Supply Chain Management: Strategy, Planning, and Operation, 7e (Chopra)
Chapter 12 Managing Uncertainty in a Supply Chain: Safety Inventory
12.1 True/False Questions
1) Safety inventory is inventory carried for the purpose of satisfying demand that exceeds the
amount forecasted for a given period.
2) Cycle inventory is inventory carried to satisfy demand that exceeds the amount forecasted for
a given period.
3) Given the product variety and high demand uncertainty in most high-tech supply chains, a
significant fraction of the inventory carried is safety inventory.
4) Raising the level of safety inventory increases product availability and thus the margin
captured from customer purchases.
5) Carrying excessive inventory can help counter demand volatility when new products come on
the market.
6) The appropriate level of safety inventory is determined by the uncertainty of both demand and
supply and the desired level of cycle inventory.
7) Product availability reflects a firm’s ability to fill a customer order out of available inventory.
8) Product fill rate is the fraction of product demand that is satisfied from product in inventory.
9) With periodic review, inventory status is checked at regular intervals and an order is placed to
raise the inventory level to a specified threshold.
10) The expected shortage per replenishment cycle (ESC) is the average units of demand that are
satisfied from inventory in stock per replenishment cycle.
11) For the same safety inventory, an increase in lot size increases the fill rate but not the cycle
service level.
12) A goal of any supply chain manager is to reduce the level of safety inventory required
regardless of the effect on product availability.
13) In most supply chains, the key to reducing the underlying forecast uncertainty is to link all
forecasts throughout the supply chain to customer demand data.
14) A reduction in supply can help dramatically reduce safety inventory required without hurting
product availability.
15) Aggregation reduces the standard deviation of demand only if demand across the regions
being aggregated is not perfectly positively correlated.
16) In case demand in different geographical regions is about the same size and independent,
aggregation increases safety inventory by the square root of the number of areas aggregated.
17) The lower the coefficient of variation of an item, the greater the reduction in safety
inventories as a result of centralization.
18) Manufacturer-driven substitution increases overall profitability for the manufacturer by
allowing some aggregation of demand, which reduces the inventory requirements for the same
level of availability.
19) Postponement allows the supply chain to delay product differentiation, which results in
disaggregating most of the inventories in the supply chain.
20) When using a continuous review policy, a manager has to account for the uncertainty of
demand during the lead time and the review interval.
21) When using a continuous review policy, the only thing a manager has to account for is the
uncertainty of demand during the lead time.
22) Under a periodic review policy, the OUL and the time are both fixed, but the replenishment
lot size is variable.
23) For a small retail enterprise, a continuous review policy is easier to implement that a periodic
review policy.
24) Periodic replenishment policies require more safety inventory than continuous review
policies.
25) Echelon inventory at the retailer is just the inventory that is physically present at the retailer.
1) Inventory carried for the purpose of satisfying demand that exceeds the amount forecasted for
a given period is
A) cycle inventory.
B) demand inventory.
C) safety inventory.
D) security inventory.
2) Safety inventory is carried because
A) demand forecasts are accurate.
B) demand forecasts are uncertain.
C) adequate supplies are available.
D) excess product was manufactured.
3) The trade-off that a supply chain manager must consider when planning safety inventory is
A) increasing product availability versus increasing inventory holding costs.
B) decreasing product availability versus decreasing inventory holding costs.
C) increasing product availability versus raising the level of safety inventory.
D) decreasing product availability versus decreasing the level of safety inventory.
4) The issue of product availability and the level of safety inventory is particularly significant in
industries where
A) product life cycles are short and demand is stable.
B) product life cycles are short and demand is very volatile.
C) product life cycles are long and demand is stable.
D) product life cycles are long and demand is very volatile.
5) The ability to provide a high level of product availability to customers while carrying very low
levels of safety inventory in its supply chain has been a key to success at which company?
A) Home Depot
B) Michael Kors
C) Nordstrom
D) Sears
6) The fraction of product demand that is satisfied from product in inventory is the
A) customer fill rate.
B) product fill rate.
C) order fill rate.
D) cycle service level (CSL).
7) The fraction of replenishment cycles that end with all the customer demand being met is the
A) customer fill rate.
B) product fill rate.
C) order fill rate.
D) cycle service level (CSL).
8) The distinction between product fill rate and order fill rate is
A) not significant in a single product situation.
B) significant in a single product situation.
C) not significant when a firm is selling multiple products.
D) order fill rates tend to be higher than product fill rates.
9) A company that tracks inventory and places an order for a lot size Q when the inventory
declines to the reorder point (ROP) is using
A) continuous review.
B) daily review.
C) occasional review.
D) periodic review.
10) A company that checks inventory status at regular periodic intervals and places an order to
raise the inventory level to a specified threshold is using
A) continuous review.
B) daily review.
C) occasional review.
D) periodic review.
11) Lead time is the gap between
A) when an order is placed and when it is received.
B) when an order is received and when it is put away.
C) when an order is received and when it is used.
D) when an order is acknowledged and when it is received.
12) The coefficient of variation measures
A) the accuracy of the demand forecast.
B) the size of the uncertainty relative to demand.
C) the relevance of cycle inventory to demand.
D) the relative certainty of the forecast.
13) As the safety inventory is increased,
A) fill rate increases and cycle service level decreases.
B) fill rate decreases and cycle service level increases.
C) both fill rate and cycle service level increase.
D) both fill rate and cycle service level decrease.
14) For the same safety inventory, an increase in lot size
A) decreases the fill rate but not the cycle service level.
B) increases the fill rate but not the cycle service level.
C) decreases both the fill rate and the cycle service level.
D) increases both the fill rate and the cycle service level.
15) The required safety inventory
A) grows rapidly with a decrease in the desired product availability.
B) grows rapidly with an increase in the desired product availability.
C) decreases with an increase in the desired product availability.
D) remains stable with an increase in the desired product availability.
16) The required safety inventory
A) increases with an increase in the lead time and the standard deviation of periodic demand.
B) decreases with an increase in the lead time and the standard deviation of periodic demand.
C) remains stable with an increase in the lead time and the standard deviation of periodic
demand.
D) increases with a decrease in the lead time and the standard deviation of periodic demand.
17) What is the descriptive term for demand that occurs not in a steady stream of single units but
in periodic large lots?
A) Batch
B) Bulky
C) Lumpy
D) Polled
18) What is an explanation offered for why firms have not historically tracked stockouts very
well?
A) There is no agreed upon definition of stockouts.
B) There is no way to track stockouts.
C) Stockouts occur after the fact.
D) Stockouts are difficult to track.
19) A goal of any supply chain manager is to
A) increase the level of safety inventory required in a way that does not adversely affect product
availability.
B) increase the level of safety inventory required regardless of the effect on product availability.
C) reduce the level of safety inventory required regardless of the effect on product availability.
D) reduce the level of safety inventory required in a way that does not adversely affect product
availability.
20) As the uncertainty of supply or demand ________, the required level of safety inventories
________.
A) grows; increases
B) increases; decreases
C) decreases; grows
D) decreases; increases
21) The ________ is the average units of demand that are not satisfied from inventory in stock
per replenishment cycle.
A) ROP
B) ESC
C) EOQ
D) CSL
22) Both ________ and ________ increase as the safety inventory is increased.
A) fill rate; cycle service level
B) lead time; cycle service level
C) fill rate; lead time
D) reorder point; lead time
23) What is the standard deviation of demand during their lead time?
A) 45 phones
B) 64 phones
C) 90 phones
D) 109 phones
24) Suppose Mr. Barksdale sets his reorder point at 1100 phones. What is his average cell phone
inventory?
A) 87.5 phones
B) 105 phones
C) 162.5 phones
D) 257.5 phones
25) What is the average flow time of a phone if the reorder point used by Mr. Barksdale is 2000
phones?
A) 1.74 weeks
B) 1.87 weeks
C) 2.00 weeks
D) 2.13 weeks
26) What is the standard deviation of demand during lead time?
A) 251 phones
B) 2187 phones
C) 4500 phones
D) 4751 phones
27) What is the expected shortage per cycle under this policy?
A) 1 phone
B) 2.2 phones
C) 4.5 phones
D) 9.8 phones
28) What is the fill rate under this policy?
A) 0.9398
B) 0.9833
C) 0.9921
D) 0.9938
29) What safety stock should be held to put the expected shortage per cycle at 5 phones?
A) 418 phones
B) 433 phones
C) 462 phones
D) 487 phones
30) What safety stock should be held to put the fill rate at 0.99?
A) 251 phones
B) 145 phones
C) 454 phones
D) 100 phones
Scenario 12.3 — The Cat Café
Daily demand for cat litter at the Cat Café in Jones is 1500 ounces with a standard deviation of
300 ounces. The proprietor orders the best cat litter money can buy online, and the average
shipping time is 5 days. Of course, if the order is placed at the end of the week, then it may take
a while longer to receive the shipment, so the standard deviation of lead time is 2 days. The state
health department keeps a close eye on the condition of the Cat Café; a cat-loving inspector visits
at least twice a week, ostensibly to inspect, but mostly to pet his favorite Scottish Fold cat named
Groundskeeper Willie.
31) Suppose the café wishes to erase any hint of impropriety and wants to peg their service level
at 99.5%. What is the level of safety inventory they should carry?
A) 7500 ounces
B) 3074 ounces
C) 19350 ounces
D) 7918 ounces
32) Suppose the café wishes to erase any hint of impropriety and wants to peg their service level
at 99%. How many days of safety inventory they should carry?
A) 4.77 days
B) 5.12 days
C) 5.33 days
D) 5.67 days
33) Suppose the café wishes to carry 8 days of demand as their safety inventory. What service
level would they achieve?
A) 93.9%
B) 100%
C) 95.2%
D) 95.7%