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

Question 1

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

Answer 1

FALSE

Question 2

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

Answer 2

TRUE

Question 3

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

Answer 3

FALSE

Question 4

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

Question 5

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 6

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

Question 7

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

Question 8

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 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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 14

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

Question 15

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 16

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

Question 17

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

Question 18

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 19

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

Question 20

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

Question 21

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 22

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 23

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 24

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 25

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

Question 27

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 28

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 29

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 30

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 31

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 32

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 33

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 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

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 36

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 37

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 38

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 39

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 40

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 41

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) 94.4%
C) 95.2%
D) 95.7%

Question 42

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 43

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 44

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 45

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 46

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 47

________ 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 48

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 49

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 50

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) 0 phones
D) 100 phones

Question 51

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 52

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 53

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 54

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 55

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 56

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 57

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) 0.9998

Question 58

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 59

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 60

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 61

Explain the impact of supplier lead time on safety inventory.

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

As retailers decrease the level of safety inventory they carry, the distributor will have to

A) decrease his or her safety inventory.
B) increase his or her safety inventory.
C) keep his or her safety inventory at the same level.
D) increase his or her cycle inventory.

Question 64

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 65

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 66

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 67

Weekly demand for 12" hot dogs at Mutt's Amazing Dogs is normally distributed with a mean of 2850 and a standard deviation of 425. The store manager continuously monitors inventory and currently orders 500 hot dogs each time the inventory drops to 6000 frames. The manufacturer currently takes two weeks to fill an order. How much safety inventory does the store carry?

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

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 70

Discuss the role of safety inventory in the supply chain and the trade-offs involved.

Question 71

Describe the two types of ordering policies and the impact each has on safety inventory.

Question 72

Weekly demand for corn tortillas at Big Truck Tacos is normally distributed with a mean of 1500 and a standard deviation of 300. Marco's takes one and one half weeks to supply a Big Truck order. Big Truck is targeting a CSL of 95 percent and monitors its inventory continuously. How much safety inventory of corn tortillas should Big Truck carry? What should their ROP be?

Question 73

Discuss the various measures of product availability.

Question 74

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 75

Explain the impact of aggregation on safety inventory.

Question 76

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 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

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 79

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 80

Weekly demand for avocados at the Guac Shop is normally distributed with a mean of 2500 and a standard deviation of 650. The store manager has decided to follow a periodic review policy to manage inventory of avocados. They plan to order every two weeks. The farmers currently take two weeks to fill an order. Given a desired CSL of 97.5 percent, how much safety inventory should the Guac Shop carry? What should their OUL be?