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Chapter 12  Inventory Management

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12

Inventory Management

TRUE/FALSE

1. The primary reason for keeping inventories low is that inventory represents a temporary monetary investment in goods on which a firm must pay interest. Answer: True Reference: Inventory Basics Difficulty: Easy Keywords: inventory, investment 2. One component of the holding cost of inventory is interest. Answer: True Reference: Inventory Basics Difficulty: Moderate Keywords: holding, cost, inventory, interest 3. One component of the ordering cost of inventory is shrinkage. Answer: False Reference: Inventory Basics Difficulty: Moderate Keywords: ordering, cost, shrinkage 4. A stockout occurs when an item that is typically stocked is not available to satisfy a demand the moment it occurs. Answer: True Reference: Inventory Basics Difficulty: Moderate Keyword: stockout 5. A backorder occurs when a customer order cannot be filled when it is placed, but is instead filled later. Answer: True Reference: Inventory Basics Difficulty: Moderate Keywords: backorder, fill

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Chapter 12  Inventory Management

6. Setup cost is independent of order size. Answer: True Reference: Inventory Basics Difficulty: Moderate Keywords: setup, cost 7. A quantity discount is attractive because there is a drop in the price per unit when the order is sufficiently large. Answer: True Reference: Inventory Basics Difficulty: Moderate Keywords: quantity, discount 8. Repeatability is an undesirable feature of some orders because they must be repeated until the order is filled correctly. Answer: False Reference: Inventory Basics Difficulty: Moderate Keyword: repeatability 9. The primary lever to reduce anticipation inventory is to place orders closer to the time when they must be received. Answer: False Reference: Inventory Basics Difficulty: Moderate Keywords: anticipation, inventory, safety, stock 10. When using ABC analysis, class C items should be reviewed frequently. Answer: False Reference: Inventory Basics Difficulty: Moderate Keywords: ABC, analysis, class 11. EOQ should be used if you use a make to order strategy and the customer specifies the entire order be delivered in one shipment. Answer: False Reference: Economic Order Quantity Difficulty: Easy Keywords: EOQ, economic, order, quantity 12. EOQ should be used if you follow a make-to-stock strategy and the item has relatively stable demand. Answer: True Reference: Economic Order Quantity Difficulty: Easy Keywords: EOQ, economic, order, quantity

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13. The EOQ is the smallest lot size that a supplier will allow a customer to order. Answer: False Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic, order, quantity 14. As the annual demand doubles, the EOQ also doubles. Answer: False Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic, order, quantity 15. Dependent-demand items are those items for which demand is influenced by market conditions and is not related to inventory decision for any other item held in stock. Answer: False Reference: Inventory Control Systems Difficulty: Moderate Keywords: dependent, demand, inventory 16. A continuous review system is sometimes called a reorder point system. Answer: True Reference: Inventory Control Systems Difficulty: Moderate Keywords: continuous, review, reorder, point 17. The scheduled receipts are orders that have been placed but not yet received. Answer: True Reference: Inventory Control Systems Difficulty: Moderate Keywords: scheduled, receipt 18. As the service level increases, the probability of not running out of stock during a cycle decreases. Answer: True Reference: Inventory Control Systems Difficulty: Moderate Keywords: service, level, stockout 19. The two-bin inventory system is a type of visual system. Answer: True Reference: Inventory Control Systems Difficulty: Moderate Keywords: two-bin, bin, visual, system 20. A periodic review system is a system in which an item’s inventory position is reviewed periodically rather than continuously. Answer: True Reference: Inventory Control Systems Difficulty: Moderate Keywords: periodic, review, continuous 475

Chapter 12  Inventory Management

21. Cycle counting is an inventory-control method whereby storeroom personnel physically count a small percent of the total number of items each day. Answer: True Reference: Inventory Control Systems Difficulty: Moderate Keywords: cycle, count, counting

MULTIPLE CHOICE 22. Which one of the following reasons creates a pressure for reducing inventories? a. High cost of capital b. On-time delivery requests from customers c. Need for better labor or equipment utilization d. Need for reduction in total payments to suppliers Answer: a Reference: Inventory Basics Difficulty: Moderate Keywords: inventory, quantity 23. Which of the following factors would cause an operations manager to hold higher inventories? a. A high probability of obsolescence. b. An extremely complicated procedure for adjusting a machine between production of two different types of product. c. An exceedingly high cost of capital. d. A constant item cost regardless of the quantity ordered. Answer: b Reference: Inventory Basics Difficulty: Moderate Keywords: inventory, quantity, setup, cost 24. A purchasing agent would be tempted to place a large order if: a. she knew that pilferage was approaching record highs. b. equipment setups were quick and easy. c. her salary and order receipt procedures were astronomical. d. the item being ordered was easily obtainable at a half dozen sources in the immediate area. Answer: c Reference: Inventory Basics Difficulty: Moderate Keywords: inventory, quantity, order, cost

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25. Which of these statements is NOT a consequence of creating more inventory? a. Workforce productivity is increased. b. Rescheduling production occurs more frequently. c. The number of setups is reduced. d. Resource utilization is decreased. Answer: d Reference: Inventory Basics Difficulty: Moderate Keywords: inventory, quantity, resource, utilization 26. Pipeline inventory is a type of inventory that is usually maintained by: a. gasoline suppliers only. b. electrical utilities only. c. any manufacturer moving materials from point to point. d. a trucking company making emergency shipments. Answer: c Reference: Inventory Basics Difficulty: Moderate Keywords: inventory, pipeline 27. Anticipation inventory is a consequence of: a. moving inventory from one point to another in a system. b. being able to produce a large quantity of items simultaneously as cheaply as producing one item. c. variable and unpredictable demand or lead time. d. variable yet predictable demand or lead time. Answer: d Reference: Inventory Basics Difficulty: Moderate Keywords: inventory, pipeline 28. Norman Regional Hospital always kept a few extra heart catheters on hand because when a patient showed up that needed one, they really needed one. This is a prime example of: a. safety stock inventory. b. anticipation inventory. c. pipeline inventory. d. cycle inventory. Answer: a Reference: Inventory Basics Difficulty: Moderate Keywords: inventory, safety, stock 29. Cycle inventory would increase if: a. the annual demand for an item fell. b. the cost of capital fell. c. the cost to place an order fell. d. the supplier had one price regardless of the quantity ordered. Answer: b Reference: Inventory Basics Difficulty: Easy Keywords: inventory, safety, stock 477

Chapter 12  Inventory Management

30. Pipeline inventory is guaranteed to rise if: a. the lot size rises. b. the average demand for the item per unit time falls. c. the lead time rises. d. the cost of capital increases. Answer: c Reference: Inventory Basics Difficulty: Easy Keywords: inventory, pipeline, lead, time 31. One of the secondary levers for reducing safety stock inventory is to reduce: a. supply uncertainties. b. setup cost. c. capacity cushions. d. delivery size. Answer: a Reference: Inventory Basics Difficulty: Moderate Keywords: inventory, safety, stock, lever 32. Which of these would increase repeatability? a. Lower product demand. b. The use of the one-worker, multiple-machines concept. c. Investment in flexible resources that can produce a wide variety of products. d. The use of a specially designed part for each application. Answer: b Reference: Inventory Basics Difficulty: Moderate Keywords: repeatability, specialization 33. Which of these decisions would tend to increase the safety stock inventory? a. The manufacturer decides to share production plans with the suppliers. b. The manufacturer performs preventive maintenance regularly. c. Customers are encourages to order items only when they need them. d. The manufacturer ensures that it has plenty of excess capacity. Answer: c Reference: Inventory Basics Difficulty: Moderate Keywords: safety, stock, inventory 34. A producer might reduce their need for anticipation inventory by: a. cutting the lead times of purchased items. b. finding more expensive suppliers. c. trimming the product line to just one item. d. offering off-season pricing plans. Answer: d Reference: Inventory Basics Difficulty: Easy Keywords: anticipation, season, inventory

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35. An items that is made to order is also called a(n): a. special. b. standard. c. EOQ. d. one-off. Answer: a Reference: Inventory Basics Difficulty: Easy Keywords: anticipation, season, inventory 36. One of the secondary levers for reducing pipeline inventory is to: a. offer seasonal pricing plans. b. increase capacity cushions. c. accept only large orders. d. select more responsive suppliers. Answer: d Reference: Inventory Basics Difficulty: Moderate Keywords: inventory, pipeline, lever 37. An item that is made to stock or ordered to stock is commonly called a(n): a. SKU. b. standard. c. line item. d. basic. Answer: b Reference: Inventory Basics Difficulty: Moderate Keywords: standard, stock 38. For a company that manufactures most of its products as standards, more inventory should be placed: a. closer to the customer. b. within the plant as work-in-process. c. close to suppliers. d. equally distributed between the plants and warehouses. Answer: a Reference: Inventory Basics Difficulty: Moderate Keywords: inventory, placement, standard 39. What is generally true about the class A items in ABC analysis? They represent: a. about 20 percent of all items. b. about 30 percent of all items. c. about 20 percent of the dollar usage. d. about 50 percent of the dollar usage. Answer: a Reference: Inventory Basics Difficulty: Moderate Keywords: ABC, analysis, class A

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Chapter 12  Inventory Management

40. What is generally true about the class C items in ABC analysis? They represent: a. about 20 percent of all items. b. about 50 percent of all items. c. about 15 percent of the dollar usage. d. about 50 percent of the dollar usage. Answer: b Reference: Inventory Basics Difficulty: Moderate Keywords: ABC, analysis, Pareto, class C 41. ABC analysis is closely related to: a. three-bin analysis. b. EOQ analysis. c. repeatability analysis. d. Pareto analysis. Answer: d Reference: Inventory Basics Difficulty: Moderate Keywords: ABC, Pareto, analysis 42. Even though the economic order quantity (EOQ) is optimal only when five assumptions are satisfied, it serves as a reasonable first approximation even when these assumptions do not quite apply. Which one of the following is not an assumption of the EOQ? a. Decisions for one item can be made independently of decisions made for other items. b. There is no uncertainty in lead-time. c. The amount of an order received is exactly equal to what was ordered, without any “short shipments” from a supplier or scrap losses in the shop. d. Quantity discounts can be taken advantage of for large lot sizes. Answer: d Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic, order, quantity, assumption 43. Which one of the following statements regarding the economic order quantity (EOQ) is TRUE? a. The EOQ model combines several different item orders to the same supplier. b. If an order quantity is larger than the EOQ, the annual holding cost for cycle inventory exceeds the annual ordering cost. c. The EOQ model assumes a variable demand pattern. d. When the interest rate drops, the inventory holding cost decreases and the EOQ decreases. Answer: b Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic, order, quantity, cycle

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44. Which one of the following statements concerning the economic order quantity (EOQ) model is TRUE? a. An increase in holding cost will increase the EOQ value. b. A decrease in demand will increase the EOQ value. c. A decrease in holding cost will increase the EOQ value. d. None of the above is true. Answer: c Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic, order, quantity, holding 45. Which one of the following statements concerning the economic order quantity (EOQ) is TRUE? a. The EOQ is the order quantity that minimizes annual inventory holding costs. b. An increase in demand will increase the EOQ value. c. The time between orders (TBO) will increase with an increase in holding costs. d. The EOQ formula assumes that there are only three relevant costs: holding, transportation, and setup. Answer: b Reference: Economic Order Quantity Difficulty: Hard Keywords: EOQ, economic, order, quantity 46. You made it through your introductory operations management course and are facing your first ordering decision. You remember as if it were yesterday your instructor’s dulcet tones indicating that you wouldn’t use the EOQ formula if: a. you followed a make-to-stock strategy for an item with stable demand. b. your carrying costs and ordering costs are known and relatively stable. c. the order size is constrained by capacity limitations such as the number or size of the delivery trucks. d. your setup costs and holding costs remain constant and can be determined. Answer: c Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic, order, quantity 47. A company operating under an EOQ policy enjoys rising annual demand for their products for three consecutive years. During this time their holding cost and ordering cost remain constant. Which statement is best? a. Their order quantity will fall and so will the time between orders. b. Their order quantity will fall but the time between orders will rise c. Their order quantity will rise but the time between orders will fall. d. Their order quantity will rise and so will the time between orders. Answer: c Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic, order, quantity

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48. The Lemma Company manufactures and sells 10 products. Ways have been found to cut both the setup and inventory holding costs in half. What effect will this have on the economic order quantities of the 10 products? a. They will be reduced by a factor of 1.41. b. They will not change. c. They will be reduced by a factor of 2.00. d. They will be increased by a factor of 1.41. Answer: b Reference: Economic Order Quantity Difficulty: Hard Keywords: EOQ, economic, order, quantity 49. The Lemming Company implements an aggressive marketing campaign and effectively doubles the number of Model 13s that it makes and sells in a year. Their total annual holding cost should: a. decrease by 50%. b. increase by 100%. c. stay the same. d. increase by 40%. Answer: d Reference: Economic Order Quantity Difficulty: Hard Keywords: EOQ, economic, order, quantity 50. Sensitivity analysis on the economic order quantity (EOQ) formula can help the operations manager answer several questions on how to manage inventories. Which one of the following questions is NOT answered by EOQ sensitivity analysis? a. How critical are errors in estimating demand (D), inventory holding cost (H), and setup cost (S)? b. What should happen to lot sizes if interest rates drop? c. What should happen to cycle inventory if the demand rate increases? d. What should happen to lot sizes if supply and lead-time uncertainty increase? Answer: d Reference: Economic Order Quantity Difficulty: Moderate Keywords: EOQ, economic, order, quantity, lead, time, lead-time 51. Which one of the following statements concerning a continuous review system is best? a. The inventory position (IP) of an item measures the item’s ability to satisfy future demand, relying only on the on-hand inventory. b. An item’s inventory position under a continuous review system increases by Q units as soon as an order is received. c. An item’s on-hand inventory increases by Q units as soon as an order is placed. d. Under a continuous review system, an item’s inventory position corresponds to the on-hand inventory unless there are backorders or one or more scheduled receipts. Answer: d Reference: Inventory Control Systems Difficulty: Hard Keywords: continuous, review, position

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52. Which one of the following descriptions best defines the cycle-service level as a measure of customer service? a. The preferred proportion of annual demand instantaneously filled from stock b. The number of stockouts tolerated per year c. The preferred proportion of days in the year when an item is in stock d. The desired probability of not running out of stock in any one inventory cycle Answer: d Reference: Inventory Control Systems Difficulty: Moderate Keywords: cycle, service, level, service 53. Which one of the following statements is best? a. The level of safety stock maintained decreases when the desired cycle-service level increases. b. The level of safety stock maintained decreases when the standard deviation of demand during leadtime increases. c. When no safety stock is maintained, stockouts will occur during approximately 50% of the cycles. d. The level of safety stock maintained is greater if mean absolute deviation (MAD) is used rather than standard deviation in estimating forecast errors. Answer: c Reference: Inventory Control Systems Difficulty: Moderate Keywords: safety, stock, stockout 54. An inventory system answers two important questions: when to order and how much to order. Which of the following statements correctly explains how a Q system (continuous review system) or a P system (periodic review system) answers these questions? a. Under a Q system, a fixed quantity is ordered every P time period. b. Under a Q system, an order is placed to replenish the inventory position up to the target level T when the inventory position reaches the reorder point R. c. Under a P system, a fixed quantity Q is ordered when the inventory position reaches the reorder point R. d. Under a P system, an order is placed to replenish the inventory position up to the target level T every P time periods. Answer: d Reference: Inventory Control Systems Difficulty: Moderate Keywords: Q, system, P, T, position 55. Which one of the following statements is best? a. A P system requires more safety stock than a Q system. b. A P system lends itself more to quantity discounts than does a Q system. c. A P system requires more administrative control and computer support than does a Q system. d. In a periodic review system, the value of Q is kept the same from one cycle to another. Answer: a Reference: Inventory Control Systems Difficulty: Moderate Keywords: P, system, Q

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56. Which one of the following statements represents an advantage of the P system over the Q system? a. Less safety stock is carried to achieve the same service level. b. The replenishment intervals can be more easily individualized for items. c. Orders can be more easily combined to the same supplier. d. A P system is more suitable for quantity discounts and capacity limitations. Answer: c Reference: Inventory Control Systems Difficulty: Moderate Keywo...