Quiz 11: Inventory Management

Inventory is defined as the stock of any item or resource used in an organization.

An inventory system is a set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be.

One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to specify when items should be ordered.

One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to determine the level of quality to specify.

One of the basic purposes of inventory analysis in manufacturing and stockkeeping services is to determine how large the orders to vendors should be.

In inventory models, high holding costs tend to favor high inventory levels.

In inventory models, high holding costs tend to favor low inventory levels and frequent replenishment.

If the cost to change from producing one product to producing another were zero the lot size would be very small.

Shortage costs are precise and easy to measure.

Inventory levels of dependent demand items are usually managed by calculations using calculus-driven, cost-minimizing models.

The fixed-time period inventory system has a smaller average inventory than the fixed-order quantity system because it must also protect against stockouts during the review period when inventory is checked.

The fixed-order quantity inventory model favors less expensive items because average inventory is lower.

The fixed-order quantity inventory model is more appropriate for important items such as critical repair parts because there is closer monitoring and therefore quicker response to a potential stockout.

The fixed-order quantity inventory model requires more time to maintain because every addition or withdrawal is logged.

Fixed-order quantity inventory models are "event triggered."

Fixed-order quantity inventory models are "time triggered."

Fixed-time period inventory models are "event triggered."

Fixed-time period inventory models are "time triggered."

Fixed-order quantity inventory systems determine the reorder point, R, and the order quantity, Q, values.

The computation of a firm's inventory position is found by taking the inventory on hand and adding it to the on-order inventory, and then subtracting back-ordered inventory.

Using the probability approach we assume that the demand over a period of time is normally distributed.

Safety stock can be defined as the amount of inventory carried in addition to the expected demand.

If demand for an item is normally distributed, we plan for demand to be twice the average demand and carry two standard deviations worth of safety stock inventory.

Safety stock can be computed when using the fixed-order quantity inventory model by multiplying a z value representing the number of standard deviations to achieve a service level or probability by the standard deviation of periodic demand.

The key difference between a fixed-order quantity inventory model where demand is known and one where demand is uncertain is in computing the reorder point.

Fixed-time period inventory models generate order quantities that vary from time period to time period, depending on the usage rate.

Fixed-order quantity systems assume a random depletion of inventory, with less than an immediate order when a reorder point is reached.

The standard fixed-time period model assumes that inventory is never counted but determined by EOQ measures.

Safety stock is not necessary in any fixed-time period system.

In the fixed-time period model it is necessary to determine the inventory currently on hand to calculate the size of the order to place with a vendor.

Some inventory situations involve placing orders to cover only one demand period or to cover short-lived items at frequent intervals.

The optimal stocking decision in inventory management, when using marginal analysis, occurs at the point where the benefits derived from carrying the next unit are more than the costs for that unit.

When stocked items are sold, the optimal inventory decision using marginal analysis is to stock that quantity where the probable profit from the sale or use of the last unit is equal to or greater than the probable losses if the last unit remains unsold.

Cycle counting is a physical inventory-taking technique in which inventory is counted on a frequent basis rather than once or twice a year.

The "sawtooth effect," named after turn-around artist Al "Chainsaw" Dunlap, is the severe reduction of inventory and service levels that occurs when a firm has gone through a hostile takeover.

The "sawtooth effect," is named after the jagged shape of the graph of inventory levels over time.

Price-break models deal with the fact that the selling price of an item varies with the order size.

Price-break models deal with the fact that the selling price of an item generally increases as the order size increases.

Price-break models deal with discrete or step changes in price as order size changes rather than a per-unit change.

In a price break model of lot sizing, to find the lowest-cost order quantity, it is sometimes necessary to calculate the economic order quantity for each possible price.

In a price break model of lot sizing, to find the lowest-cost order quantity, it is sometimes necessary to calculate the economic order quantity for each possible price and to check to see whether the lowest cost quantity is feasible.

In a price break model of lot sizing the lowest cost quantity is always feasible.

One of the drivers of the direct-to-store (direct distribution) approach is the upstream migration of value-added logistics services.

One of the drivers of the direct-to-store (direct distribution) approach is the increase in global sourcing.

One of the drivers of the direct-to-store (direct distribution) approach is the decrease in trucking industry regulation.

You should visualize inventory as stacks of money sitting on forklifts, on shelves, and in trucks and planes while in transit.

One of the daily, delicate balancing acts that logistics managers have to perform involves the trade-off between transportation costs and fulfillment speed.

One of the daily, delicate balancing acts that logistics managers have to perform involves the trade-off between customer satisfaction and cost to serve.

One of the daily, delicate balancing acts that logistics managers have to perform involves the trade-off between inventory costs and the cost of stock-outs.

The average cost of inventory in the United States is 20 to 25 percent of its value.

Savings from reduced inventory results in increased profit.

The costs associated with reduced inventory results in lower profits.

Which of the following is not one of the categories of manufacturing inventory? A) Raw materials B) Finished products C) Component parts D) Just-in-time E) Supplies

Which of the following is one of the categories of manufacturing inventory? A) Economic order inventory B) Work-in-process C) Quality units D) JIT inventory E) Re-order point

Firms keep supplies of inventory for which of the following reasons? A) To maintain dependence of operations B) To provide a feeling of security for the workforce C) To meet variation in product demand D) To hedge against wage increases E) In case the supplier changes the design

Which of the following is not a reason to carry inventory? A) To provide a safeguard for variation in raw material delivery time B) To take advantage of economic purchase-order size C) To maintain independence of operations D) To meet variation in product demand E) To keep the stock out of the hands of competitors

When developing inventory cost models, which of the following are not included as costs to place an order? A) Phone calls B) Taxes C) Clerical D) Calculating quantity to order E) Postage

When material is ordered from a vendor, which of the following is not a reason for delays in the order arriving on time? A) Normal variation in shipping time B) A shortage of material at the vendor's plant causing backlogs C) An unexpected strike at the vendor's plant D) A lost order E) Redundant ordering systems

Which of the following is not included as an inventory holding cost? A) Annualized cost of materials B) Handling C) Insurance D) Pilferage E) Storage facilities

Which of the following is usually included as an inventory holding cost? A) Order placing B) Breakage C) Typing up an order D) Quantity discounts E) Annualized cost of materials

In making any decision that affects inventory size, which of the following costs do not need to be considered? A) Holding costs B) Setup costs C) Ordering costs D) Fixed costs E) Shortage costs

Which of the following are fixed-order quantity inventory models? A) Economic order quantity model B) The ABC model C) Periodic replenishment model D) Cycle counting model E) P model

Which of the following are fixed-time period inventory models? A) The EOQ model B) The least cost method C) The Q model D) Periodic system model E) Just-in-time model

Which of the following is a perpetual system for inventory management? A) Fixed-time period B) Fixed-order quantity C) P model D) First-in-first-out E) The wheel of inventory

Which of the following is an assumption of the basic fixed-order quantity inventory model? A) Lead times are averaged B) Ordering costs are variable C) Price per unit of product is constant D) Back orders are allowed E) Stock-out costs are high

Which of the following is not an assumption of the basic fixed-order quantity inventory model? A) Ordering or setup costs are constant B) Inventory holding cost is based on average inventory C) Diminishing returns to scale of holding inventory D) Lead time is constant E) Demand for the product is uniform throughout the period

Which of the following is the symbol used in the textbook for the cost of placing an order in the fixed-order quantity inventory model? A) C B) TC C) H D) Q E) S

Which of the following is the set of all cost components that make up the fixed-order quantity total annual cost (TC) function? A) Annual purchasing cost, annual ordering cost, fixed cost B) Annual holding cost, annual ordering cost, unit cost C) Annual holding cost, annual ordering cost, annual purchasing cost D) Annual lead time cost, annual holding cost, annual purchasing cost E) Annual unit cost, annual set up cost, annual purchasing cost

Assuming no safety stock, what is the reorder point (R) given an average daily demand of 50 units, a lead time of 10 days and 625 units on hand? A) 550 B) 500 C) 715 D) 450 E) 475

Assuming no safety stock, what is the reorder point (R) given an average daily demand of 78 units and a lead time of 3 days? A) 421 B) 234 C) 78 D) 26 E) 312

If annual demand is 12,000 units, the ordering cost is $6 per order, and the holding cost is $2.50 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model? A) 576 B) 240 C) 120.4 D) 60.56 E) 56.03

If annual demand is 50,000 units, the ordering cost is $25 per order, and the holding cost is $5 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model? A) 909 B) 707 C) 634 D) 500 E) 141

If annual demand is 35,000 units, the ordering cost is $50 per order, and the holding cost is $0.65 per unit per year, which of the following is the optimal order quantity using the fixed-order quantity model? A) 5,060 B) 2,320 C) 2,133 D) 2,004 E) 1,866

Using the fixed-order quantity model, which of the following is the total ordering cost of inventory given an annual demand of 36,000 units, a cost per order of $80, and a holding cost per unit per year of $4? A) $849 B) $1,200 C) $1,889 D) $2,267 E) $2,400

A company is planning for its financing needs and uses the basic fixed-order quantity inventory model. Which of the following is the total cost (TC) of the inventory given an annual demand of 10,000, setup cost of $32, a holding cost per unit per year of $4, an EOQ of 400 units, and a cost per unit of inventory of $150? A) $1,501,600 B) $1,498,200 C) $500,687 D) $499,313 E) None of these

A company has recorded the last five days of daily demand on their only product. Those values are 120, 125, 124, 128, and 133. The time from when an order is placed to when it arrives at the company from its vendor is 5 days. Assuming the basic fixed-order quantity inventory model fits this situation and no safety stock is needed, which of the following is the reorder point (R)? A) 120 B) 126 C) 630 D) 950 E) 1,200

A company has recorded the last six days of daily demand on a single product they sell. Those values are 37, 115, 93, 112, 73, and 110. The time from when an order is placed to when it arrives at the company from its vendor is 3 days. Assuming the basic fixed-order quantity inventory model fits this situation and no safety stock is needed, which of the following is the reorder point (R)? A) 540 B) 270 C) 115 D) 90 E) 60

Using the probability approach to determine an inventory safety stock and wanting to be 95 percent sure of covering inventory demand, which of the following is the number of standard deviations necessary to have the 95 percent service probability assured? A) 1.28 B) 1.64 C) 1.96 D) 2.00 E) 2.18

To take into consideration demand uncertainty in reorder point (R) calculations, what do we add to the product of the average daily demand and lead time in days when calculating the value of R? A) The product of average daily demand times a standard deviation of lead time B) A z value times the lead time in days C) The standard deviation of vendor lead time times the standard deviation of demand D) The product of lead time in days times the standard deviation of lead time E) The product of the standard deviation of demand variability and a z-score relating to a specific service probability.

In order to determine the standard deviation of usage during lead time in the reorder point formula for a fixed-order quantity inventory model, which of the following must be computed first? A) Standard deviation of daily demand B) Number of standard deviations for a specific service probability C) Stockout cost D) Economic order quantity E) Safety stock level

If it takes a supplier four days to deliver an order once it has been placed and the standard deviation of daily demand is 10, which of the following is the standard deviation of usage during lead time? A) 10 B) 20 C) 40 D) 100 E) 400

If it takes a supplier 25 days to deliver an order once it has been placed and the standard deviation of daily demand is 20, which of the following is the standard deviation of usage during lead time? A) 50 B) 100 C) 400 D) 1,000 E) 1,600

If it takes a supplier two days to deliver an order once it has been placed and the daily demand for three days has been 120, 124, and 125, which of the following is the standard deviation of usage during lead time? A) About 2.16 B) About 3.06 C) About 4.66 D) About 5.34 E) About 9.30

A company wants to determine its reorder point (R). Demand is variable and they want to build a safety stock into R. If the average daily demand is 12, the lead time is 5 days, the desired z value is 1.96, and the standard deviation of usage during lead time is 3, which of the following is the desired value of R? A) About 6 B) About 16 C) About 61 D) About 66 E) About 79

A company wants to determine its reorder point (R). Demand is variable and they want to build a safety stock into R. The company wants to have a service probability coverage of 95 percent. If average daily demand is 8, lead time is 3 days, and the standard deviation of usage during lead time is 2, which of the following is the desired value of R? A) About 17.9 B) About 19.7 C) About 24.0 D) About 27.3 E) About 31.2

Which of the following is not necessary to compute the order quantity using the fixed-time period model with safety stock? A) Forecast average daily demand B) Safety stock C) Inventory currently on hand D) Ordering cost E) Lead time in days

Using the fixed-time period inventory model, and given an average daily demand of 200 units, 4 days between inventory reviews, 5 days for lead time, 120 units of inventory on hand, a z of 1.96, and a standard deviation of demand over the review and lead time of 3 units, which of the following is the order quantity? A) About 1,086 B) About 1,686 C) About 1,806 D) About 2,206 E) About 2,686

Using the fixed-time period inventory model, and given an average daily demand of 75 units, 10 days between inventory reviews, 2 days for lead time, 50 units of inventory on hand, a service probability of 95 percent, and a standard deviation of demand over the review and lead time of 8 units, which of the following is the order quantity? A) 863 B) 948 C) 1,044 D) 1,178 E) 4,510

Using the fixed-time period inventory model, and given an average daily demand of 15 units, 3 days between inventory reviews, 1 day for lead time, 30 units of inventory on hand, a service probability of 98 percent, and a standard deviation of daily demand is 3 units, which of the following is the order quantity? A) About 30.4 B) About 36.3 C) About 42.3 D) About 56.8 E) About 59.8

You would like to use the fixed-time period inventory model to compute the desired order quantity for a company. You know that vendor lead time is 5 days and the number of days between reviews is 7. Which of the following is the standard deviation of demand over the review and lead time if the standard deviation of daily demand is 8? A) About 27.7 B) About 32.8 C) About 35.8 D) About 39.9 E) About 45.0

You would like to use the fixed-time period inventory model to compute the desired order quantity for a company. You know that vendor lead time is 10 days and the number of days between reviews is 15. Which of the following is the standard deviation of demand over the review and lead time period if the standard deviation of daily demand is 10? A) 25 B) 40 C) 50 D) 73 E) 100

If a vendor has correctly used marginal analysis to select their stock levels for the day (as in the newsperson problem), and the profit resulting from the last unit being sold (C_u) is $0.90 and the loss resulting from that unit if it is not sold (C_o) is $0.50, which of the following is the probability of the last unit being sold? A) Greater than 0.357 B) Greater than 0.400 C) Greater than 0.556 D) Greater than 0.678 E) None of these

If a vendor has correctly used marginal analysis to select their stock levels for the day (as in the newsperson problem), and the profit resulting from the last unit being sold (C_u) is $120 and the loss resulting from that unit if it is not sold (C_o) is $360, which of the following is the probability of the last unit being sold? A) Greater than 0.90 B) Greater than 0.85 C) Greater than 0.75 D) Greater than 0.25 E) None of these

The Pareto principle is best applied to which of the following inventory systems? A) EOQ B) Fixed-time period C) ABC classification D) Fixed-order quantity E) Single-period ordering system

Which of the following are the recommended percentage groupings of the ABC classifications of the dollar volume of products? A) A items get 15%, B items get 35%, and C items get 50% B) A items get 15%, B items get 45%, and C items get 40% C) A items get 25%, B items get 35%, and C items get 40% D) A items get 25%, B items get 15%, and C items get 60% E) A items get 20%, B items get 30%, and C items get 50%

Using the ABC classification system for inventory, which of the following is a true statement? A) The "C" items are of moderate dollar volume B) You should allocate about 50% of the dollar volume to "B" items C) The "A" items are of low dollar volume D) The "A" items are of high dollar volume E) Inexpensive and low usage items are classified as "C" no matter how critical

Which of the following values for z should we use in as safety stock calculation if we want a service probability of 98%? A) 1.64 B) 1.96 C) 2.05 D) 2.30 E) None of these

Computer inventory systems are often programmed to produce a cycle count notice in which of the following case? A) When the record shows a near maximum balance on hand B) When the record shows positive balance but a backorder was written C) When quality problems have been discovered with the item D) When the item has become obsolete E) When the item has been misplaced in the stockroom

ABC inventory classification schemes divide inventory items into three groupings. What are these groupings usually based upon? A) Unit cost B) Lead time C) Criticality D) Weight E) Dollar volume

What is the basic purpose of inventory analysis? A) To provide precise inventory valuations when generating accounting records for the firm's annual report. B) Because there are costs for making each new production setup, inventory allows management to reduce the number of setups. C) To provide a safeguard for variation in raw material delivery time. D) To take advantage of economic purchase order size. E) To specify when items should be ordered and how large the order should be.

The 80-20 rule, that is the logic of the few having the greatest importance and the many having little importance has been broadened to include inventory situations. The term often used to refer to this logic is called what? A) The Peter Principle B) The Pareto Principle C) Little's Law D) The Parkinson Rule E) The Elitist Conspiracy

Demand for organic super fresh lettuce in a local super market is 5 with probability 0.2; 6 with probability 0.3; 7 with probability 0.4 or 8 with probability 0.1. Unsold lettuce are given to a food bank with a salvage value of $1.00 per lettuce. Cost of the lettuce is $3:00 per unit. Selling price is $6:00 per unit. Using single period model, what is the optimal order quantity in number of units of lettuce the super market should use? A) 7 B) 6 C) 5 D) 8 E) None of these

Daily demand for fresh cauliflower in the ZZ-Warehouse store follows normal distribution with mean 100 cartons and s.d. 20 cartons. The ZZ-Warehouse buys at a cost of $50.00 per carton, sells it for $70.00 per carton. Unsold cartons are sold for $20.00 per carton. What is the optimal order quantity, using the single period model? A) 100 B) 80 C) 95 D) 110 E) 105

Using the simple order quantity model in an inventory control problem, Kathy calculated the order quantity to be 1000 units. In a review, she found out that the demand is actually double that of the quantity she had used and the holding cost is only half that of the value she used, The new economic order quantity using the correct data will be: A) 1000 B) 2000 C) 1414 D) 707.1 E) cannot be found without other cost information.

In ABC Printing, Queen's black is a popular input with an annual demand of 50,000 gallons. Ordering cost of $50 per order, and the holding cost is $5 per unit per year; the economic order quantity is 1000. Hence during the year, they used 1000 as the order quantity. An audit of the costs revealed that the true ordering cost was only $25 and the true holding cost was $10 per gallon per year. The correct order quantity would have been 500. How much did ABC lose due to incorrect cost information during the year? A) 0 B) 1250 C) -1250 D) 500 E) Cannot be found without additional information.