This Study Resource Was: Coyle Supply Chain Management: A Logistics Perspective, 10 Chapter 9 Test Bank

Coyle Supply Chain Management: A Logistics Perspective, 10th Edition
Chapter 9 Test Bank
CHAPTER 9 TEST QUESTIONS
True-False
1. Inventory management is not as important as it once was due to other factors that have come
into play.
ANSWER: False, Page 291
2. Inventory plays a dual role in organizations. Inventory impacts the cost of goods sold as well as
supporting the balance sheet, a new concept only recently receiving attention.
3. "Batching economies" and "cycle stocks" are the same.

ANSWER: True, Page 294
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4. Purchase economies and transportation economies are not complementary.
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5. A reason to hold inventory arises when an organization anticipates that an unusual event might
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occur that will negatively impact its source of supply.
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6. Capital cost is also called interest or opportunity cost.

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7. Storage space costs are not variable.

8. Ordering cost refers to the expense of placing an order for additional inventory and does not
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include the cost or expense of the product itself.

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9. The reorder point depends on the orders in-house at that time.

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10. EOQ can only be used for "push" inventory.

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11. In comparison with the basic EOQ approach, the fixed interval model does not require close
surveillance of inventory levels.
12. JIT, MRP, and MRP II all incorporate some version of the basic EOQ model into their
philosophies.
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Chapter 9 Test Bank
13. JIT was developed in the U.S. and copied by the Japanese.
14. JIT is often used to force inventory back up the pipeline and therefore does not reduce
inventory.
15. MRPII will not allow an organization to integrate financial planning with operations and
logistics.
16. The ABC analysis is based on Pareto's law.

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17. ABC analysis uses a single criterion to classify SKUs from most important to least important.
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a. True
b. False
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c. I have no idea
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ANSWER: a, Page 348
Multiple Choice
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18. Inventory as an asset on the balance sheet and a _____ on the income statement.
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a. liability
b. footnote
c. statement
d. variable expense
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ANSWER: d, Page 290

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19. This type of inventory is influenced by the reliability of demand and lead time.
a. Cycle stock
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b. WIP
c. Safety stock
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d. Seasonal stock
ANSWER: b, Page 295
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20. Batching economies or cycle stocks usually arise from three sources. Which of these is not a
source?
a. Procurement
b. Transportation
c. Production
d. Demand
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Chapter 9 Test Bank
ANSWER: d, Page 294
21. WIP inventories:

a. are not included on the balance sheet.
b. are associated with manufacturing.
c. are the same as VMI inventories.
d. are not impacted by EOQ.
ANSWER: b, Page 296
22. Seasonal stocks are not influenced by:

a. EOQ.
b. weather.
c. transportation.
d. holidays.
ANSWER: a, Page 296
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23. Perpetual inventory systems are required for any EOQ model having _____ demand while
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periodic inventory systems are used for EOQ models having _____ demand.
a. variable; variable
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b.
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variable; constant
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c. constant; constant
d. constant; variable
ANSWER: b, Page 317
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24. Capital cost focuses on the cost of capital tied up in _____ and the resulting lost opportunity
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from investing that capital elsewhere.

a. plants
b. inventory
c. distribution centers
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d. WIP
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ANSWER: b, Page 300
25. The fixed order interval EOQ model is best used for SKUs with:
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a. variable demand.
b. stable demand.
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c. unknown demand.
d. seasonal demand.
ANSWER: b, Page 332
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26. In the event of a "stockout" one of the things that could happen is:
a. the vendor's plant shuts down.
b. the cost of capital is increased.
c. the SCOR process would come into play.
d. extra shipping cost may be incurred.
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Chapter 9 Test Bank
ANSWER: d, Page 307
27. Dependent demand relates to:

a. demand for another inventory item or product.
b. the spare parts needed to fill the order.
c. VMI inventories.
d. the cost of capital for the firm.
ANSWER: a, Page 313
28. As Q decreases for EOQ, the cost per order:

a. increases.
b. decreases.
c. stays the same.
d. can't be determined.
ANSWER: b, Page 321
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29. JIT is a _____ system.
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a. push
b. Pareto's law
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c. MRP
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d. pull
ANSWER: d, Page 315
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30. A DRP system is usually coupled with a _____ system in an attempt to manage the flow and
timing of both inbound materials and outbound finished goods.
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a. Kanban
b. VMI/consignment
c. MRP
d. JIT
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ANSWER: c, Page 343

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Essay
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31. Discuss how seasonality can affect inventory.

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ANSWER: Organizations that are faced with seasonality issues are constantly challenged when
determining how much inventory to accumulate. Organizations that process agriculture products
are a good example of supply seasonality. While the supply of the raw material is available during
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only one part of the year, demand is stable throughout the year. Therefore, the finished product
usually has to be stored until it is sold. That is, when the raw material is available, it needs to be
converted to finished product. This scenario often involves high storage costs and high
obsolescence costs. An alternative scenario might be to store the raw material, or some
preprocessed version of it, and use it to make the finished product as the demand dictates.
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Sometimes seasonality can impact transportation, particularly if domestic water transportation is

used. Another example would be the seasonality of the construction industry in the United States
and its impact on the availability of flatbed tractor trailers. Although construction takes place in
many areas of the United States year round, the northern states experience a slowdown in
construction activity during the winter months. As spring approaches in the north, construction
activity increases dramatically. The peak springtime construction season places a heavy demand
on a fixed capacity of flatbed trailers to move construction supplies. (Pages 297–298)
32. Discuss capital cost and include both the hurdle rate and WACC in your answer.
ANSWER: 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 not investing that capital
elsewhere. For example, all organizations borrow money from external sources to fund
operations. This money might be in the form of equity (from stock issues) or debt (borrowing
from banks). In either case, borrowed money has a cost associated with it. For equity, it is
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dividends; for debt, it is interest payments. In either case, an organization incurs a cost for
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borrowing money. If an organization decides to use this money to buy raw materials, build
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manufacturing plants, and hire labor to produce finished products for storage, then this inventory
carries this "borrowed money" cost while sitting waiting to be sold. As such, capital tied up in
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inventory still requires dividend or interest payments to the funding source. The opportunity cost
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of this inventory is the return on capital the organization might have realized if it had invested in
another opportunity rather than in raw materials, plants, and labor.
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The capital cost is frequently the largest component of inventory carrying cost. An organization
usually expresses it as a percentage of the dollar value of the inventory held.
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In practice, determining an acceptable number to use for capital cost is not an easy task. One way
of calculating capital cost for inventory decision making might use an organization's hurdle rate,
the minimum rate of return on new investments. In this way, the organization makes inventory
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decisions in the same way that it does for investing in new facilities, advertising, and so on.
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Another way of calculating capital cost is for an organization to use its weighted average cost of
capital (WACC). WACC is the weighted average percent of debt service of all external sources of
funding, including both equity and debt. This method reflects the direct debt service costs of
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having capital tied up in inventory.

(Page 300)
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33. Discuss dependent versus independent demand as it is related to inventory.

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ANSWER: Demand for a given inventory item is termed independent when such demand is
unrelated to the demand for other items. Conversely, demand is defined as dependent when it is
directly related to, or derives from, the demand for another inventory item or product. For
example, the demand for a laptop computer is independent, while the demand for its computer
chip is dependent. This dependency can be vertical (the laptop needs the chip for assembly) or
horizontal (the laptop needs an instruction manual for final delivery to customer).
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Chapter 9 Test Bank
So, for many manufacturing processes, basic demand for raw materials, component parts, and
subassemblies depends on the demand for the finished product. In contrast, the demand for the
end-use items, which are typically sold to a customer, is independent of the demand for any other
higher-order manufactured item.
An important point to remember is that developing inventory policies for items exhibiting
independent demand requires that forecasts be developed for these items. Alternatively,
forecasting is less relevant for items having dependent demand, since the required quantities for
these items depend entirely on the demand for the end-use product. So, once the difficult task of
forecasting demand for end-use items is completed, determining the demand for dependent items
requires simple calculations based on the bill of materials for that item. (Pages 313–314)
34. What are push and pull systems, and name at least one inventory management system that is a
push or pull system?
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ANSWER: The "pull" approach relies on customer orders to move product through a logistics
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system, while the "push" approach uses inventory replenishment techniques in anticipation of
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demand to move products.
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A principal attribute of pull systems is that they can respond quickly to sudden or abrupt changes
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in demand because they produce to an order and have very little, if any, finished goods inventory.
This is especially true for products where the final addition of value can be postponed.
Alternatively, push systems produce to inventory in anticipation of demand, thus making their
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ability to adapt to changing demand volumes and preferences limited.

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Pull systems usually run on short-term forecasts, allowing them the flexibility to adapt to swings
in demand. On the other hand, push systems use longer-term forecasts that allow for scale
economies in manufacturing but result in high finished goods inventories. These high levels of
finished goods inventories can make shelf life a problem in push systems, while this is not an
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issue for pull systems.

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Characteristically, JIT is a pull system since organizations place orders for more inventory only
when the amount on hand reaches a certain minimum level, thus "pulling" inventory through the
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logistics system as needed. Having established a master production schedule, MRP develops a
time-phased approach to inventory scheduling receipt. Because they generate a list of required
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materials in order to assemble or manufacture a specific amount of finished products, MRP and
MRP II approaches are push based. (Pages 314–315)
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35. How can inventory carrying cost be calculated for a specific product? What suggestions
would you offer for determining the measure of product value to be used in this calculation?
ANSWER: Calculating the cost to carry (or hold) a particular item in inventory involves three
steps. First, the value of the item stored in inventory must be determined. Each organization has
predetermined accounting practices to determine the value of inventory for balance sheet
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Chapter 9 Test Bank
purposes. The most relevant value measure for determining carrying costs is the cost of goods
sold or the direct labor, materials, and overhead consumed by that item plus the direct costs of
moving that item from the manufacturing facility into a distribution center for storage. Second,
determine the cost of each individual carrying cost component and add them together to
determine the total direct costs consumed by the item while being held in inventory.
Two types of costs should be considered here: variable-based costs and value-based costs.
Variable-based costs are those that are specifically out-of-pocket expenditures, for example,
inbound freight expense to the distribution center. Value-based costs are those that use the total
value (or total direct costs consumed) of the item at the location where carrying costs are being
determined, for example, taxes. Normally, inventory carrying costs are calculated on an annual
basis. This assumes that the item will be held in storage for a one-year time period. These two
costs must be adjusted for the actual length of time the item will be in storage. One word of
caution when calculating inventory carrying costs: a decision must be made (in accordance with
the organization's accounting standards) as to which costs are "one-time" and which costs are
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"reoccurring." This will be especially true when the length of time an item is stored will be
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greater than one year. (Pages 301–302)
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36. Compare and contrast the fixed quantity version of EOQ with the fixed interval version. In
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which situations would each be used?
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ANSWER: As its name implies, the fixed order quantity model involves ordering a fixed amount
of product each time reordering takes place. The exact amount of product to be ordered depends
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on the product's cost and demand characteristics and on relevant inventory carrying and
reordering costs. Organizations using this approach generally need to develop a minimum stock
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level to determine when to reorder the fixed quantity. This is called the reorder point. When the
number of units of an item in inventory reaches the reorder point, the fixed order quantity (the
EOQ) is ordered. The reorder point, then, triggers the next order.
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The second form of the basic approach is the fixed order interval approach to inventory
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management, also called the fixed period or fixed review period approach. In essence, this
technique involves ordering inventory at fixed or regular intervals; generally, the amount ordered
depends on how much is in stock and available at the time of review. Organizations usually count
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inventory near the interval’s end and base orders on the amount on hand at that time.
In comparison with the basic EOQ approach, the fixed interval model does not require close
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surveillance of inventory levels; thus, the monitoring is less expensive. This approach is best used
for inventory items that have a relatively stable demand. Using this approach for volatile demand
items might quickly result in a stockout since time triggers orders rather than inventory levels.
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If demand and lead time are constant and known in advance, then an organization using the fixed
order interval approach will periodically reorder exactly the same amount of inventory. If either
demand or lead time varies, however, the amount ordered each time will vary, becoming a result
of demand as well as lead time length. (Pages 316–333)
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Chapter 9 Test Bank
37. What is Vendor Managed Inventory?
ANSWER: Essentially, vendor-managed inventory (VMI) usually means that the manufacturer
will manage the inventory of its products (and possibly related products) at the retailer's
warehouse(s) and reorder as appropriate for customer fulfillment. The manufacturer may also
have a representative at the designated retail warehouse locations to assure accurate and timely
delivery. The retailer should experience lower costs associated with inbound logistics, and the
manufacturer should be able to offset its additional cost with increased sales (fewer stockouts,
more complete orders, etc.) because of the more accurate and timely information of product
orders at the store level. (Pages 345–346)
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Coyle Supply Chain Management: A Logistics Perspective, 10th Edition

Chapter 9 Test Bank

CHAPTER 9 TEST QUESTIONS

3. "Batching economies" and "cycle stocks" are the same.

6. Capital cost is also called interest or opportunity cost.

ANSWER: True, Page 300

7. Storage space costs are not variable.

include the cost or expense of the product itself.

ANSWER: True, Page 304

9. The reorder point depends on the orders in-house at that time.

ANSWER: False, Page 324

10. EOQ can only be used for "push" inventory.

ANSWER: True, Page 334

16. The ABC analysis is based on Pareto's law.

ANSWER: d, Page 290

ANSWER: d, Page 294

21. WIP inventories:

22. Seasonal stocks are not influenced by:

from investing that capital elsewhere.

ANSWER: b, Page 300

ANSWER: d, Page 307

27. Dependent demand relates to:

28. As Q decreases for EOQ, the cost per order:

ANSWER: c, Page 343

31. Discuss how seasonality can affect inventory.

Sometimes seasonality can impact transportation, particularly if domestic water transportation is

having capital tied up in inventory.

33. Discuss dependent versus independent demand as it is related to inventory.

ability to adapt to changing demand volumes and preferences limited.

issue for pull systems.

37. What is Vendor Managed Inventory?

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