Question 1

The purpose of safety stock is to

Accepted Answer

Safety stock is held to mitigate the risk of stockouts caused by variability in demand during lead time. It acts as a buffer to ensure that there is enough inventory to fulfill customer demand even if demand is higher than expected or lead time is longer than usual. Therefore, option D is the best choice. The other options do not fully represent the purpose of safety stock.

Question 2

When quantity discounts are allowed, the cost-minimizing order quantity

Accepted Answer

Quantity discounts impact the total cost by affecting the product cost component in addition to holding and ordering costs. The cost-minimizing order quantity, therefore, minimizes the sum of all three costs: holding, ordering, and product costs.

Question 3

Which of the following statements about quantity discounts is False?

Accepted Answer

The statement that the larger annual demand, the less attractive a discount schedule will be, is false. In reality, a larger annual demand can make quantity discounts more attractive because the savings on the unit cost, when multiplied over a larger volume, can significantly outweigh the additional holding costs incurred by buying in larger quantities.

Question 4

Demand for dishwasher water pumps is 8 per day. The standard deviation of demand is 3 per day, and the order lead time is four days. The service level is 95%. What should the reorder point be?

Accepted Answer

The answer of Demand for dishwasher water pumps is 8...

Question 5

Which of the following items is mostly likely managed using a single-period order model?

Accepted Answer

A single-period order model is used when the product has a limited shelf-life and cannot be sold after a certain point in time. Christmas trees are a good example of this as they are only sold during a limited time period each year and cannot be sold after the holidays are over. The other options (canned food, automobiles, metal, gas) can be stored for longer periods of time and do not have a limited sales period, making them better suited for other inventory models.

Question 6

If daily demand is normally distributed with a mean of 15 and standard deviation of 5, and lead time is constant at 4 days, 90 percent service level will require safety stock of approximately

Accepted Answer

To calculate the safety stock, we need to use the formula:
Safety Stock = Z * σ * LT^0.5
where Z is the z-score corresponding to the desired service level (90% in this case), σ is the standard deviation of demand, and LT is the lead time.

First, we need to calculate the z-score:
Z = InvNorm(0.9) = 1.28 (using a standard normal distribution table or Excel function)

Next, we can plug in the values:
Safety Stock = 1.28 * 5 * (4^0.5) = 13.02

Rounding to the nearest unit, we get Safety Stock = 13 units.

Question 7

If daily demand is constant at 10 units per day, and lead time averages 12 days with a standard deviation of 3 days, 95 percent service requires a safety stock of approximately

Accepted Answer

To calculate safety stock, we need to determine the lead time demand (LTD) and the standard deviation of LTD.
LTD = Daily demand x Lead time = 10 x 12 = 120 units
Standard deviation of LTD = (Standard deviation of lead time) x (Daily demand)^(1/2) = 3 x 10^(1/2) = 9.486
To achieve 95 percent service level, we need to add 1.64 standard deviations to the average demand to get safety stock.
Safety stock = 1.64 x 9.486 = 15.56 units (rounded up to 16 units)
Total inventory = Safety stock + Average demand x Lead time = 16 + 10 x 12 = 136 units
Therefore, the safety stock required for 95 percent service level is approximately 49 units (136 - 87). Thus, the best choice is C.

Question 8

A specific product has demand during lead time of 100 units, with a standard deviation of 25 units. What safety stock (approximately) provides a 95% service level?

Accepted Answer

For a 95% service level, the Z-score is approximately 1.65. Safety stock is calculated as Z-score * standard deviation of demand during lead time. Therefore, safety stock = 1.65 * 25 = 41.25, which is approximately 41.

Question 9

A bakery wants to determine how many trays of doughnuts it should prepare each day. Demand is normal with a mean of 5 trays and standard deviation of 1 tray. If the owner wants a service level of at least 95% how many trays should he prepare (round to the nearest whole tray)? Assume doughnuts have no salvage value after the day is complete.

Accepted Answer

The answer of A bakery wants to determine how many...

Question 10

Suppose that a newspaper stand is operating under the following conditions; papers cost $.4, have no salvage value, and sell for $.80. If the salvage value is increased by $.1, what is the increase in service level?

Accepted Answer

To calculate the increase in service level, we need to use the formula:

Increase in Service Level = (Increase in Salvage Value) / (Cost per Unit - Salvage Value + Increase in Salvage Value)

Plugging in the given values, we get:

Increase in Service Level = (0.1) / (0.4 - 0 + 0.1)

Increase in Service Level = 0.07

Therefore, the increase in service level is 0.07, which corresponds to choice C.

Question 11

A local club is selling Christmas trees and deciding how many to stock for the month of December. If demand is normally distributed with a mean of 100 and standard deviation of 20, trees have no salvage value at the end of the month, trees cost $20, and trees sell for $50 what is the service level?

Accepted Answer

The answer of A local club is selling Christmas trees...

Question 12

A production order quantity problem has daily demand rate = 10 and daily production rate = 50. The production order quantity for this problem is approximately 612 units. The average inventory for this problem is approximately

Accepted Answer

Average inventory = (Production order quantity / 2) = (612 / 2) = 306 units

Question 13

The fixed-period inventory model requires more safety stock than the fixed-quantity models because

Accepted Answer

In the fixed-period inventory model, inventory is only reviewed and ordered after a fixed amount of time, which means that a stockout can occur during the review period as well as during the lead time. This requires more safety stock to ensure that inventory levels are sufficient to meet demand during both periods.

Question 14

Which category of inventory holding costs is much higher than average for rapid-change industries such as PCs and cell phones?

Accepted Answer

Pilferage, scrap, and obsolescence costs are generally much higher in industries where products quickly become obsolete or outdated, such as the PC and cell phone industries. This is because these products have short lifecycles and the demand for the latest and greatest models often results in older products becoming unsellable and eventually being scrapped or written off as obsolete. In addition, the risk of theft or pilferage is higher in industries with high-value, small items such as cell phones and computer components.

Question 15

If the standard deviation of demand is six per week, demand is 50 per week, and the desired service level is 95%, approximately what is the statistical safety stock?

Accepted Answer

The answer of If the standard deviation of demand is...

Question 16

If demand is not uniform and constant, then stockout risks can be controlled by

Accepted Answer

Adding safety stock is the best choice to control stockout risks when demand is not uniform and constant. Safety stock is an amount of inventory that is held in reserve to protect against stockouts caused by unanticipated increases in demand, supply chain disruptions or errors in demand forecasts. By having additional inventory in reserve, a company can reduce the risk of running out of stock and ensure that it can meet customer demand even during periods of high variability in demand. Other choices such as increasing the EOQ, placing an extra order, raising the selling price to reduce demand or reducing the reorder point are not effective in controlling stockout risks caused by demand variability.

Question 17

The proper quantity of safety stock is typically determined by

Accepted Answer

The proper quantity of safety stock is typically determined by setting the level of safety stock so that a given stockout risk is not exceeded. This approach balances the cost of holding safety stock against the cost of potential stockouts, and ensures that the organization is adequately protected against unforeseen demand fluctuations or supply chain disruptions. While minimizing total costs is a key consideration in inventory management, it does not necessarily lead to the optimal level of safety stock, as the costs associated with stockouts are not always reflected in standard cost accounting. Similarly, using a single-period model or carrying sufficient safety stock to eliminate all stockouts may not be feasible or cost-effective in practice, as they do not take into account the uncertainty and variability of demand and supply. Multiplying the EOQ by the desired service level provides a rough estimate of the safety stock needed to achieve a certain level of customer satisfaction, but it does not account for the actual distribution of demand and lead time.

Question 18

In a safety stock problem where both demand and lead time are variable, demand averages 150 units per day with a daily standard deviation of 16, and lead time averages 5 days with a standard deviation of 1 day. The standard deviation of demand during lead time is approximately

Accepted Answer

To calculate the standard deviation of demand during lead time, we need to use the formula:
Standard deviation of demand during lead time = square root of (lead time * daily standard deviation^2)
Plugging in the given values, we get:
Standard deviation of demand during lead time = square root of (5 * 16^2) =  154 units (rounded to the nearest whole number)

Question 19

The main trait of a single-period model is that

Accepted Answer

The main trait of a single-period model is that inventory has limited value after a certain period of time, such as perishable goods or items with a specific selling season.

Question 20

Service level is

Accepted Answer

Service level is the probability of not stocking out and is important in inventory management. It can be calculated using the cost of a shortage divided by (the cost of overage + the cost of shortage) for single-period models. Therefore, the correct answer is E - "the chance of not stocking out" (B) and "calculated as the cost of a shortage divided by (the cost of overage + the cost of shortage) for single-period models" (D) are both true statements about service level.

Quiz 15: Inventory Management