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 System
C) 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 to
the grocery store every Saturday to buy their groceries. The inventory target level is used to
determine 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 times
B) Counting inventory on a pre-determined schedule
C) Setup reduction to shorten cycle times
D) Count to determine length of the production cycle
Explanation: Answer B is correct. Cycle counting includes developing a count schedule based
on ABC classifications. For example, count A items 12 times per year, B items 6 times, and C
items 2 times. Answers A, C & D are not correct because Cycle Counting does not relate to
cycle times in production.
(3) The primary purpose of a Cycle Counting process is to:
A) Reduce the headcount in the warehouse
B) Eliminate the physical inventory
C) Correct inventory records
D) Identify and eliminate causes of inventory errors
Explanation: Answer D is correct. The primary purpose is to find and correct causes on
inventory errors. Cycle counting does provide the benefits stated in B & C but these are
secondary to D. The major goal is to improve inventory accuracy. Answer A is not true as
warehouse 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 amount
B) Order a lot equal to a given number of period demand
C) Order just the amount needed
D) Order in fixed intervals

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, period
order 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 products
III. Length of the production run is unlimited
IV. Raw materials which are on MRP
A) I, II and III
B) I, III and IV
C) II, III and IV
D) 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 result
in 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, what
is the impact on the order quantity?
A) Order multiples will increase
B) Order quantities will increase
C) 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 the
formula. Therefore reducing S results in a decrease in the EOQ. If S is increased the EOQ
quantity increases.
(7) Based on the following information, what is the Order Point?
Lead Time = 3 Weeks
Demand/Week = 200 Units
Safety Stock = 1 Weeks Supply Lot Size = 100 Units
A) 700
B) 800 OP = DDLT + SS = (200 x 3) + (200 x 1) = 800
C) 600
D) 300
Explanation: Answer B is correct. Order Point = Demand during Lead Time + Safety Stock
DDLT = 200 x 3 = 600 Safety Stock = 1 weeks supply = 200. Therefore, OP = 600 + 200 =
800.

(8) For which of the following conditions would Periodic Review be appropriate?
I. Raw materials consumed in production
II. Small issues from inventory where transactions are expensive
III. Ordering costs are low
IV. Many items are ordered together from same source
A) I, III and IV
B) I, II, and IV
C) II, III and IV
D) II and IV
Explanation: Answer C is correct. Periodic Review is often used when there are many small
issues from inventory. For example, an administrative assistant reviewing the office supplies
inventory once per month and placing an order to the vendor. Periodic Review usually results in
ordering more often and therefore works best with relatively low ordering costs. Choice I is not
correct 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 increases
B) Decreases as lead time increases
C) Increases as desired service level increases
D) Decreases as random forecast error decreases
Explanation: Answer B is correct. The amount of safety stock required increases as lead time is
increased. This is because safety stock is designed to cover demand/usage variations during
replenishment 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
Lead Time = 1 Week

Review Period = 3 Weeks

Safety Stock = One Weeks Supply

A) 500 Target = DDLT + DDRP + SS = (100 x 1) + (100 x 3) + (100 x 1) = 500

B) 400
C) 300
D) 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 during
Review Period + Safety Stock. In this case, DDLT = 100 x1 = 100 DDRP = 100 x 3 = 300
Safety Stock = One Weeks Supply = 100. Therefore, Target Level = 100 + 300 + 100 = 500

(11) Given the following data what is the annual carrying cost?
Order Quantity = 500 Units
Cost per Unit = $10
Carrying Cost = 20%
A)
B)
C)
D)

$1,000
$250
$500 (500/2 = 250 avg. inv.) (250 x $10 x 0.2 = $500)
$100

Answer C is correct. Average Inventory = Q/2 + Safety Stock. In this example, no safety stock
is specified so the average inventory = the order quantity (Q) divided by 2. The annual carrying
cost = 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 stock
calculations?
A)
B)
C)
D)

Should always be 100%

Should include calculated cost of stock-outs
Is easy to calculate
Management should set policy

Explanation: Answer D is correct. The desired service level depends on many things some of
which require judgment. For example, how many stock-outs will the market accept before
significant loss in revenue occurs? Management must take the various factors into consideration
and decide what service level to target. Service level is rarely set at 100% as this requires
tremendous 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.