Principles of Supply Chain

Management A Balanced Approach 3rd

Edition Wisner Test Bank
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Chapter 7—Inventory Management

TRUE/FALSE

1. Service parts sold to the repair shops are examples of dependent demand.

ANS: F PTS: 1 REF: p. 212

2. Dependent Demand must be forecasted based on market conditions.

ANS: F PTS: 1 REF: p. 212

3. The four broad categories of inventory are raw materials, work-in-process, subassemblies, and finished
goods.

ANS: F PTS: 1 REF: p. 213

4. Inventory turnover ratio shows how many times a firm turns over its inventory in an accounting
period. Faster turnovers are generally viewed as negative because it indicates instability in the firm's
inventory level.

ANS: F PTS: 1 REF: p. 214

5. The term Cycle Counting is synonymous with physically counting inventory.

ANS: T PTS: 1 REF: p. 215-216

6. The ABC inventory control system categorizes inventory items into three groups, A, B, and C. A items
are given highest priority, while C items have the lowest priority. Prioritization may be based on
annual dollar usage, shelf life, or sales volume.

ANS: T PTS: 1 REF: p. 215-216

7. Pareto Analysis is an inventory model used to determine the optimal order size that minimizes total
annual inventory costs.

ANS: F PTS: 1 REF: p. 216

8. The ABC inventory matrix shows an ABC inventory classification based on annual usage on the
vertical axis and an ABC inventory classification based on physical inventory on the horizontal axis.

ANS: T PTS: 1 REF: p. 216-217

9. Radio Frequency Identification (RFID) is considered an eventual replacement of bar code because of
its ability to store huge amount of information to differentiate specific unit of good.

ANS: T PTS: 1 REF: p. 218

10. Electronic Product Code (EPC) is the only RFID standard adopted by the commercial sector and the
U.S. Department of Defense.

ANS: F PTS: 1 REF: p. 218

 11. An RFID reader does not require direct line of sight to read the information stored in an RFID tag.

ANS: T PTS: 1 REF: p. 220-222

12. The EOQ, also known as the economic order quantity, is the optimal order size in terms of cost
because it minimizes the annual total inventory cost. The EOQ is the lot size where inventory holding
costs equal annual ordering costs.

ANS: T PTS: 1 REF: p. 225-226

13. The total annual inventory cost is the sum of the annual purchase cost, the annual holding cost, the
annual capacity cost, and the annual ordering cost.

ANS: F PTS: 1 REF: p. 226

14. Relaxing the instantaneous replenishment assumption of the EOQ model results in the Economic
Manufacturing Quantity model.

ANS: T PTS: 1 REF: p. 227

15. The optimal order quantity for the quantity discount model may exist at a price breakpoint.

ANS: T PTS: 1 REF: p. 227-231

16. In the Economic Manufacturing Quantity model, the annual consumption rate must be higher than the
annual production rate.

ANS: F PTS: 1 REF: p. 231-232

17. When demand and lead time are constant, reorder point is the demand during lead time.

ANS: T PTS: 1 REF: p. 237-238

18. The continuous review inventory system is more expensive to monitor compared to the periodic
review inventory system.

ANS: T PTS: 1 REF: p. 241-242

19. The (s, S) continuous review inventory system orders the same quantity Q when physical inventory
reaches the reorder points.

ANS: F PTS: 1 REF: p. 242-243

20. The periodic inventory review system reviews physical inventory at specific points in time.

ANS: T PTS: 1 REF: p. 243

MULTIPLE CHOICE

1. Dependent demand and independent demand items differ in that

I. for any product, all components are dependent-demand items
II. the need for independent-demand items is forecast
 III. the need for dependent-demand items is calculated

a. I only
b. I & II only
c. I & III only
d. II & III only
e. I, II & III
ANS: E PTS: 1 REF: p. 212

2. Which of the following would most likely be considered a dependent demand item?
a. Bicycle tires used to assemble a bicycle
b. Television (TV)
c. Couch
d. Lawn Mower
ANS: A PTS: 1 REF: p. 212

3. Which of the following cannot be considered as independent demand items?

a. wholesale and retail merchandise items
b. maintenance, repair, and operating supplies at a manufacturing company
c. maintenance, repair, and operating supplies at a service firm
d. raw material items that become part of the final product at a manufacturing firm
e. service industry items such as hospital supplies or office supplies for law firms
ANS: D PTS: 1 REF: p. 212

4. ____, such as lubricants for machines, are used in the production process, but do not become parts of
the final products.
a. Raw materials
b. Work-in-process
c. Maintenance, repair and operating supplies
d. Finished goods
e. Cycle stock
ANS: C PTS: 1 REF: p. 213

5. Companies hold a supply of inventory for all of the following reasons EXCEPT:
a. meet variation in product demand
b. increase production change/setup costs
c. allow production scheduling flexibility
d. purchase in bulk to take advantage of quantity discounts
e. maintain independence of operations (Decoupling)
ANS: B PTS: 1 REF: p. 212-213

6. Which of the following is a disadvantage of excessive inventory?

a. It hides production and other problems.
b. It leads to higher inventory ordering cost.
c. It leads to lower average inventory.
d. It eliminates cycle stock.
e. It reduces the need to conduct cycle count.
ANS: A PTS: 1 REF: p. 212-214

7. Which of the following is not an example of an ordering cost for products purchased from a supplier?
 a. the cost of transmitting the order
b. the cost of receiving the product
c. the cost associated with processing the invoice
d. the opportunity cost of not ordering from a least cost supplier
e. the cost of handling the product
ANS: D PTS: 1 REF: p. 214

ABC Inventory Matrix

Use the graph below to answer the question(s).

8. In the ABC Inventory Matrix, inventory in area Y suggests

a. under-stocked A and B items.
b. under-stocked B and C items.
c. overstocked A and B items.
d. over-stocked B and C items.
e. inventory matches sales.
ANS: E PTS: 1 REF: p. 217-218

9. In the ABC Inventory Matrix, inventory in area Z suggests

a. under-stocked A and B items.
b. under-stocked B and C items.
c. overstocked A and B items.
d. over-stocked B and C items.
e. inventory matches sales.
ANS: D PTS: 1 REF: p. 217-218

10. Which of the following is NOT an assumption of the classic Economic Order Quantity (EOQ)?
a. Lead time is known and constant.
b. Demand is known and constant.
c. Instantaneous replenishment.
d. There is no quantity discount.
e. The production rate must be greater than the consumption rate.
ANS: E PTS: 1 REF: p. 225-226
11. The primary purpose of the basic economic order quantity model is
a. to calculate the reorder point, so that replenishments take place at the proper time
b. to minimize the sum of carrying cost and holding cost
c. to maximize the customer service level
d. to minimize the sum of setup cost and holding cost
e. to calculate the optimum safety stock
ANS: D PTS: 1 REF: p. 225-226

12. If an item is ordered at its economic order quantity, the annual carrying cost should be:
a. slightly less than the annual ordering cost.
b. equal to the annual ordering cost.
c. twice the annual purchase price.
d. the square root of the annual ordering cost.
e. cannot be determined because there is insufficient information provided.
ANS: B PTS: 1 REF: p. 225-229

13. What inventory factor may be omitted from the basic EOQ derivation because it is a constant?
a. Annual order-processing cost
b. Annual purchase cost of goods
c. Annual capital cost
d. Annual setup costs
e. all of these
ANS: B PTS: 1 REF: p. 226

14. Which of the following is not an assumption of the economic order quantity model?
a. Demand is known, constant, and independent.
b. Lead time is known and constant.
c. Quantity discounts are not possible.
d. Production and use can occur simultaneously.
e. The only variable costs are setup cost and holding (or carrying) cost.
ANS: D PTS: 1 REF: p. 226

15. The cost of a widget is $5, and the carrying rate is 40%; cost of processing an order is $25, annual
demand is for 400 widgets, and supply and usage patterns are stable. What is the economic order
quantity (EOQ)?
a. 5
b. 20
c. 25
d. 100
e. 200
ANS: D PTS: 1 REF: p. 228

16. If usage is constant, as order size increases, annual order costs ____ but annual carrying costs ____.
a. increase ..... increase
b. decrease ..... decrease
c. increase ..... decrease
d. decrease ..... increase
e. remain the same ..... increase
ANS: D PTS: 1 REF: p. 229
17. Which one of the following statements regarding the economic order quantity 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 exceeds the annual
ordering cost.
c. The EOQ model assumes a variable demand pattern.
d. When the interest rate drops, both the holding cost and the EOQ decreases.
e. EOQ is used to determine the optimum shipping quantity.
ANS: B PTS: 1 REF: p. 225-229

18. Use this information below to calculate the optimal order quantity:
Annual demand for backpacks is 43,000 units
The cost to place an order is $220
The per unit cost of the item is $60.00
The annual holding rate is 37.5%

Choose the closest answer.

a. 920 units
b. 250 units
c. 710 units
d. 830 units
ANS: A PTS: 1 REF: p. 226-229

19. If your company had an annual purchase cost of items equal to $2,000,000, an annual holding cost of
$150,000 and an annual ordering cost of $750,000 this scenario would reveal that:
a. Your fixed lot size was lower than the EOQ
b. Your fixed lot size was equal to the EOQ
c. Your fixed lot size was higher than the EOQ
d. Nothing because there is insufficient information to discern where the EOQ would be.
ANS: A PTS: 1 REF: p. 226-229

20. The EOQ model with quantity discounts attempts to determine

a. what is the lowest purchasing price.
b. whether to use fixed-quantity or fixed period order policy.
c. how many units should be ordered.
d. what is the shortest lead time.
e. what is the lowest amount of inventory necessary to satisfy a certain service level.
ANS: C PTS: 1 REF: p. 227-231

Figure 7-1
Use the graph below to answer the question(s).
21. Which of the following is TRUE in relation to Figure 7-1?
a. Curve J represents the annual ordering cost, and curve K represents the annual holding
cost.
b. A lot size of G has an annual total cost of about C.
c. At lot size H both holding costs and ordering costs exceed the annual total cost.
d. The EOQ is most likely lot size G, and curve L is the annual ordering cost curve.
ANS: D PTS: 1 REF: p. 226-229

22. If the actual order quantity is the economic order quantity in a problem that meets the assumptions of
the model, the average amount of inventory on hand
a. is zero
b. is affected by the amount of product cost
c. is one-half of the economic order quantity
d. is smaller than the holding cost per unit
e. cannot be determined from the given information
ANS: C PTS: 1 REF: p. 228-230

23. In the absence of demand and delivery lead time variation, if demand is eight per day and purchase
lead time is four days, the reorder point is:
a. 3.
b. 8.
c. 32.
d. 35.
e. 56.
ANS: C PTS: 1 REF: p. 236-238

24. In the absence of demand and delivery lead time uncertainty, reorder point is the ____.
a. demand during lead time
b. safety stock
c. sum of demand during lead time and safety stock
d. economic order quantity
e. average inventory
ANS: A PTS: 1 REF: p. 236-238
 25. The UNLV Bookstore sells a unique calculator to college students. The demand for this calculator has
a normal distribution with an average daily demand of 20 units and a standard deviation of 4 units per
day. The lead time for this calculator is very stable at 9 days. Compute the statistical reorder point that
results in a 95 percent in-stock probability (Z = 1.65).
a. 19.8 units
b. 80 units
c. 180 units
d. 199.8 units
e. 720 units
ANS: D PTS: 1 REF: p. 236-241

SHORT ANSWER

1. Briefly describe the differences between dependent and independent demand. Provide examples of
dependent and independent demand items for each of the following industries: automotive industry,
personal computer industry, bicycle industry

ANS:
Dependent demand items are those parts whose demand is based on the demand of the final product in
which the parts are used. Independent demand items are the end items consumers typically buy, and
whose demand is affected by trends, seasonal patterns, and general market conditions. Service parts
are also considered independent demand items.

1. Automotive Industry:
a. Independent demand item − car/truck and service parts.
b. Dependent demand item − tires, axle, steering wheel, and battery used to assemble
the automobiles.

2. Personal Computer Industry:

a. Independent demand item − computer/laptop computer and hardware sold directly
to the consumers.
b. Dependent demand item − monitor, CPU, and keyboard used to assemble the PC.

3. Bicycle Industry:
a. Independent demand item − bicycle
b. Dependent demand item − tires, handlebars, chain, and seats used to assemble the
bicycles.

PTS: 5 REF: p. 210

2. List four assumptions of the EOQ model.

ANS:
a. Demand must be known and constant
b. Delivery time must be known and constant
c. Replenishment is instantaneous
d. Price is constant/quantity discounts are not allowed
e. Holding cost is known and constant
f. Ordering cost is known and constant
g. Stockouts are not allowed

PTS: 5 REF: p. 223

 3. Name and briefly describe the four basic types of inventory.

ANS:
a. Raw materials − unprocessed, purchased inventory.
b. Work-in-process − partially processed inventory.
c. Finished goods − inventory or materials that have been completely processed or
assembled, ready for sales or shipping to customers.
d. Maintenance, repairs and operating (MRO) supplies − (e.g., lubrication) goods used in
the manufacturing process, but do not become parts of the finished goods.

PTS: 5 REF: p. 211

4. Name the two major RFID standards.

ANS:
a. The Electronic Product Code (EPC) standard managed by the EPCglobal, Inc.
b. The 18000 standard of the International Organization for Standardization (ISO).

PTS: 5 REF: p. 217

ESSAY

1. Describe the ABC inventory matrix, and how is it used to manage inventory.

ANS:
An ABC inventory matrix is used to assist in identifying obsolete stocks and to analyze whether a
company is stocking the correct inventory by comparing two ABC analyses. The vertical axis of the
ABC inventory matrix shows the firm's inventory classification based on inventory usage whereas the
horizontal axis shows the firm's inventory classification based on physical inventory.

Items appearing along the diagonal of the matrix suggest inventory matches sales. Items in the top left
triangle indicate under-stocked A and B items, where as items in the lower right triangle suggest
overstocked B and C items, or obsolete stocks.

PTS: 10

2. What is Radio Frequency Identification (RFID)? Provide four examples or scenarios of how RFID can
be used to aid in supply chain management.

ANS:
RFID aids in inventory management by making it easier to track inventory in the supply chain. It can
synchronize information and physical flow of goods across the supply chain from manufacturers to
retail outlets and to the consumers. Moreover, it is also very useful for tracking returned goods through
the supply chain and to prevent counterfeit. For examples,

1. Materials management: As supply vehicle enters the warehouse, the fixed-portal RFID
reader positioned at the entrance reads the tags on the pallets or individual items to
provide handling, routing, and storage information of the incoming goods, and inventory
status can be updated automatically.

2. Manufacturing: An RFID tag can be placed on the unit being produced so that specific
 customer configurations can be incorporated automatically during the production
process. This is invaluable in a make-to-order environment.

3. Distribution center: As the logistics vehicle arrives at the loading dock, the fixed-portal
RFID reader communicates with the tag on the vehicle to confirm that it is approved to
pickup goods. When the loaded vehicle leaves the dock and crosses the portal, the reader
picks up the signals from the tags to alert the RFID software and ERP system to update
the inventory automatically and initiate an advanced shipping notice (ASN), proof of
pickup, and invoices.

4. Retail store: As delivery vehicle enters the unloading dock, the fixed-portal reader picks
up the signals from the tags, and the RFID software application processes the signals to
provide specific handling instructions and initiates automatic routing of the goods. RFID
reader can also be placed on the store shelf to trigger automatic replenishments when an
item reaches its reorder point. Moreover, inventory status can be updated automatically
in real time at any stage of the supply chain, and handheld readers can be used to assist
in cycle counting.

PTS: 10

3. Use the graph below to answer the questions that follow.

a. Identify the Annual Holding Cost curve. Provide a brief description of what the Annual
Holding Cost curve represents.
b. Identify the Annual Ordering Cost curve. Provide a brief description of what the Annual
Ordering Cost curve represents.
c. Identify the Annual Total Cost Curve. Provide a brief description of what the Annual
Total Cost curve represents.
d. Identify the Economic Order Quantity. Provide a brief description of what the Economic
Order Quantity represents.

ANS:
a. Identify the Annual Holding Cost curve. Provide a brief description of what the Annual
Holding Cost curve represents.
Curve K. Curve K represents the cost to a firm for holding inventory for an entire year.
The larger the order size, the more inventory a firm holds, thus the higher the annual cost
 of holding inventory.

b. Identify the Annual Ordering Cost curve. Provide a brief description of what the Annual
Ordering Cost curve represents.
Curve L. Curve L represents the cost to a firm for ordering inventory for an entire year.
The larger the order size, the fewer orders required to accumulate a year's worth of
inventory, thus the lower the annual cost of holding inventory.

c. Identify the Annual Total Cost Curve. Provide a brief description of what the Annual
Total Cost curve represents.
Curve J. Curve J is the sum of Curve K and Curve L. It begins very high as ordering
costs are very high to begin, but as curve L and curve K near intersection, annual costs
decrease. The intersection of K and L represents the lowest annual total cost, and thus
reveals the EOQ. After K and L intersect, annual total cost again begins to increase.

d. Identify the Economic Order Quantity. Provide a brief description of what the Economic
Order Quantity represents.
The EOQ is the order size at which annual holding cost and annual ordering cost are
equal, and where annual total cost is at its minimum. On this chart the EOQ is point G.

PTS: 10