8/18/2019 BSCM Session 7with Answers and Explanations

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BSCM Quiz Session #7

Inventory Management

(1) All of the following are techniques to determine when to order EXCEPT?

A) Order Point System

B) Two Bin SystemC) Periodic Review System (How much to order not when)D) Master Scheduling Process

Explanation: Answer C is correct. Periodic Review does not determine “when” to order but

rather how much to order. The review periods are usually fixed. For example, a person going tothe grocery store every Saturday to buy their groceries. The inventory “target level” is used todetermine how much to purchase. Answers A, B & D describe systems which determine “when”

to replenish inventory.

(2) Which of the following best describes Cycle Counting?

A) A process to reduce cycle timesB) Counting inventory on a pre-determined scheduleC) Setup reduction to shorten cycle timesD) Count to determine length of the production cycle

Explanation: Answer B is correct. Cycle counting includes developing a count schedule basedon ABC classifications. For example, count A items 12 times per year, B items 6 times, and Citems 2 times. Answers A, C & D are not correct because Cycle Counting does not relate tocycle times in production.

(3) The primary purpose of a Cycle Counting process is to:

A) Reduce the headcount in the warehouseB) Eliminate the physical inventoryC) Correct inventory recordsD) Identify and eliminate causes of inventory errors

Explanation: Answer D is correct. The primary purpose is to find and correct causes oninventory errors. Cycle counting does provide the benefits stated in B & C but these aresecondary to D. The major goal is to improve inventory accuracy. Answer A is not true aswarehouse personnel usually do the cycle counting.

(4) The lot size rule named lot-for-lot (LFL, L4L) will do which of the following:

A) Order a fixed amountB) Order a lot equal to a given number of period demandC) Order just the amount neededD) Order in fixed intervals

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Explanation: Answer C is correct. The definition of Lot-for-Lot is to order only what is needed.The other answers describe other approaches to order quantities including fixed lot size, periodorder quantity and periodic review.

(5) Which of the following conditions will cause the EOQ concept to be invalid?

I. Products that are made-to-order

II. Short shelf-life productsIII. Length of the production run is unlimitedIV. Raw materials which are on MRP

A) I, II and IIIB) I, III and IVC) II, III and IVD) I, II, III and IV

Explanation: Answer A is correct. The Economic Order Quantity (EOQ) formula assumes that products are made-to-stock, shelf-life is not an issue so the economic quantity can be made or

 purchased, and replenishment is in lots or batches received all at once. Choice IV does not resultin the calculation being invalid as EOQ can certainly be used for raw material quantities.

(6) According to EOQ formula, if the ordering costs for an item are greatly reduced, whatis the impact on the order quantity?

A) Order multiples will increaseB) Order quantities will increaseC) Order multiples will decrease

D) Order quantities will decrease

2AS

IC

 

Explanation: Answer D is correct. “S” which represents the ordering cost is in the top of theformula. Therefore reducing S results in a decrease in the EOQ. If “S” is increased the EOQquantity increases.

(7) Based on the following information, what is the Order Point?

Lead Time = 3 Weeks Demand/Week = 200 UnitsSafety Stock = 1 Weeks’ Supply Lot Size = 100 Units 

A) 700B) 800 OP = DDLT + SS = (200 x 3) + (200 x 1) = 800C) 600D) 300

Explanation: Answer B is correct. Order Point = Demand during Lead Time + Safety StockDDLT = 200 x 3 = 600 Safety Stock = 1 week’s supply = 200. Therefore, OP = 600 + 200 =800.

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(8) For which of the following conditions would Periodic Review be appropriate?

I. Raw materials consumed in productionII. Small issues from inventory where transactions are expensiveIII. Ordering costs are lowIV. Many items are ordered together from same source

A) I, III and IVB) I, II, and IVC) II, III and IVD) II and IV

Explanation: Answer C is correct. Periodic Review is often used when there are many smallissues from inventory. For example, an administrative assistant reviewing the office suppliesinventory once per month and placing an order to the vendor. Periodic Review usually results inordering more often and therefore works best with relatively low ordering costs. Choice I is notcorrect because MRP planning is best for raw materials consumed in production.

(9) All of the following are true about the amount of Safety Stock needed EXCEPT?

A) Increases as demand variability during lead time increasesB) Decreases as lead time increasesC) Increases as desired service level increasesD) Decreases as random forecast error decreases

Explanation: Answer B is correct. The amount of safety stock required increases as lead time isincreased. This is because safety stock is designed to cover demand/usage variations duringreplenishment lead time. Answers A, C & D are true statements regarding safety stock quantity.

(10) Given the following data what is the Periodic Review Target Level?

Demand/Week = 100 Units Review Period = 3 WeeksLead Time = 1 Week Safety Stock = One Weeks’ Supply 

A) 500 Target = DDLT + DDRP + SS = (100 x 1) + (100 x 3) + (100 x 1) = 500B) 400C) 300D) 600

Explanation: Answer A is correct. The formula for the inventory Target Level when using the

Periodic Review technique is: Target Level = Demand during Lead Time + Demand duringReview Period + Safety Stock. In this case, DDLT = 100 x1 = 100 DDRP = 100 x 3 = 300Safety Stock = One Weeks’ Supply = 100. Therefore, Target Level = 100 + 300 + 100 = 500

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(11)  Given the following data what is the annual carrying cost?

Order Quantity = 500 UnitsCost per Unit = $10Carrying Cost = 20%

A)  $1,000

B) 

$250C)  $500 (500/2 = 250 avg. inv.) (250 x $10 x 0.2 = $500)D)  $100

Answer C is correct. Average Inventory = Q/2 + Safety Stock. In this example, no safety stockis specified so the average inventory = the order quantity (Q) divided by 2. The annual carryingcost = average inventory x unit cost x carrying cost as a %. Therefore, average inventory =500/2 = 250; Annual Carrying Cost = 250 x $10 x 0.2 = $500.

(12)  Which of the following is true about determining service level to use in safety stockcalculations?

A)  Should always be 100%B)  Should include calculated cost of stock-outsC)  Is easy to calculateD)  Management should set policy

Explanation: Answer D is correct. The desired service level depends on many things some ofwhich require judgment. For example, how many stock-outs will the market accept beforesignificant loss in revenue occurs? Management must take the various factors into considerationand decide what service level to target. Service level is rarely set at 100% as this requirestremendous investment in inventory and expediting. Stock-out costs are very difficult to

calculate in most cases. For example, what is the exact cost of an unhappy customer.