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

Question 1

If demand increases by a factor of k,the optimal lot size decreases by a factor of k.

Answer 1

False

Question 2

When demand is steady,cycle inventory and lot size are related as follows:
Cycle Inventory = Lot Size × 2 = Q*2.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

A key to reducing lot size without increasing costs is to reduce the holding cost associated with each lot.

Question 6

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

Question 7

Total ordering and holding costs are unstable around the economic order quantity.

Question 8

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 9

A lot or batch size is the quantity that a stage of the supply chain either produces or purchases at a given time.

Question 10

The total annual cost is the sum of annual material cost,annual order cost,and annual holding cost,and is given as TC = CD + (D/Q)S + (Q/2)hC.

Question 11

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

Question 12

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 13

The optimal lot size is referred to as the economic order quantity (EOQ).It is denoted by Q * and is given by the equation: Q* = 2DS/hC.

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

The inventory profile is a plot depicting the level of inventory over time.

Question 19

Increasing the lot size or cycle inventory often decreases the cost incurred by different stages of a supply chain.

Question 20

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 21

Holding cost is the cost of carrying one unit in inventory for a specified period of time,usually one year.

Question 22

A discount is volume-based if the discount is based on the total quantity purchased over a given period,regardless of the number of lots purchased over that period.

Question 23

The goal of trade promotions is to influence retailers to act in a way that helps the retailer achieve its objectives.

Question 24

The fixed ordering cost includes all costs that do not vary with the size of the order but are incurred each time an order is placed.

Question 25

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 26

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

Question 27

Quantity discounts lead to a minor buildup of cycle inventory in the supply chain.

Question 28

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

Question 29

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

Question 30

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 31

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

Question 32

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.
E) B and C only

Question 33

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 34

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.
E) none of the above

Question 35

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 36

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

Question 37

The fixed ordering cost is the cost of carrying one unit in inventory for a specified period of time,usually one year.

Question 38

Discounts related to price discrimination will be lot size based.

Question 39

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.
E) none of the above

Question 40

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.

Question 41

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 42

Which of the following is not a cost that must be considered in any lot sizing decision?

A) Average price per unit purchased, $C/unit
B) Fixed ordering cost incurred per lot, $S/lot
C) Holding cost incurred per unit per year, $H/unit/year = hC
D) Manufacturing cost per unit, $M/unit

Question 43

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 44

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 45

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 46

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 47

Which of the following would not be an example of a fixed ordering cost?

A) Administrative cost incurred to place an order
B) Trucking cost incurred to transport an order
C) Labor cost incurred to receive an order
D) Labor cost incurred to manufacture a part

Question 48

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.
E) increase the holding cost associated with each lot.

Question 49

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 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 50

Which of the following would not be included in holding cost?

A) Cost of capital
B) Cost of physically storing the inventory
C) Cost of manufacturing
D) Cost that results from the product becoming obsolete

Question 51

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 52

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 53

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.
E) an inventory picture.

Question 54

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 55

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 56

If demand increases by a factor of k,the optimal lot size increases by a factor of

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

Question 57

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 58

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 59

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.
E) none of the above

Question 60

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.
E) a reduction in purchase price per unit.

Question 61

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 62

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 63

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 64

Which cost estimates the rate at which the value of the product being stored drops either because the market value of that product drops or because the product quality deteriorates?

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

Question 65

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 66

When the retailer decides to pass through some or all of the promotion to customers to spur sales,the result is

A) a lowering of the price of the product for the end customer.
B) increased purchases and thus increased sales for the entire supply chain.
C) an increase in the amount of inventory held at the retailer.
D) A and B only

Question 67

The manufacturer can justify offering trade promotions resulting in forward buying by retailers 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) the retailer decreases his total cost.
D) A and B only

Question 68

When developing estimates for holding and ordering costs,it is important to

A) estimate these costs to a high level of precision.
B) get a good approximation quickly.
C) develop estimates that will not be changed.
D) both A and C

Question 69

For commodity products where price is set by the market,manufacturers can use lot size based quantity discounts to

A) achieve coordination in the supply chain and increase supply chain cost.
B) relax coordination in the supply chain and increase supply chain cost.
C) relax coordination in the supply chain and decrease supply chain cost.
D) achieve coordination in the supply chain and decrease supply chain cost.

Question 70

Discounts related to price discrimination will be

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

Question 71

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 72

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 73

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 74

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 75

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 76

Which of the following is not a key goal (from the manufacturer's perspective)of a trade promotion?

A) Induce retailers to use price discounts, displays, or advertising to spur sales.
B) Shift inventory from the manufacturer to the retailer and the customer.
C) Shift inventory from the retailer to the customer.
D) Defend a brand against competition.

Question 77

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 78

Which of the following is a possible response that a retailer could make to a trade promotion?

A) Pass through some or all of the promotion to customers to spur sales.
B) Pass through very little of the promotion to customers but purchase in greater quantity during the promotion period to exploit the temporary reduction in price.
C) Shift inventory from the retailer to the customer.
D) A and B only

Question 79

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 80

When the retailer decides to pass through very little of the promotion to customers but purchase in greater quantity during the promotion period to exploit the temporary reduction in price,the result is

A) a lowering of the price of the product for the end customer.
B) increased purchases and thus increased sales for the entire supply chain.
C) an increase in the amount of inventory held at the retailer.
D) all of the above