Operations Management: Processes and Supply Chains, 10e (Krajewski et al.) Chapter 9 Supply Chain Inventory Management

Operations Management: Processes and Supply Chains, 10e (Krajewski et al.) Chapter 9 Supply Chain Inventory Management 1) Inventory management is the planning and controlling of inventories in order to meet the competitive priorities of the organization. Answer: TRUE Reference: Introduction Difficulty: Easy Keywords: inventory management, planning, controlling 2) When looking at inventory management, the term "lot size" refers to the physical dimensions of the area where the inventory is stored. Answer: FALSE Reference: Introduction Difficulty: Easy Keywords: inventory management, lot size 3) When looking at inventory management, the term "lot size" refers to the quantity of an inventory item management either buys from a supplier or manufactures using internal processes. Answer: TRUE Reference: Introduction Difficulty: Easy Keywords: inventory management, lot size, buys, manufactures 4) 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 Difficulty: Easy Keywords: inventory, investment 5) One component of the holding cost of inventory is interest. Answer: TRUE Keywords: holding cost, inventory, interest 6) One component of the ordering cost of inventory is shrinkage. Answer: FALSE Keywords: ordering cost, shrinkage 9-1

7) A stockout occurs when an item that is typically stocked is not available to satisfy a demand the moment it occurs. Answer: TRUE Keywords: stockout 8) A backorder occurs when a customer order cannot be filled when it is placed, but is instead filled later. Answer: TRUE Keywords: backorder, fill 9) Setup cost is independent of order size. Answer: TRUE Keywords: setup cost 10) Reducing setup costs will increase the pressure to keep larger inventories. Answer: FALSE Keywords: setup cost 11) Increasing inventory levels can sometimes help a firm reduce both its inbound and outbound transportation costs. Answer: TRUE Keywords: pressure for large inventories 12) A quantity discount is attractive because there is a drop in the price per unit when the order is sufficiently large. Answer: TRUE Keywords: quantity discount 13) Repeatability is an undesirable feature of some orders because they must be repeated until the order is filled correctly. Answer: FALSE 9-2

14) The primary lever to reduce anticipation inventory is to place orders closer to the time when they must be received. Answer: FALSE Keywords: anticipation inventory, safety stock 15) A stock-keeping unit (SKU) is an individual item or product that has an identifying code and is held in inventory somewhere along the supply chain. Answer: TRUE Reference: ABC Analysis Difficulty: Easy Keywords: SKU, individual item, inventory, identifying code 16) A stock-keeping unit (SKU) is a specially designed container for holding a specific amount of an inventory item somewhere along the supply chain. Answer: FALSE Reference: ABC Analysis Difficulty: Easy Keywords: SKU, inventory item, inventory, supply chain 17) ABC analysis is a process for categorizing SKUs according to dollar usage so that managers can focus on items with the highest dollar value. Answer: TRUE Reference: ABC Analysis Keywords: ABC analysis, dollar value 18) When using ABC analysis, class C SKUs should be reviewed frequently. Answer: FALSE Reference: ABC Analysis Keywords: ABC analysis, class 19) 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: ABC Analysis Keywords: cycle counting, physical count 20) 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 Difficulty: Easy Keywords: EOQ, economic order quantity 21) EOQ should be used if you follow a make-to-stock strategy and the item has relatively stable demand. Answer: TRUE Difficulty: Easy Keywords: EOQ, economic order quantity 22) The EOQ is the smallest lot size that a supplier will allow a customer to order. 9-3

Answer: FALSE Keywords: EOQ, economic order quantity 23) As the annual demand increases, the EOQ also increases. Answer: TRUE Keywords: EOQ, economic order quantity 24) Considering the EOQ model, smaller lots are justified when holding costs are decreased. Answer: FALSE Keywords: EOQ, economic order quantity, holding cost, lot size 25) Considering the EOQ model, a reduction in ordering costs justifies reducing the lot sizes ordered. Answer: TRUE Difficulty: Easy Keywords: EOQ, economic order quantity, ordering cost, lot size 26) Dependent demand items are those items for which demand is influenced by market conditions and is not related to inventory decisions for any other item held in stock. Answer: FALSE Keywords: dependent demand, inventory 27) Independent-demand items are those items for which demand is influenced by market conditions and is not related to inventory decisions for any other items held in stock. Answer: TRUE Keywords: independent demand, inventory 9-4

28) If on-hand inventory = 100 units, scheduled receipts = 100 units and backorders = 100 units, the Inventory Position (IP) is the sum of the three, or 300 units. Answer: FALSE Keywords: continuous review, periodic review, inventory position 29) If on-hand inventory = 100 units, scheduled receipts = 100 units and backorders = 100 units, the Inventory Position (IP) is 100 units. Answer: TRUE Keywords: continuous review, periodic review, inventory position 30) A continuous review system is sometimes called a reorder point system. Answer: TRUE Keywords: continuous review, reorder point 31) A continuous review system is sometimes called a fixed interval reorder system. Answer: FALSE Keywords: continuous review, reorder point 32) The scheduled receipts are orders that have been placed but not yet received. Answer: TRUE Keywords: scheduled receipt 33) As the service level increases, the probability of not running out of stock during a cycle decreases. Answer: TRUE Keywords: service level, stockout 34) The two-bin inventory system is a type of visual system. Answer: TRUE Keywords: two-bin, visual system 9-5

35) A periodic review system is a system in which an item's inventory position is reviewed periodically rather than continuously. Answer: TRUE Keywords: periodic review, continuous 36) Which of the following generates pressure to increase inventories? A) inventory holding costs B) ordering costs C) storage and handling costs D) taxes and insurance Answer: B Difficulty: Easy Keywords: pressures for small / large inventories 37) Which of the following generates pressure to decrease inventories? A) inventory shrinkage costs B) backorders and stockouts C) transportation costs D) quantity discounts Answer: A Difficulty: Easy Keywords: pressures for small / large inventories 38) Which of the following DOES NOT generate pressure to decrease inventories? A) taxes and insurance B) inventory holding costs C) storage and handling costs D) ordering costs Keywords: pressures for small / large inventories 39) Which of the following DOES NOT generate pressure to increase inventories? A) transportation costs B) backorders and stockouts C) inventory shrinkage costs D) quantity discounts Answer: A Keywords: pressures for small / large inventories 9-6

40) Inventories needed for the production of services and goods (inputs to a firm's transformation processes) are called: A) quarantined materials B) work-in-process C) raw materials D) finished goods Answer: C Difficulty: Easy Keywords: types of inventories 41) Items, such as components or assemblies, needed to manufacture a final product are called: A) quarantined materials B) work-in-process C) raw materials D) finished goods Answer: B Difficulty: Easy Keywords: types of inventories 42) Items sold to a firm's customers are called: A) quarantined materials B) work-in-process C) raw materials D) finished goods Difficulty: Easy Keywords: types of inventories Use the following to answer the questions below. Shipments of Product A from a distribution center to a retailer are made in lots of 350. The retailer's average demand for A is 75 units per week. Lead time from distributor to retailer is 3 weeks. The retailer pays for the shipments when they leave the distributor. The distributor has agreed to reduce the lead time to 2 weeks if the retailer will purchase quantities of 400 per shipment instead of 350. 43) Refer to the instruction above. With the change in purchased quantities, the average cycle inventory will: A) decrease by 75 units. B) increase by 50 units. C) decrease by 25 units. D) increase by 25 units. Keywords: types of inventories, cycle inventory, pipeline inventory 44) Refer to the instruction above. With the change in lead times, the pipeline inventory will: A) decrease by 75 units. B) increase by 50 units. C) decrease by 25 units. D) increase by 25 units. 9-7

Answer: A Keywords: types of inventories, cycle inventory, pipeline inventory 45) Refer to the instruction above. The net impact on the retailer will be: A) no net change in average cycle and pipeline inventories. B) a net average increase in cycle and pipeline inventories of 50 units. C) a net average decrease in cycle and pipeline inventories of 75 units. D) a net average decrease in cycle and pipeline inventories of 50 units. Keywords: types of inventories, cycle inventory, pipeline inventory Use the following to answer the questions below. Shipments of Product X from a plant to a wholesaler are made in lots of 600. The wholesaler's average demand for X is 100 units per week. Lead time from plant to wholesaler is 4 weeks. The wholesaler pays for the shipments when they leave the plant. 46) Refer to the instruction above. What is the total of the wholesaler's current cycle plus pipeline inventories? A) 300 units B) 100 units C) 700 units D) 400 units Answer: C Keywords: types of inventories, cycle inventory, pipeline inventory 9-8

47) Refer to the instruction above. If the plant reduces its lead time from 4 to 2 weeks and keeps its 600 unit lot size, what is the wholesaler's new total cycle plus pipeline inventories? A) 300 units B) 500 units C) 700 units D) 200 units Answer: B Keywords: types of inventories, cycle inventory, pipeline inventory 48) Refer to the instruction above. If the plant reduces its shipment lot size from 600 to 400 units and keeps its 4 week lead time, what is the wholesaler's new total cycle plus pipeline inventories? A) 600 units B) 300 units C) 500 units D) 400 units Answer: A Keywords: types of inventories, cycle inventory, pipeline inventory 49) Refer to the instruction above. Which of the following situations results in the wholesaler's total cycle plus pipeline inventories amounting to 550 units? A) plant shipment lot size of 400 and plant-to-wholesaler lead time of 2 weeks B) plant shipment lot size of 500 and plant-to-wholesaler lead time of 3 weeks C) plant shipment lot size of 400 and plant-to-wholesaler lead time of 3 weeks D) plant shipment lot size of 600 and plant-to-wholesaler lead time of 4 weeks Answer: B Keywords: types of inventories, cycle inventory, pipeline inventory 50) Refer to the instruction above. Which of the following situations results in the wholesaler's total cycle plus pipeline inventories amounting to 400 units? A) plant shipment lot size of 500 and plant-to-wholesaler lead time of 3 weeks B) plant shipment lot size of 400 and plant-to-wholesaler lead time of 3 weeks C) plant shipment lot size of 600 and plant-to-wholesaler lead time of 4 weeks D) plant shipment lot size of 400 and plant-to-wholesaler lead time of 2 weeks Keywords: types of inventories, cycle inventory, pipeline inventory 51) Which of the following is NOT a lever for reducing cycle inventories? A) place purchased item orders at fixed intervals B) reduce lot sizes for items moving in the supply chain C) streamline methods for placing orders and making machine set ups D) increase repeatability to eliminate the need for changeovers Answer: A 9-9

Keywords: inventory, types of inventories, inventory reduction, tactics 52) Which of the following does not increase repeatability? A) parts standardization B) customization C) group technology D) flexible automation Answer: B Keywords: inventory, types of inventories, inventory reduction, tactics 53) 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. Keywords: pipeline inventory, lever 54) What is generally true about the class A SKUs in ABC analysis? They represent about: A) 20 percent of all SKUs. B) 30 percent of all SKUs. C) 20 percent of the dollar usage. D) 50 percent of the dollar usage. Answer: A Reference: ABC Analysis Keywords: ABC analysis, class A 9-10

55) What is generally true about the class A SKUs in ABC analysis? They represent about: A) 50 percent of all SKUs. B) 80 percent of all SKUs. C) 20 percent of the dollar usage. D) 80 percent of the dollar usage. Reference: ABC Analysis Keywords: ABC analysis, class A 56) What is generally true about the class B SKUs in ABC analysis? They represent about: A) 20 percent of all SKUs and about 80 percent of the dollar usage. B) 80 percent of all SKUs and about 20 percent of the dollar usage. C) 30 percent of all SKUs and about 15 percent of the dollar usage. D) 50 percent of all SKUs and about 95 percent of the dollar usage. Answer: C Reference: ABC Analysis Keywords: ABC analysis, class B 57) What is generally true about the class C SKUs in ABC analysis? They represent about: A) 20 percent of all SKUs. B) 50 percent of all SKUs. C) 15 percent of the dollar usage. D) 50 percent of the dollar usage. Answer: B Reference: ABC Analysis 58) What is generally true about the class C SKUs in ABC analysis? They represent about: A) 20 percent of all SKUs. B) 30 percent of all SKUs. C) 5 percent of the dollar usage. D) 50 percent of the dollar usage. Answer: C Reference: ABC Analysis Keywords: ABC analysis, Pareto, class C 59) ABC analysis is closely related to: A) three-bin analysis. B) EOQ analysis. C) repeatability analysis. D) Pareto analysis. Reference: ABC Analysis Keywords: ABC analysis, Pareto analysis 60) Which one of the following is NOT a method for tracking inventory and ensuring accurate records? A) assigning responsibility to specific employees for issuing and receiving materials B) updating the reorder points to minimize safety stock C) cycle counting D) logic error checks Answer: B 9-11

Reference: ABC Analysis Keywords: ABC analysis, cycle counting 61) Which one of the following is not an assumption of the EOQ model? 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. Keywords: EOQ, economic order quantity, assumptions 62) 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 Keywords: EOQ, economic order quantity, cycle inventory 63) 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. B) A decrease in demand will increase the EOQ. C) A decrease in holding cost will increase the EOQ. D) None of the above is true. Answer: C Keywords: EOQ, economic order quantity, holding cost 9-12

64) 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. 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 Difficulty: Hard Keywords: EOQ, economic order quantity 65) You have taken a job in industry and are facing your first ordering decision. As you prepare to place the order, you remember your instructor teaching you 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 Keywords: EOQ, economic order quantity 66) 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 Keywords: EOQ, economic order quantity, time between orders 67) 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 Difficulty: Hard Keywords: EOQ, economic order quantity, setup cost, holding cost 9-13

68) The Lemming Company implements an aggressive marketing campaign and effectively doubles the annual demand for Model 13s. Their total annual holding cost should: A) decrease by 50%. B) increase by 100%. C) stay the same. D) increase by 40%. Difficulty: Hard Keywords: EOQ, economic order quantity, holding cost 69) 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? Keywords: EOQ, economic order quantity, lead time, sensitivity analysis 70) Vilas County Hospital consumed 400 boxes of bandages per week last year. The price of bandages was $80 per box, and the hospital operates 52 weeks per year. The cost of processing an order was $64, and the cost of holding one box throughout a full year was 20% of the value of the material. Last year the hospital ordered bandages, on average, once every two weeks, each time ordering 800 boxes. What extra cost did the hospital incur that could have been avoided if the EOQ concept had been applied? A) less than or equal to $650 B) more than $650 and less than $1,050 C) more than $1,050 and less than $1,450 D) more than $1,450 Keywords: EOQ, economic order quantity, total cost 9-14

Scenario 9.1 The Talbot Company uses electrical assemblies to produce an array of small appliances. One of its high cost / high volume assemblies, the XO-01, has an estimated annual demand of 8,000 units. Talbot estimates the cost to place an order is $50, and the holding cost for each assembly is $20 per year. The company operates 250 days per year. 71) Use the information in Scenario 9.1. What is the economic order quantity for the XO-01? A) less than or equal to 100 units B) greater than 100 units but less than or equal to 180 units C) greater than 180 units but less than or equal to 250 units D) greater than 250 units Answer: C Keywords: EOQ, economic order quantity 72) Use the information in Scenario 9.1. What are the annual inventory holding costs if Talbot orders using the EOQ quantity? A) less than or equal to $1,500 B) greater than $1,500 but less than or equal to $4,000 C) greater than $4,000 but less than or equal to $6,500 D) greater than $6,500 Answer: B Keywords: EOQ, economic order quantity, inventory holding cost 73) Use the information in Scenario 9.1. What are the annual ordering costs if Talbot orders using the EOQ quantity? A) less than or equal to $1,000 B) greater than $1,000 but less than or equal to $2,500 C) greater than $2,500 but less than or equal to $4,000 D) greater than $4,000 Answer: B Keywords: EOQ, economic order quantity, inventory holding cost 9-15

74) Use the information in Scenario 9.1. What are the total annual holding and ordering costs if Talbot orders using the EOQ quantity? A) greater than $7,000 B) greater than $5,000 but less than or equal to $7,000 C) greater than $2,500 but less than or equal to $5,000 D) less than or equal to $2,500 Answer: C Keywords: EOQ, economic order quantity, total inventory holding and ordering costs 75) Use the information in Scenario 9.1. What is the cycle length (time between orders) when orders are placed using the EOQ quantity? A) less than 5 days B) greater than 5 days but less than or equal to 10 days C) greater than 10 days but less than or equal to 15 days D) greater than 15 days Answer: B Keywords: EOQ, economic order quantity, cycle length, time between orders 76) Use the information in Scenario 9.1. How many times per year must Talbot order the XO- 01 when orders are placed using the EOQ quantity? A) less than 10 times per year B) greater than 10 times but less than or equal to 20 times per year C) greater than 20 times but less than or equal to 30 times per year D) greater than 30 times per year Keywords: EOQ, economic order quantity, orders per year 9-16

77) Use the information in Scenario 9.1. The purchasing manager decides that, in order to save purchasing time, orders for the XO-01 will be placed every three months, or four times per year. How much does this approach cost Talbot in total annual holding and ordering costs (instead of Talbot ordering using the EOQ quantity)? A) greater than $18,000 B) greater than $14,000 but less than or equal to $18,000 C) greater than $10,000 but less than or equal to $14,000 D) less than or equal to $10,000 Answer: B Keywords: EOQ, economic order quantity, total inventory holding and ordering costs Scenario 9.2 The Burdell Company is a small manufacturing company that uses gear assemblies to produce four different models of mountain bikes. One of these gear assemblies, the "Smooth Shifter", is used for the two most expensive of Burdell's four models, and has an estimated annual demand of 300 units. Burdell estimates the cost to place an order is $40, and the holding cost for each assembly is $60 per year. The company operates 250 days per year. 78) Use the information in Scenario 9.2. What is the economic order quantity for the Smooth Shifter? A) less than or equal to 40 units B) greater than 40 units but less than or equal to 80 units C) greater than 80 units but less than or equal to 120 units D) greater than 120 units Answer: A Keywords: EOQ, economic order quantity 79) Use the information in Scenario 9.2. What are the annual inventory holding costs if Burdell orders using the EOQ quantity? A) less than or equal to $300 B) greater than $300 but less than or equal to $500 C) greater than $500 but less than or equal to $700 D) greater than $700 Answer: C Keywords: EOQ, economic order quantity, inventory holding cost 9-17

80) Use the information in Scenario 9.2. What are the annual ordering costs if Burdell orders using the EOQ quantity? A) less than or equal to $200 B) greater than $200 but less than or equal to $350 C) greater than $350 but less than or equal to $500 D) greater than $500 Keywords: EOQ, economic order quantity, ordering cost 81) Use the information in Scenario 9.2. What are the total annual holding and ordering costs if Burdell orders using the EOQ quantity? A) greater than $1,500 B) greater than $1,000 but less than or equal to $1,500 C) greater than $750 but less than or equal to $1,000 D) less than or equal to $750 Answer: B Keywords: EOQ, economic order quantity, total inventory holding and ordering costs 82) Use the information in Scenario 9.2. What is the cycle length (time between orders) when orders are placed using the EOQ quantity? A) less than or equal to 5 days B) greater than 5 days but less than or equal to 10 days C) greater than 10 days but less than or equal to 15 days D) greater than 15 days Keywords: EOQ, economic order quantity, cycle length, TBO 83) Use the information in Scenario 9.2. How many times per year must Burdell order the Smooth Shifter when orders are placed using the EOQ quantity? A) less than or equal to 10 times per year B) more than 10 times but fewer than or equal to 20 times per year C) more than 20 times but fewer than or equal to 30 times per year D) more than 30 times per year Answer: B Keywords: EOQ, economic order quantity, orders per year 84) Use the information in Scenario 9.2. The purchasing manager decides that, in order to save purchasing time, orders for the Smooth Shifter will be placed once a month, or twelve times per year. How much does this approach cost Burdell in additional annual holding and ordering costs (instead of Burdell ordering using the EOQ quantity)? A) more than $500 B) more than $200 but less than or equal to $500 C) more than $50 but less than or equal to $200 D) less than or equal to $50 9-18

Keywords: EOQ, economic order quantity, total inventory holding and ordering costs Scenario 9.3 Tom Bergman, owner and operator of the Earplug Superstore, is reviewing the costs associated with the store s best-selling hearing aid, the BZ15. The data available to Mr. Bergman concerning this device follow. Demand = 25 units/week Order cost = $3/order Holding cos = $1.50/unit/year The Earplug Superstore operates 52 weeks a year. 85) Use the information in Scenario 9.3. If Tom decides to order at the economic order quantity, what is the sum of the annual ordering cost and holding cost? A) less than or equal to $90 B) greater than $90 but less than or equal to $100 C) greater than $100 but less than or equal to $115 D) greater than $115 Answer: C Keywords: EOQ, economic order quantity, total cost 86) Use the information in Scenario 9.3. Tom cuts the ordering cost in half by implementing a streamlined processing system. How many fewer units should he now order each time he places an order? A) less than or equal to 10 units B) greater than 10 but less than or equal to 15 units C) greater than 15 but less than or equal to 20 units D) greater than 20 units Keywords: EOQ, economic order quantity, ordering cost 87) Use the information in Scenario 9.3. If Tom orders a one-year supply at a time, how much higher are his total (ordering and holding) costs compared to total costs incurred if he ordered at his EOQ? A) less than or equal to $600 B) greater than $600 but less than or equal to $700 C) greater than $700 but less than or equal to $800 D) greater than $800 Keywords: EOQ, economic order quantity, total cost 88) Use the information in Scenario 9.3. If Tom orders at the economic order quantity, how 9-19

many units does he order at a time? A) less than or equal to 75 units B) greater than 75 but less than or equal to 150 units C) greater than 150 but less than or equal to 250 units D) greater than 250 units Answer: A Keywords: EOQ, economic order quantity 89) Use the information in Scenario 9.3. If Tom orders such that his annual holding cost is twice what his annual ordering cost is, how many units at a time is he ordering? A) less than or equal to 100 units B) greater than 100 but less than or equal to 105 units C) greater than 105 but less than or equal to 110 units D) greater than 110 units Answer: B Difficulty: Hard Keywords: EOQ, economic order quantity 9-20

90) A neighborhood sportswear store sells a pair of Victoria sneakers for $40. Due to the recent fitness craze, these shoes are in high demand: 50 pairs of shoes are sold per week. The ordering cost is $20 per order, and the annual holding cost is 20% of selling price. If the store operates 52 weeks a year, what can you say about the current lot size of 235? A) too large B) too small C) just right D) cannot tell from the information given Answer: A Keywords: EOQ, economic order quantity 91) An item experiences an annual demand of 7,200 units. It costs $8 to hold an item in inventory for one year and $16 to place an order. If the EOQ model is used, what is the time between orders? Assume that there are 52 business weeks in a year. A) less than 1 week B) greater than 1 week but less than or equal to 2 weeks C) greater than 2 weeks but less than or equal to 3 weeks D) greater than 3 weeks Answer: B Keywords: EOQ, economic order quantity, time between orders Scenario 9.4 Consider the following data for an independent-demand item maintained by Vicki Crittenden, the proprietor of a local auto repair shop: Weekly demand = 50 units Ordering cost = $8/order Holding cost = $4/unit/year Weeks in a year = 50 92) Use the information in Scenario 9.4. If Crittenden uses the EOQ model, how frequently must she place orders for this item? A) every week B) every 2 weeks C) every 3 weeks D) every 4 weeks Answer: B Keywords: EOQ, economic order quantity, time between orders 93) Use the information in Scenario 9.4. Due to new ordering procedures initiated by Crittenden, the ordering cost is dropping to $4 per order. At the same time, the weekly demand increases to 64 units per week due to an increase in business. What effect do these changes have on the EOQ quantity for this item? A) The EOQ quantity remains unchanged. B) The EOQ quantity increases by 20%. C) The EOQ quantity decreases by 20%. D) Sufficient information is not available for answering this question. 9-21

Answer: C Keywords: EOQ, economic order quantity 94) 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 onhand inventory unless there are backorders or one or more scheduled receipts. Difficulty: Hard Keywords: continuous review system, inventory position 95) 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 Keywords: cycle-service level, customer service 9-22

96) 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 lead-time 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 Keywords: safety stock, stockout 97) 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. Keywords: Q system, P system, inventory target level (T), inventory position 98) 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 Keywords: P system, Q system 99) 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 Keywords: P system, Q system 9-23

100) Which one of the following statements represents an advantage of a Q system over the P system? A) A perpetual inventory system is not mandatory. B) Orders for multiple items from the same supplier can be combined more easily. C) Fixed replenishment intervals are possible, which can be, administratively, quite convenient. D) The Q system is more suited for quantity discounts and physical limitations. Keywords: Q system, P system 101) Which one of the following statements about inventory control systems is best? A) A single-bin system is essentially a P system, with the target inventory and current inventory position established visually. B) A base-stock system minimizes ordering and setup costs by placing orders more infrequently. C) The base-stock system is mostly used for inexpensive items because it maximizes cycle inventory costs. D) Visual systems are intended for use with high-value items, such as jet engines, that don't experience a steady demand. Answer: A Keywords: inventory control, single-bin system, P system 102) Which one of the following descriptions of a base-stock system is best? A) It is particularly attractive when review and ordering costs are both significant. B) It can be seen as a way to minimize cycle inventory. C) Examples include gasoline storage tanks at a service station. D) An item's inventory is stored at two different locations or "bins." Answer: B Keywords: base-stock system, cycle inventory 103) Which one of the following statements about inventory control systems is true? A) A two-bin inventory system is essentially a P system because the inventory is reviewed only on a periodic basis. B) An optional replenishment system is particularly attractive when both review and ordering costs are significant. C) Visual systems are difficult to administer because records on current inventory position have to be kept for every item. D) Overstocking is quite common for those items that are managed by using the base-stock system. Answer: B Keywords: inventory control, optional replenishment system 9-24

104) Consider the following conditions for an item used in the Hess Company's manufacturing process: On-hand inventory: 40 units Open orders (scheduled receipts): 100 units Backorders: 60 units What is Hess's inventory position for this item? A) 200 units B) 140 units C) 80 units D) 40 units Answer: C Difficulty: Easy Keywords: inventory position 105) Consider the following conditions for an item used in the Hess Company's manufacturing process: On-hand inventory: 40 units Open orders (scheduled receipts): 100 units Backorders: 60 units Reorder point: 100 units Quantity per order: 50 units Which of the following statements best describes Hess's situation regarding inventory replenishment? A) No action is required, since a scheduled receipt is due to be delivered to Hess. B) To cover its backorders, Hess should order two lots of 50 units. C) Because it is incurring backorders, Hess should increase its reorder point. D) Hess should place an order for 50 units, since the inventory position is less than the reorder point. Keywords: inventory position, reorder point 106) Consider the following conditions for an item used in the Hess Company's manufacturing process: On-hand inventory: 80 units Open orders (scheduled receipts): 100 units Backorders: 20 units What is Hess's inventory position for this item? A) 200 units B) 160 units C) 180 units D) 80 units Answer: B Difficulty: Easy Keywords: inventory position 9-25

107) Consider the following conditions for an item used in the Hess Company's manufacturing process: On-hand inventory: 80 units Open orders (scheduled receipts): 100 units Backorders: 20 units Reorder point: 150 units Quantity per order: 50 units Which of the following statements best describes Hess's situation regarding inventory replenishment? A) No action is required, since Hess's inventory position is greater than the reorder point. B) Hess should order one lot of 50 units to cover its backorders. C) Because it is incurring backorders, Hess should increase its reorder point. D) Hess should place an order for 50 units, since their inventory position is less than the reorder point. Answer: A Keywords: inventory position, reorder point Scenario 9.5 Cranium, Inc., purchases term papers from an overseas supplier under a continuous review system. The average demand for a popular mode is 300 units a day with a standard deviation of 30 units a day. It costs $60 to process each order and there is a five-day leadtime. The holding cost for a paper is $0.25 per year and the company policy is to maintain a 98% service level. Cranium operates 200 days per year. A normal distribution table is appended to this exam. 108) Use the information in Scenario 9.5. What is the EOQ for these papers? A) less than or equal to 3,000 units B) greater than 3,000 units but less than or equal to 4,000 units C) greater than 4,000 units but less than or equal to 5,000 units D) greater than 5,000 units Keywords: EOQ, economic order quantity 109) Use the information in Scenario 9.5. What is the reorder point R to satisfy a 98% cycleservice level? A) less than or equal to 1,500 units B) greater than 1,500 units but less than or equal to 1,600 units C) greater than 1,600 units but less than or equal to 1,700 units D) greater than 1,700 units Answer: C Keywords: reorder point, cycle-service level 9-26

110) Use the information in Scenario 9.5. What service level does a reorder point of 1,524 imply? A) less than or equal to 50% B) greater than 50% but less than or equal to 55% C) greater than 55% but less than or equal to 60% D) greater than 60% Keywords: service level, reorder point 111) Use the information in Scenario 9.5. If lead-time increases by three days, what is the reorder point needed to maintain a 98% service level? A) less than or equal to 2,400 units B) greater than 2,400 units but less than 2,500 units C) greater than 2,500 units but less than 2,600 units D) greater than 2,600 units Answer: C Keywords: lead time, reorder point, service level 112) Use the information in Scenario 9.5. What is the cost of holding the safety stock necessary to maintain the 98% service level? A) less than or equal to $30 B) greater than $30 but less than $40 C) greater than $40 but less than $50 D) greater than $50 Answer: B Keywords: safety stock, service level 113) Use the information in Scenario 9.5. What is the standard deviation of demand throughout the five-day lead-time period? A) about 45 units B) about 67 units C) about 103 units D) about 200 units Answer: B Keywords: standard deviation of demand, lead time 9-27

114) Use the information in Scenario 9.5. What combination of changes in lead-time and service level would result in exactly the same level of safety stock as indicated in the table? A) Lead-time drops to 41 days and service level increases to 99%. B) Lead-time increases to 18.52 days and service level drops to 92%. C) Lead-time increases to 20.54 days and service level drops to 90%. D) Lead-time drops to 3.5 days and service level increases to 99.54%. Answer: C Difficulty: Hard Keywords: standard deviation of demand, lead time, service level, safety stock, stockout Scenario 9.6 A company operating under a continuous review system has an average demand of 50 units per week for the item it produces. The standard deviation in weekly demand is 20 units. The lead-time for the item is six weeks, and it costs the company $30 to process each order. The holding cost for each unit is $10 per year. The company operates 52 weeks per year. A normal distribution table is appended to this exam. 115) Use the information in Scenario 9.6. What is the economic order quantity (EOQ) for this item? A) less than or equal to 175 units B) greater than 175 units but less than or equal to 200 units C) greater than 200 units but less than or equal to 225 units D) greater than 225 units Answer: A Keywords: EOQ, economic order quantity 116) Use the information in Scenario 9.6. What is the desired safety stock level if the company has a policy of maintaining a 90% cycle-service level? A) less than or equal to 50 units B) greater than 50 but less than or equal to 100 units C) greater than 100 but less than or equal to 150 units D) greater than 150 units Answer: B Keywords: safety stock, cycle-service level, reorder 9-28

117) Use the information in Scenario 9.6. What is the reorder point if the company finally decides to implement a 95 percent cycle-service level? A) less than or equal to 300 units B) greater than 300 but less than or equal to 325 units C) greater than 325 but less than or equal to 350 units D) greater than 350 units Keywords: reorder point, safety stock, cycle-service level Scenario 9.7 You are the operations manager of a firm that uses the continuous-review inventory control system. Suppose the firm operates 52 weeks a year, 365 days, and has the following characteristics for its primary item: Demand = 25,000 units/year Ordering cost = $30/order Holding cost = $8/unit/year Lead time = 2 weeks Standard deviation in weekly demand = 100 units A normal distribution table is appended to this exam. 118) Use the information in Scenario 9.7. What safety stock level provides a 95% cycleservice level? A) less than or equal to 150 units B) greater than 150 but less than or equal to 200 units C) greater than 200 but less than or equal to 250 units D) greater than 250 units Answer: C Keywords: safety stock, cycle-service level 119) Use the information in Scenario 9.7. What is the economic order quantity for this item? A) less than or equal to 400 units B) greater than 400 but less than or equal to 450 units C) greater than 450 but less than or equal to 500 units D) greater than 500 units Answer: B Keywords: EOQ, economic order quantity 9-29

120) Use the information in Scenario 9.7. How many orders per year does the company place if they order the economic order quantity each time? A) less than or equal to 70 units B) greater than 70 but less than or equal to 80 units C) greater than 80 but less than or equal to 90 units D) greater than 90 units Answer: A Keywords: orders per year, EOQ, economic order quantity 121) Use the information in Scenario 9.7. What is the length of their order cycle if they order the economic order quantity each time? A) less than or equal to 4 days B) greater than 4 days but less than or equal to 5 days C) greater than 5 days but less than or equal to 6 days D) greater than 6 days Keywords: EOQ, economic order quantity, order cycle, TBO 122) Use the information in Scenario 9.7. If the company desires a 95% service level, how many times per year will they stock out if they order the economic order quantity each time? A) less than or equal to 3 times B) greater than 3 times but less than or equal to 4 times C) greater than 4 times but less than or equal to 5 times D) greater than 5 times Answer: A, Inventory Control systems Keywords: EOQ, stock out, service level, ROP 123) Use the information in Scenario 9.7. What is the reorder point for this item if they use a 95% service level? A) 1,046 units B) 170 units C) 1,194 units D) 68 units Answer: C, Inventory Control systems Keywords: ROP, reorder point, service level 124) Use the information in Scenario 9.7. What is the annual cost of holding safety stock for this item if they use a 90% service level? A) less than or equal to $1,500 B) greater than $1,500 but less than or equal to $1,550 C) greater than $1,550 but less than or equal to $1,600 D) greater than $1,600 Answer: A 9-30

, Inventory Control systems Keywords: safety stock, service level, holding cost 125) Use the information in Scenario 9.7. If this firm uses an EOQ model for purchase decisions, which change would result in the biggest increase in order quantity over the order quantity determined with the original data? A) The cost of ordering rises to $50 per order. B) The holding cost drops to $5 per unit per year. C) The annual demand soars to 30,000 units per year. D) The lead-time increases to three months. Answer: A Keywords: EOQ, economic order quantity 126) Use the information in Scenario 9.7. What is the total cost (ordering and carrying) if the company orders the economic order quantity for this item? A) less than or equal to $3,000 B) greater than $3,000 but less than or equal to $3,200 C) greater than $3,200 but less than or equal to $3,400 D) greater than $3,400 Keywords: EOQ, economic order quantity, holding cost, ordering cost 9-31

Scenario 9.8 Peterson Enterprises uses a continuous review inventory control system. The firm operates 50 weeks per year and has the following characteristics for an item: Demand = 50,000 units/year Ordering cost = $35/order Holding cost = $2/unit/year Lead-time = 3 weeks Standard deviation in weekly demand = 125 units A normal distribution table is appended to this exam. 127) Use the information in Scenario 9.8. What is the EOQ for this item? A) less than or equal to 1,100 units B) greater than 1,100 but less than or equal to 1,200 units C) greater than 1,200 but less than or equal to 1,300 units D) more than 1,300 units Keywords: EOQ, economic order quantity 128) Use the information in Scenario 9.8. If Peterson wishes to provide a 90% cycle-service level, what is the reorder point? A) less than or equal to 2,700 units B) greater than 2,700 but fewer than or equal to 3,100 units C) greater than 3,100 but fewer than or equal to 3,500 units D) greater than 3,500 units Answer: C Keywords: ROP, reorder point, cycle-service level 9-32

129) Cynthia Korinsky, manager of a large medical supply house that operates 50 weeks per year and five days per week, has decided to implement a periodic review system for all class A SKUs. One such SKU has the following characteristics: Demand = 10,000 units per year (or 40 units per workday) Order cost = $50 per order Holding cost = $5 per unit per year If Korinsky wishes to minimize total cost (thereby approximating the EOQ), the number of workdays between orders (or P), should be: A) less than or equal to 10 days. B) greater than 10 days but less than or equal to 12 days. C) greater than 12 days but less than or equal to 14 days. D) greater than 14 days. Answer: B Keywords: EOQ, economic order quantity, periodic review, P, order cycle Scenario 9.9 Demand = 5,200 units/year Standard deviation of weekly demand = 11 units Ordering costs = $45/order Holding costs = $2/unit/year Cycle-service level = 90% (z for 90% = 1.28) Lead-time = 3 weeks Number of weeks per year = 52 weeks 130) Use the information in Scenario 9.9. If a firm uses the continuous review system to control the inventory, what would be the reorder point? A) 0 units B) greater than 0 but less than or equal to 300 units C) greater than 300 but less than or equal to 600 units D) greater than 600 units Answer: C Keywords: reorder point, continuous review 9-33

131) Use the information in Scenario 9.9. The firm decided to change to the periodic review system to control the item's inventory. For the most recent review, an inventory clerk checked the inventory of this item and found 500 units. There were no scheduled receipts at the time. How many units should be ordered? (HINT: Use the EOQ model to derive P, the time between reviews.) A) 0 units B) greater than 0 but less than or equal to 300 units C) greater than 300 but less than or equal to 600 units D) greater than 600 units Answer: C Difficulty: Hard Keywords: EOQ, economic order quantity, periodic review, P, reorder 132) Your firm uses a continuous review system (Q system), in which the inventory position is updated after every transaction. The firm operates 52 weeks per year. One of the items has the following characteristics: Demand = 14,560 units per year Ordering cost = $40 per order Holding cost = $6 per unit per year Lead-time = 2 weeks Standard deviation in weekly demand = 100 units Cycle-service level = 80% If Q is made equal to the EOQ, what are the desired values for Q and R? A) Q is between 65 and 69, and R is between 398 and 402. B) Q is between 65 and 69, and R is between 362 and 366. C) Q is between 439 and 443, and R is between 678 and 682. D) Q is between 439 and 443, and R is between 559 and 563. Answer: C Reference: Multiple Sections Keywords: continuous review (Q) system, reorder, R, EOQ, economic order quantity 9-34