Sample/practice exam 4 June, questions and answers PDF

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Sample Answer to Sample Questions Sample Question 1 A key of the procurement process is the selection of suppliers. As the Procurement Manager for a company, provide and explain Five non-price criteria that should be used in the selection process of suppliers for material needed in the production of some of the brands of clothing. Sample answer Criteria in the selection of suppliers can include: - Quality: specifications that a user desires in an item - Reliability: consistent on-time delivery and performance history - Capability: potential supplier’s production facilities and capacity, technical capability, management and organizational capabilities, and operating controls. These factors indicate the supplier’s ability to provide a needed quality and quantity of material in a timely manner. - Financial considerations: supplier’s financial position. - Geographical location: ability to fill rush orders, meet delivery times, and utilize greater supplier-buyer cooperation

You should explain each of them in the context of the item you are procuring. Sample Question 2 What are four major components of inventory carrying cost? Explain each. Sample Answer: There are four major components of inventory carrying a cost: capital cost, storage space cost, inventory service cost, and inventory risk cost. Sometimes called the interest or opportunity cost, capital cost focuses on the cost of capital tied up in inventory and the resulting lost opportunity from investing that capital elsewhere. The opportunity cost of this inventory is the return on capital (minimum rate of return) the organization might have realized if it had invested in another opportunity rather than in raw materials, plants, and labour. Another way of calculating capital cost is for an organization to use its weighted average cost of capital (WACC). WACC is the weighted average per cent of debt service of all

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external sources of funding, including both equity and debt. This method reflects the direct debit service costs of having capital tied up in inventory. Normally only direct materials, direct labour, and direct plant cost are included in the out-of-pocket investment in inventory. Including inbound transportation costs to a distribution centre in inventory, value is consistent with this notion of including variable costs in inventory value. Storage space cost includes handling costs associated with moving products into and out of inventory, as well as storage costs such as rent, heating, and lighting. Contrast the use of public warehousing versus private warehousing as with public warehousing, almost all handling and storage costs vary directly with the level of stored inventory. As a result, these variable costs are relevant to decisions regarding inventory. When an organization uses private warehousing, however, many storage space costs (such as depreciation on the building) are fixed and are not relevant to inventory carrying costs. Inventory service cost includes insurance and taxes. Depending on the product value and type, the risk of loss or damage might require high insurance premiums. Inventory risk cost reflects the very real possibility that inventory dollar value might decline for reasons beyond an organization’s control. Any calculation of inventory risk costs should include the costs associated with obsolescence, damage, pilferage, and other risks to stored products. The extent to which inventoried items are subject to such risks will affect the inventory value and thus the carrying cost. Sample Question 3 What might four events occur when an organisation is out of stock of a needed product? What costs are associated with each of these events? Sample Answer: A stock-out occurs when desired quantities of finished goods are not available when or where a customer needs them. When a seller is unable to satisfy demand with available inventory, one of four possible events might occur: (1) the buyer waits until the product is available; (2) the buyer back-orders the product; (3) the seller loses current revenue; or (4) the seller loses a buyer and future revenue. From the perspective of most organizations, these four outcomes are ranked from best to worst in terms of desirability and cost impact.

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Theoretically, scenario 1 (customer waits) should cost nothing; this situation is more likely to occur where product substitutability is very low. Scenario 2 would increase the seller’s variable costs. Scenario 3 would result in the buyer canceling a portion of or the entire order, thus negatively impacting the current revenue of the seller. Scenario 4 is the worst situation for the seller and the most difficult to calculate because it results in the loss of future revenue from the buyer Sample Question 3 Managing inventory is a critical activity for the success of supply chain since inventory impacts the costs of goods sold as well as supports customer service. List and discuss reasons for holding inventory. Sample Answer: List of reasons: - batching economies/cycle stocks (price discounts in the acquisition, production, and transportation) - uncertainty/safety stocks (a buffer against uncertainties in deliveries and orders) - time/in-transit and work-in-process stocks (time-related trade-offs, work in process inventory) - seasonal stocks (dealing with perishable supply, seasonal demand) - anticipatory stocks (strike, price increases, major shortages, weather, political unrest, etc.) - market proliferation (choices of products for customers) - interfaces with other areas of the organization (particularly marketing and manufacturing You need to discuss the above briefly

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