quantity discounts.
D) basic quantity discounts.

Question 47

Trade promotions lead to a significant ________ in lot size and cycle inventory because of forward buying by the ________.

A) decrease, retailer
B) increase, retailer
C) decrease, supplier
D) increase, supplier

Question 48

Scenario 11.3 - Sammy's Sammwiches
Sammy's is the hot new lunch spot among the hipsters, who flock there at noon for their artisanal peanut butter and jelly sandwiches, which sell for $12.95. The sandwiches are made from two slices of their own artisanal bread, which they bake continuously throughout the day at a rate of seven loaves an hour (each loaf contains twenty slices). The actual cost of a loaf of bread is $1 and the cost to hold a loaf is 80%, since freshness is important in baking as well as to hipsters. The cost to run a new batch of a dough is $3 per loaf. Sammy's sells their sandwiches at a rate of fifty per hour.
What is the cost to run Sammy's at the economic production lot size?

A) $5.46
B) $2.73
C) $1.36
D) $0.68

Question 49

Scenario 11.2 - S&H Mercantile
The S&H Mercantile in Luther is the only game in town for a number of items, and tries valiantly to use only the storage space needed to display items since there is no stock room in the back of the store. One popular item, a 16-ounce can of dehydrated water, takes up 20 square inches of shelf space. The shelf space available for this item measures five feet by four feet. The store manager would like to order a quantity that can fill the shelf space without stacking and without needing to store cans elsewhere in the store. The amount ordered should all be on display once the S&H runs out and ideally would arrive just as the last can is purchased.
Drought conditions spike demand during the summer to an annualized rate of 27,000 cans per year and the price rises to $12 per can. If the ordering cost per lot is 75 cents, what is the holding cost percentage?

A) 3.1%
B) 1.81%
C) 31%
D) 18.1%

Question 50

A key to reducing lot size without increasing costs is to

A) reduce the holding cost associated with each lot.
B) reduce the fixed cost associated with each lot.
C) reduce the material cost associated with each lot.
D) reduce the manufacturing cost associated with each lot.

Question 51

Scenario 11.2 - S&H Mercantile
The S&H Mercantile in Luther is the only game in town for a number of items, and tries valiantly to use only the storage space needed to display items since there is no stock room in the back of the store. One popular item, a 16-ounce can of dehydrated water, takes up 20 square inches of shelf space. The shelf space available for this item measures five feet by four feet. The store manager would like to order a quantity that can fill the shelf space without stacking and without needing to store cans elsewhere in the store. The amount ordered should all be on display once the S&H runs out and ideally would arrive just as the last can is purchased.
Suppose the annual demand is 8,000 units and the cost per can is $3 with a holding cost of 10%. What is the required order cost per lot?

A) 32 cents
B) $3.20
C) $32
D) $1.44

Question 52

In the pricing schedule for marginal unit quantity discounts,

A) the average cost of a unit decreases at a breakpoint.
B) the average cost of a unit increases at a breakpoint.
C) the marginal cost of a unit decreases at a breakpoint.
D) the marginal cost of a unit increases at a breakpoint.

Question 53

Scenario 11.2 - S&H Mercantile
The S&H Mercantile in Luther is the only game in town for a number of items, and tries valiantly to use only the storage space needed to display items since there is no stock room in the back of the store. One popular item, a 16-ounce can of dehydrated water, takes up 20 square inches of shelf space. The shelf space available for this item measures five feet by four feet. The store manager would like to order a quantity that can fill the shelf space without stacking and without needing to store cans elsewhere in the store. The amount ordered should all be on display once the S&H runs out and ideally would arrive just as the last can is purchased.
Drought conditions spike demand during the summer to an annualized rate of 27,000 cans per year and the price rises to $12 per can with a holding cost of 20%. What is the required order cost per lot?

A) 9.2 cents
B) 92 cents
C) $9.20
D) $92.00

Question 54

Quantity discounts lead to

A) a significant buildup of cycle inventory in the supply chain.
B) a slight buildup of cycle inventory in the supply chain.
C) a decrease in cycle inventory in the supply chain.
D) minor fluctuations of cycle inventory in the supply chain.

Question 55

A key to reducing cycle inventory is

A) the reduction of holding cost.
B) the reduction of manufacturing cost.
C) the reduction of lot size.
D) the reduction of warehouse space.

Question 56

A price discount where the discount is based on the total quantity purchased over a given period, regardless of the number of lots purchased over that period, is

A) customer based.
B) lot size based.
C) supplier based.
D) volume based.

Question 57

Scenario 11.1 - Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady demand for peas. Over the course of the past week, 457 patrons have ordered the hearty breakfast and each serving contains a half cup of English peas. It costs two cents to hold a half cup of peas in inventory for a year and $3 to place an order (remember they come all the way from England!). It takes two weeks to ship a container from England loaded with peas.
If demand increases by a factor of k, the optimal lot size increases by a factor of

A) k.
B) k/2.
C) k-squared.
D) the square root of k.

Question 58

Pricing schedules with all unit quantity discounts encourage retailers to

A) decrease the size of their lots.
B) increase the size of their lots.
C) decrease the size of their inventory.
D) increase the price of their products.

Question 59

In a supply chain where each stage of the supply chain independently makes its pricing decisions with the objective of maximizing its own profit,

A) supply chain profit is lower than a coordinated solution.
B) supply chain profit is higher than a coordinated solution.
C) supply chain profit is about the same as a coordinated solution.
D) supply chain profit will be maximized.

Question 60

A price discount where the pricing schedule offers discounts based on the quantity ordered in a single lot is

A) customer based.
B) lot size based.
C) supplier based.
D) volume based.

Question 61

Describe the impact of trade promotions on cycle inventory.

Question 62

Replenishment orders in multi-echelon supply chains should be

A) synchronized to increase cycle inventory and order costs.
B) synchronized to facilitate supplier evaluation and selection.
C) synchronized to keep cycle inventory and order costs low.
D) separated to increase cycle inventory and order costs.

Question 63

The practice where a firm charges differential prices to maximize profits is

A) lot pricing.
B) marginal pricing.
C) price incrimination.
D) price discrimination.

Question 64

Discuss the role of cycle inventory in the supply chain.

Question 65

The goal of trade promotions is to

A) influence retailers to act in a way that helps the retailer achieve its objectives.
B) influence retailers to act in a way that helps the manufacturer achieve its objectives.
C) influence retailers to act in a way that will maximize supply chain profit.
D) influence retailers to act in a way minimize supply chain cost.

Question 66

Scenario 11.4 - Caffeine and Sugar
With a fixed cost of $100 per order, Nathan decided it was vital to get his money's worth. His monthly demand for energy drinks was 10,000 bottles and holding cost was estimated at 20% of unit cost. The mail order company offered him a couple of possibilities - he could pay $4.00 per bottle for orders of up to 10,000 bottles. After that threshold, he would pay only $3.98 per bottle, and if he ordered 20,00 or more bottles in an order, he would pay only $3.96 per bottle.
What is the best order quantity for Nathan to use?

A) 5,477
B) 5,505
C) 10,000
D) 5,491

Question 67

Discounts related to price discrimination will be

A) volume based.
B) unit based.
C) marginally based.
D) lot size based.

Question 68

Tastee Mart sells Frostee Flakes. Demand for Frostee Flakes is 500 boxes per week. Tastee Mart has a holding cost of 30 percent and incurs a fixed cost of $100 for each replenishment order it places for Frostee Flakes. Given that cost is $2 per box of Frostee Flakes, how much should Tastee Mart order in each replenishment lot? If a trade promotion lowers the price of Frostee Flakes to $1.80 for a month, how much should Tastee Mart order given the short-term price reduction?

Question 69

Scenario 11.4 - Caffeine and Sugar
With a fixed cost of $100 per order, Nathan decided it was vital to get his money's worth. His monthly demand for energy drinks was 10,000 bottles and holding cost was estimated at 20% of unit cost. The mail order company offered him a couple of possibilities - he could pay $4.00 per bottle for orders of up to 10,000 bottles. After that threshold, he would pay only $3.98 per bottle, and if he ordered 20,00 or more bottles in an order, he would pay only $3.96 per bottle.
What is the best total cost that Nathan can incur?

A) $488,644
B) $492,780
C) $493,720
D) $484,382

Question 70

Which cost should only include receiving and storage costs that vary with the quantity of product received?

A) Cost of capital
B) Obsolescence (spoilage) cost
C) Handling cost
D) Occupancy cost

Question 71

Discuss the characteristics of a successful multi-echelon supply chain.

Question 72

Which cost takes into account the return demanded on the firm's equity and the amount the firm must pay on its debt?

A) Cost of capital
B) Obsolescence (spoilage) cost
C) Handling cost
D) Occupancy cost

Question 73

The retailer can justify the forward buying when

A) they have inadvertently built up a lot of excess inventory.
B) the forward buy allows the manufacturer to smooth demand by shifting it from peak to low-demand periods.
C) it decreases his total cost.
D) A and C only

Question 74

The XYZ Company has an assembly plant in Cincinnati and its parts plant in Indianapolis. Parts are transported from Indianapolis to Cincinnati using trucks. Each shipment costs $100. The Cincinnati plant assembles and sells 300 finished products each day and operates 50 weeks a year. Part #456 costs $50 and XYZ Company incurs a holding cost of 20 percent per year. How many of part #456 should XYZ Company put in each shipment? What is the cycle inventory of part #456 at XYZ Company?

Question 75

Which cost should reflect the incremental change in space cost due to changing cycle inventory?

A) Cost of capital
B) Obsolescence (spoilage) cost
C) Handling cost
D) Occupancy cost