Question 1

In the single period inventory model, when the goodwill cost increases:

Accepted Answer

When the goodwill cost increases, it means the cost of not having enough inventory to meet demand (and thus potentially losing customers or facing other negative consequences) is higher. Therefore, to mitigate this risk, the optimal strategy is to increase the order quantity to ensure a higher probability of meeting customer demand.

Question 2

What are the three typical types of inventory process classifications?

Accepted Answer

The answer of What are the three typical types of...

Question 3

In the single period inventory model, the probability distribution for customer demand:

Accepted Answer

In the single period inventory model, the probability distribution for customer demand can be either discrete or continuous, depending on the nature of the demand data.

Question 4

In the production lot size model, the maximum inventory level (M) is lower than in the EOQ model.Why? By how much?

Accepted Answer

The answer of In the production lot size model, the...

Question 5

In the single period inventory model, if the unit salvage value equals the unit cost of the good, the optimal service level will be:

Accepted Answer

In the single period inventory model, if the unit salvage value equals the unit cost of the good, it means there is no loss on unsold inventory. Therefore, the retailer can aim for a 100% service level without risking financial loss due to unsold stock, as any unsold items can be salvaged (sold off) for their cost value.

Question 6

In the basic economic order quantity (EOQ) model, at Q* the estimated total annual holding cost:

Accepted Answer

In the basic EOQ model, the total annual holding cost and total annual ordering cost are equal at Q*. This is because the EOQ model strives to find the quantity at which the sum of these costs is minimized. Therefore, the answer is B.

Question 7

In the basic economic order quantity (EOQ) model, if monthly demand is a constant 430 units, the order quantity is 144 (12 dozen), and the firm operates during fifty five-day weeks a year, the cycle time will be approximately:

Accepted Answer

The EOQ formula is: 
Q = sqrt((2DS)/H)
where Q is the order quantity, D is the annual demand, S is the setup cost per order, and H is the holding cost per unit per year.

Plug in the given values:
Q = sqrt((2*430*144)/0)
Q = 144

The cycle time is the time between orders, which is the order quantity divided by the demand per day:
Cycle time = Q / (D/365)
Cycle time = 144 / (430/365*55)
Cycle time ≈ 7 working days (rounded to the nearest day)

Question 8

Opportunity cost (or shrinkage or obsolescence) is an example of:

Accepted Answer

Opportunity cost, shrinkage, and obsolescence all represent costs that are incurred from holding inventory, such as the cost of not being able to sell a product because it has become outdated or spoiled. This is an example of holding cost, which is the cost of storing inventory over time. The other options (order/setup cost, customer satisfaction cost, and procurement/manufacturing cost) do not directly relate to the cost of holding inventory.

Question 9

A two bin system is an example of a:

Accepted Answer

A two bin system is an inventory management system that utilizes two bins of inventory. When one bin is empty, it signals a reorder of that bin while the second bin is being used. This is an example of the (R,Q) policy, where the reorder point (R) is the inventory level at which a new order is placed and the order quantity (Q) is the amount that is ordered.

Question 10

When comparing the safety stock of the cycle service level (SSc) approach with the safety stock level of the unit service level (SSu) approach, other things being equal:

Accepted Answer

The cycle service level approach considers the overall service level for a cycle, while the unit service level approach considers the service level for individual units. Since the cycle service level approach takes into account the variability of demand over the entire cycle, it typically results in a higher safety stock level compared to the unit service level approach, which only accounts for the variability of demand for each individual unit. Therefore, SSc is generally greater than SSu.

Question 11

In the single period inventory model, customer demand is always assumed to be:

Accepted Answer

In the single period inventory model, customer demand is considered stochastic, meaning it is treated as a random variable with some probability distribution, but the exact form of the distribution is not specified. This accounts for the uncertainty in demand.

Question 12

In the single period inventory model:

Accepted Answer

Salvage value is typically less than the selling price because it represents the value that can be recovered from unsold inventory, which is usually sold at a discount or disposed of at a lower value than its original selling price.

Question 13

If sales data differs from demand, what constitutes the difference?

Accepted Answer

The answer of If sales data differs from demand, what...

Question 14

In the production lot size model:

Accepted Answer

In the production lot size model, the maximum inventory position, M, equals Q* and at Q*, the annual production setup costs equal annual holding costs. This is the optimal solution that minimizes the total cost of inventory.

Question 15

By what amount does adding safety stock increase annual inventory costs?

Accepted Answer

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Question 16

In the planned shortage model, a zero value for R, the reorder point, means:

Accepted Answer

Reorder when the back-order position is zero means that the reorder point is set to zero.

Question 17

If you compare EOQ with the production lot size model, the optimal order quantity and the holding costs differ by the factor

Accepted Answer

The answer of If you compare EOQ with the production...

Question 18

When compared with the maximum inventory level of the economic order quantity (EOQ) model, the maximum inventory level of the production lot size model is:

Accepted Answer

In the production lot size model, inventory is replenished gradually as items are produced, leading to a smaller maximum inventory level compared to the EOQ model, where inventory is replenished all at once.

Question 19

For the production lot size model to be appropriate, the relationship between D, annual demand, and P, maximum annual production rate, must be:

Accepted Answer

The production lot size model is appropriate when the annual demand (D) is less than or equal to the maximum annual production rate (P). If D is greater than P, it would not be possible to produce enough to meet the demand, making the model incorrect. If D is equal to P, the model would result in producing exactly the demand each year, which may not be the most cost-effective option. Therefore, C is the correct answer, where D < P.

Question 20

In the basic economic order quantity (EOQ) model, a doubling of estimated annual demand would lead to what change in Q*?

Accepted Answer

In the basic EOQ model, Q* is proportional to the square root of annual demand. Therefore, a doubling of estimated annual demand would lead to less than a 50% increase in Q*. Specifically, Q* would increase by a factor of the square root of 2, which is approximately 1.41.

Quiz 8: Inventory Models