Deck 18: Inventory Management

Question 1

Reorder point models are primarily used for dependent-demand items.

Answer 1

False

Question 2

The EOQ should be regarded as an approximate quantity rather than an exact quantity. Thus, rounding the calculated value is acceptable.

Answer 2

True

Question 3

The average inventory level and the number of orders per year are inversely related: As one increases, the other decreases.

Answer 3

True

Question 4

The A-B-C approach involves classifying inventory items based on their name.

Question 5

The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs reasonable.

Question 6

A retail store that carries twice as much inventory as its competitor will provide twice the customer service level.

Question 7

An inventory buffer adds value and lowers cost in all supply chains.

Question 8

To provide satisfactory levels of customer service while keeping inventory costs within reasonable bounds, two fundamental decisions must be made about inventory: when to order and how much to order.

Question 9

Understocking an inventory item is a sure sign of inadequate inventory control.

Question 10

The average inventory level is inversely related to order size.

Question 11

An example of inventory holding cost is the cost of moving goods to temporary storage after receipt from a supplier.

Question 12

DVD recorders would be an example of independent-demand items.

Question 13

EOQ inventory models are basically concerned with the timing of orders.

Question 14

Decoupling operations means to break the linkage between two sequential operations.

Question 15

Interest, insurance, and opportunity costs are all associated with holding costs.

Question 16

In the A-B-C approach, C items typically represent about 15 percent of the number of items, but 60 percent of the dollar usage.

Question 17

In the EOQ formula, holding costs under 10 percent are expressed as percentages, above 10 percent are expressed as annual unit costs.

Question 18

The objective of inventory management is to minimize the cost of holding inventory.

Question 19

One important use of inventories in manufacturing is to decouple operations through the use of work-in-process inventories.

Question 20

Carrying cost is a function of order size; the larger the order quantity, the higher the inventory carrying cost.

Question 21

The fixed-order-interval model requires a larger amount of safety stock than the ROP model for the same risk of a stockout.

Question 22

Safety stock is held because we anticipate future demand.

Question 23

Because price is not a factor in the EOQ formula, quantity discounts will not affect EOQ calculations.

Question 24

The rate of demand is an important factor in determining the ROP.

Question 25

Discrete stocking levels are used when an organization does not want visibility of inventory levels.

Question 26

ROP models indicate to managers the time between orders.

Question 27

In the fixed-order-interval model, the order size is the same for each order.

Question 28

Profit margins tend to be inversely related to inventory turns.

Question 29

In the quantity discount model, the optimum quantity will always be found on the lowest total cost curve.

Question 30

The total cost curve is relatively flat near the EOQ.

Question 31

The single-period model can be very helpful in determining when to order.

Question 32

ROP models assume that demand during lead time is composed of a series of dependent daily demands.

Question 33

When to order can be calculated by the ROP and expressed as a quantity.

Question 34

Annual ordering cost is inversely related to order size.

Question 35

Variability in demand and/or lead time can be compensated for by safety stock.

Question 36

In the quantity discount model, if holding costs are given as a percentage of unit price, a graph of the total cost curves will have the same EOQ for each curve.

Question 37

Solving quality problems can lead to lower inventory levels.

Question 38

The inventory value of the supply chain exceeds the inventory value of the organization's work-in-process inventory.

Question 39

The fixed-order-interval model requires a continuous monitoring of inventory levels.

Question 40

The single-period model can be very helpful in determining how much to order.

Question 41

Even though it is often the case that no cash outflows result when demand exceeds capacity, __________ can nevertheless be experienced in those circumstances.

A) foreorder costs
B) service costs
C) shortage costs
D) holding costs
E) setup costs

Question 42

Which of the following is not one of the assumptions of the basic EOQ model?

A) Annual demand requirements are known and constant.
B) Lead time does not vary.
C) Each order is received in a single delivery.
D) Quantity discounts are availablE.
E) Ordering and holding costs have been estimated reasonably accurately.

Question 43

It is critical that the exact quantity calculated in the EOQ model be ordered.

Question 44

Average demand for a particular item is 1,200 units per year. It costs $100 to place an order for this item, and it costs $24 to hold one unit of this item in inventory for one year. If the fixed-order-interval model is chosen in this instance, how often (on average) will this item be ordered?

A) once a month
B) once every other month
C) twice a month
D) twice every three months
E) three times every two months

Question 45

Using the EOQ model, the higher an item's carrying costs, the more frequently it will be ordered.

Question 46

A single-period model would be used mainly by organizations going out of business.

Question 47

Which of the following interactions with vendors would potentially lead to inventory reductions?

A) reduced lead times
B) increased safety stock
C) less frequent purchases
D) larger batch quantities
E) longer order intervals

Question 48

A stock or store of goods is called a(n):

A) bundler.
B) servicer.
C) retailer.
D) supply chain.
E) inventory.

Question 49

The basic EOQ model ignores the purchasing cost.

Question 50

Monitoring inventory turns over time can be used as a measure of performance.

Question 51

The calculation of safety stock requires knowledge of demand and lead time variability.

Question 52

A quantity discount will lower the reorder point.

Question 53

Cycle counting can be used in motorcycle inventory control.

Question 54

The two basic issues in inventory are how much to order and when to order.

Question 55

In the single-period model, the service level is the probability that demand will not exceed the stocking level in any period.

Question 56

Safety stock eliminates all stockouts.

Question 57

When the item is offered for resale, shortage costs in the single-period model can include a charge for loss of customer goodwill.

Question 58

If there are shipping cost economies that result from bundling orders for different items together, the __________ model becomes a relatively more attractive option.

A) multi-period
B) reorder-point
C) fixed-order-quantity
D) fixed-order-interval
E) multi-item

Question 59

Which of the following is typically the largest of all inventory costs?

A) shortage cost
B) purchase cost
C) holding cost
D) ordering cost
E) pipeline cost

Question 60

Weekly demand for a particular item averages 30 units, with a standard deviation of 4. This item is managed with a fixed-order-interval model. The order interval is three weeks, and this item has a certain lead time of one week. The desired service level is 97.5 percent. Assume that it is now time to place another order, and there are 43 units on hand. How many units should be ordered?

A) 120
B) 93
C) 136
D) 46
E) 84

Question 61

Which of the following is not true for the economic production quantity model?

A) Usage rate is constant.
B) Production rate exceeds usage rate.
C) Run size exceeds maximum inventory.
D) There are no ordering or setup costs.
E) Average inventory is one-half maximum inventory.

Question 62

A nonlinear cost related to order size is the cost of:

A) interest.
B) insurance.
C) taxes.
D) ordering.
E) space.

Question 63

In the basic EOQ model, if D = 60 per month, S = $12, and H = $10 per unit per month, EOQ is:

A) 10.
B) 12.
C) 24.
D) 72.
E) 144.

Question 64

In the A-B-C classification system, items which account for about 60 percent of the annual dollar value, but only about 10 to 15 percent of the items in inventory, would be classified as:

A) A items.
B) B items.
C) C items.
D) A items plus B items.
E) B items plus C items.

Question 65

In the A-B-C classification system, items which account for about 15 percent of the annual dollar value, but which account for a majority of the inventory items, would be classified as:

A) A items.
B) B items.
C) C items.
D) A items plus B items.
E) B items plus C items.

Question 66

In the basic EOQ model, if annual demand is 50, carrying cost is $2, and ordering cost is $15, EOQ is approximately:

A) 11.
B) 20.
C) 24.
D) 28.
E) 375.

Question 67

In a supermarket, a vendor's restocking the shelves every Monday morning is an example of:

A) safety stock replenishment.
B) economic order quantities.
C) reorder points.
D) fixed order intervals.
E) blanket ordering.

Question 68

The EOQ model is most relevant for which one of the following?

A) ordering items with dependent demand
B) determination of safety stock
C) ordering perishable items
D) determining fixed-interval order quantities
E) determining fixed order quantities

Question 69

In the basic EOQ model, if annual demand doubles, the effect on the EOQ is:

A) It doubles.
B) It is four times its previous amount.
C) It is half its previous amount.
D) It is about 70 percent of its previous amount.
E) It increases by about 40 percent.

Question 70

In the basic EOQ model, an annual demand of 40 units, an ordering cost of $5, and a holding cost of $1 per unit per year will result in an EOQ of:

A) 20.
B) square root of 200.
C) 200.
D) 400.
E) 600.

Question 71

A risk avoider would want ______ safety stock.

A) less
B) more
C) the same
D) zero
E) 50 percent

Question 72

Dairy items, fresh fruit, and newspapers are items that:

A) do not require safety stocks.
B) cannot be ordered in large quantities.
C) are subject to deterioration and spoilagE.
D) require that prices be lowered every two days.
E) have minimal holding costs.

Question 73

A cycle count program will usually require that A items be counted:

A) daily.
B) once a week.
C) monthly.
D) quarterly.
E) more often than annually.

Question 74

When carrying costs are stated as a percentage of unit price, the minimum points on the total cost curves:

A) line up.
B) equal zero.
C) do not line up.
D) cannot be calculated.
E) depend on the percentage assigned.

Question 75

The purpose of cycle counting is to:

A) count all the items in inventory.
B) count bicycles and motorcycles in inventory.
C) reduce discrepancies between inventory records and actual quantities.
D) reduce theft.
E) count 10 percent of the items each month.

Question 76

Which is not a true assumption in the basic EOQ model?

A) Each order is received in a single delivery.
B) Lead time does not vary.
C) No more than three items are involveD.
D) Usage rate is constant.
E) No quantity discounts.

Question 77

In a two-bin inventory system, the amount contained in the second bin is equal to the:

A) ROP.
B) EOQ.
C) amount in the first bin.
D) optimum stocking level.
E) safety stock.

Question 78

In an A-B-C system, the typical percentage of the number of items in inventory that is classified as A items is about:

A) 10.
B) 30.
C) 50.
D) 70.
E) 90.

Question 79

In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will:

A) double.
B) increase, but not double.
C) decrease by a factor of 2.
D) remain the samE.
E) increase, but more information is needed to calculate exactly how much.

Question 80

Which of the following is least likely to be included in order costs?

A) processing vendor invoices for payment
B) processing purchase orders
C) inspecting incoming goods for quantity
D) taking an inventory to determine how much is needed
E) temporary storage of delivered goods