Supply Chain Management: Strategy, Planning, and Operation, 7e (Chopra)
Chapter 11 Managing Economies of Scale in a Supply Chain: Cycle Inventory
11.1 True/False Questions
1) Cycle inventory exists because producing or purchasing in large lots allows a stage of the
supply chain to exploit economies of scale and thus increase cost.
2) Cycle inventory is the physical inventory in the supply chain due to either production or
purchases demanded by the customer.
3) Lot sizes and cycle inventory do not affect the flow time of material within the supply chain.
4) Average flow time resulting from cycle inventory = Cycle Inventory/Demand = Q/2D.
5) Cycle inventory is primarily held to take advantage of economies of scale in order to reduce
profit within the supply chain.
6) Cycle inventory exists in a supply chain because different stages exploit economies of scale to
lower total cost.
7) The costs considered in lot sizing decisions include material cost, fixed ordering cost, and
manufacturing cost.
8) A firm is often better served by ordering a convenient lot size close to the economic order
quantity rather than the precise EOQ.
9) To reduce the optimal lot size by a factor of k, the fixed order cost S must be reduced by a
factor of k.
10) A key to reducing cycle inventory is the reduction of lot size.
11) Aggregating across products, retailers, or suppliers in a single order allows for a reduction in
lot size for individual products because fixed ordering and transportation costs are now spread
across multiple products, retailers, or suppliers.
12) Reduction of fixed cost may be achieved by aggregating lots across multiple products,
customers, or suppliers.
13) A discount is volume-based if the pricing schedule offers discounts based on the quantity
ordered in a single lot.
14) Pricing schedules with all unit quantity discounts encourage retailers to increase the size of
their lots, which reduces the average inventory and flow time in a supply chain.
15) Marginal unit quantity discounts have also been referred to as multi-block tariffs.
16) For commodity products where price is set by the market, manufacturers can use lot size-
based quantity discounts to achieve coordination in the supply chain and decrease supply chain
cost.
17) The supply chain profit is higher if each stage of the supply chain independently makes its
pricing decisions with the objective of maximizing its own profit.
18) For products where the firm has market power, two-part tariffs can be used to achieve
coordination in the supply chain and maximize supply chain profits.
19) Price discrimination is the practice where a firm charges differential prices to maximize
profits.
20) Although a forward buy is often the retailer’s appropriate response and increases their own
profits, it usually increases demand variability with a resulting increase in inventory and flow
times within the supply chain.
21) In a multiechelon supply chain, it is important for a distributor to distinguish between
retailers with high demand and retailers with low demand.
22) In a multiechelon supply chain, the integer rule calls for an integer multiple of retailers to be
serviced by each distributor.
23) The effects of fixed costs associated with production or purchasing, quantity discounts
offered by suppliers, and short-term price discounts offered by suppliers on lot sizing decisions
must be understood by a supply chain manager.
24) Transportation costs due to aggregation can be minimized by coordinating orders coming
from the same supplier.
25) Using EDLP is the best way to reduce costs attributed to shipping.
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11.2 Multiple Choice Questions
1) Cycle inventory exists because producing or purchasing in large lots allows a stage of the
supply chain to
A) exploit economies of scale and raise cost.
B) exploit economies of scale and lower cost.
C) exploit customers and lower cost.
D) exploit customers and raise cost.
2) The quantity of inventory that a stage of the supply chain either produces or purchases at a
given time is
A) an order.
B) a job.
C) a shipment.
D) a lot or batch.
3) The average inventory in the supply chain due to either production or purchases in lot sizes
that are larger than those demanded by the customer is
A) annual inventory.
B) distribution inventory.
C) cycle inventory.
D) physical inventory.
4) A graphical plot depicting the level of inventory over time is
A) an inventory graph.
B) a distribution inventory.
C) an inventory drawing.
D) an inventory profile.
5) When demand is steady, cycle inventory and lot size are related as
A) Cycle Inventory = Lot Size × 2.
B) Cycle Inventory = Lot Size*2.
C) Cycle Inventory = Lot Size/2.
D) Cycle Inventory = Lot Size = Q.
6) Average flow time resulting from cycle inventory is equal to
A) Cycle Inventory/Demand = Q/2.
B) Cycle Inventory/Demand = Q/2D.
C) Cycle Inventory = Q/2.
D) Cycle Inventory = Lot Size = Q.
7) Cycle inventory is primarily held to
A) take advantage of diseconomies of scale and increase cost within the supply chain.
B) take advantage of diseconomies of scale and reduce cost within the supply chain.
C) take advantage of economies of scale and increase cost within the supply chain.
D) take advantage of economies of scale and reduce cost within the supply chain.
8) The primary role of cycle inventory is to allow different stages in the supply chain to
A) purchase product in lot sizes that maximize the sum of the material, ordering, and holding
cost.
B) purchase product in lot sizes that minimize the sum of the material, ordering, and holding
cost.
C) sell product in lot sizes that maximize the sum of the material, ordering, and holding cost.
D) sell product in lot sizes that minimize the sum of the material, ordering, and holding cost.
9) Economies of scale in purchasing and ordering motivate a manager to
A) increase the lot size and cycle inventory.
B) decrease the lot size and cycle inventory.
C) eliminate inventory.
D) increase the lot size and reduce cycle inventory.
10) The price paid per unit is referred to as
A) the material cost and is denoted by C.
B) the fixed ordering cost and is denoted by S.
C) the holding cost and is denoted by H.
D) the purchase price and is denoted by P.
11) All costs that do not vary with the size of the order but are incurred each time an order is
placed are referred to as
A) the material cost and are denoted by C.
B) the fixed ordering cost and are denoted by S.
C) the holding cost and are denoted by H.
D) the purchase price and are denoted by P.
12) The cost of carrying one unit in inventory for a specified period of time, usually one year, is
referred to as
A) the material cost and is denoted by C.
B) the fixed ordering cost and is denoted by S.
C) the holding cost and is denoted by H.
D) the purchase price and is denoted by P.
13) Ordering costs would include which of the following?
A) Cost from theft
B) Transportation cost
C) Security cost
D) Damage cost
14) Inventory holding costs would include which of the following?
A) Transportation cost
B) Buyer time
C) Obsolescence cost
D) Receiving cost
15) Total ordering and holding costs
A) are relatively stable.
B) are relatively stable around the economic order quantity.
C) are relatively unstable around the economic order quantity.
D) are unstable.
Scenario 11.1 — Bubble and Squeak
The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a
steady demand for peas. Over the course of the past week, 457 patrons have ordered the hearty
breakfast and each serving contains a half cup of English peas. It costs two cents to hold a half
cup of peas in inventory for a year and $3 to place an order (remember they come all the way
from England!). It takes two weeks to ship a container from England loaded with peas.
16) What is the optimal order quantity?
A) 2670 cups
B) 17.8 cups
C) 1335 cups
D) 8.9 cups
17) What is the average inventory if they order at the optimal order quantity?
A) 2670 cups
B) 2000 cups
C) 1335 cups
D) 667 cups
18) What is the cost of the inventory policy (excluding cost of goods) if the diner orders at the
economic order quantity?
A) $53.40
B) $106.80
C) $26.70
D) $80.10
19) How many orders per year does the diner place if they order at the economic order quantity?
A) 18
B) 9
C) 5
D) 14
20) What is the average flow time of a half cup of peas if the diner orders at the economic order
quantity?
A) 8.76 weeks
B) 5.84 weeks
C) 2.92 weeks
D) 11.68 weeks
21) The diner orders at the economic order quantity but an analysis of dates on the cans of peas
revealed that the flow time was actually 5 weeks. A quick check revealed that the computer had
automatically adjusted up the economic order quantity as demand had risen during the past few
months. What is the new weekly demand for English peas?
A) 234 half cups
B) 78 half cups
C) 312 half cups
D) 156 half cups
22) If demand increases by a factor of k, the optimal lot size increases by a factor of
A) k.
B) k/2.
C) k-squared.
D) the square root of k.
Scenario 11.2 — S&H Mercantile
The S&H Mercantile in Luther is the only game in town for a number of items, and tries
valiantly to use only the storage space needed to display items since there is no stock room in the
back of the store. One popular item, a 16-ounce can of dehydrated water, takes up 20 square
inches of shelf space. The shelf space available for this item measures five feet by four feet. The
store manager would like to order a quantity that can fill the shelf space without stacking and
without needing to store cans elsewhere in the store. The amount ordered should all be on
display once the S&H runs out and ideally would arrive just as the last can is purchased.
23) Suppose the annual demand is 8,000 units and the cost per can is $3 with a holding cost of
10%. What is the required order cost per lot?
A) 38 cents
B) $3.20
C) $32
D) $1.44
24) Drought conditions spike demand during the summer to an annualized rate of 27,000 cans
per year and the price rises to $12 per can with a holding cost of 20%. What is the required order
cost per lot?
A) 9.2 cents
B) 92 cents
C) $9.20
D) $92.00
25) Drought conditions spike demand during the summer to an annualized rate of 27,000 cans
per year and the price rises to $12 per can. If the ordering cost per lot is 75 cents, what is the
holding cost percentage?
A) 3.1%
B) 1.81%
C) 31%
D) 18.1%
26) Aggregating across products, retailers, or suppliers in a single order allows for
A) an increase in lot size for individual products.
B) an increase in customer demand.
C) a reduction in holding cost per unit.
D) a reduction in lot size for individual products.
a supply chain.
Scenario 11.3 — Sammy’s Sammwiches
Sammy’s is the hot new lunch spot among the hipsters, who flock there at noon for their artisanal
peanut butter and jelly sandwiches, which sell for $12.95. The sandwiches are made from two
slices of their own artisanal bread, which they bake continuously throughout the day at a rate of
seven loaves an hour (each loaf contains twenty slices). The actual cost of a loaf of bread is $1
and the cost to hold a loaf is 80%, since freshness is important in baking as well as to hipsters.
The cost to run a new batch of a dough is $3 per loaf. Sammy’s sells their sandwiches at a rate of
fifty per hour.
27) What is the optimal batch size to produce?
A) 8.36 loaves
B) 1.8 loaves
C) 5.56 slices
D) 8.36 slices
28) What is the cost to run Sammy’s at the economic production lot size?
A) $5.46
B) $2.73
C) $1.36
D) $0.68
29) Aggregating across products, retailers, or suppliers in a single order allows for a reduction in
lot size for individual products because
A) fixed ordering and transportation costs are now charged to retailers.
B) fixed ordering and transportation costs are now charged to suppliers.
C) fixed ordering and transportation costs are now spread across multiple products, retailers, or
suppliers.
D) holding costs are now charged to retailers or suppliers.
30) A key to reducing cycle inventory is
A) the reduction of holding cost.
B) the reduction of manufacturing cost.
C) the reduction of lot size.
D) the reduction of warehouse space.
31) A key to reducing lot size without increasing costs is to
A) reduce the holding cost associated with each lot.
B) reduce the fixed cost associated with each lot.
C) reduce the material cost associated with each lot.
D) reduce the manufacturing cost associated with each lot.
32) A price discount where the pricing schedule offers discounts based on the quantity ordered in
a single lot is
A) customer based.
B) lot size based.
C) supplier based.
D) volume based.
33) A price discount where the discount is based on the total quantity purchased over a given
period, regardless of the number of lots purchased over that period, is
A) customer based.
B) lot size based.
C) supplier based.
D) volume based.
34) Pricing schedules with all unit quantity discounts encourage retailers to
A) decrease the size of their lots.
B) increase the size of their lots.
C) decrease the size of their inventory.
D) increase the price of their products.