Operations Management: Processes and Supply Chains, 12e (Krajewski)
Chapter 9 Inventory Management
1) A quantity discount is attractive because there is a drop in the price per unit when the order is
sufficiently large.
2) Inventory management is the planning and controlling of inventories in order to meet the competitive
priorities of the organization.
3) When looking at inventory management, the term “lot size” refers to the physical dimensions of the
area where the inventory is stored.
4) When looking at inventory management, the term “lot size” refers to the quantity of an inventory item
management either buys from a supplier or manufactures using internal processes.
5) The primary reason for keeping inventories low is that inventory represents a temporary monetary
investment.
6) One component of the holding cost of inventory is interest.
7) One component of the ordering cost of inventory is shrinkage.
8) A stockout occurs when an item that is typically stocked is not available to satisfy a demand the
moment it occurs.
9) A backorder occurs when a customer order cannot be filled when it is placed, but is instead filled later.
10) Setup cost is independent of order size.
11) Reducing setup costs will increase the pressure to keep large inventories.
12) Increasing inventory levels can sometimes help a firm reduce both its inbound and outbound
transportation costs.
13) The term lot size signifies:
A) the total production of a single SKU for a one-year period.
B) the physical dimensions of the raw materials used to make a batch of one SKU.
C) the dimensions of the container used to ship an order to any location outside of company property.
D) the number of units of a single item that a company buys from a supplier.
14) Which of the following generates pressure to increase inventories?
A) inventory holding costs
B) ordering costs
C) storage and handling costs
D) taxes and insurance
15) Which of the following generates pressure to decrease inventories?
A) inventory shrinkage costs
B) backorders and stockouts
C) transportation costs
D) quantity discounts
16) Which of the following does not generate pressure to decrease inventories?
A) taxes and insurance
B) inventory holding costs
C) storage and handling costs
D) ordering costs
17) Which of the following does not generate pressure to increase inventories?
A) transportation costs
B) backorders and stockouts
C) inventory shrinkage costs
D) quantity discounts
18) ________ is the planning and controlling of inventories in order to meet the competitive priorities of
the organization.
19) The term ________ is used to refer to the quantity of inventory management either buys from a
supplier or manufactures using internal processes.
20) ________ is the opportunity cost of investing in an asset relative to the expected return on assets of
similar risk.
21) Inventory ________ cost is the variable cost of keeping items on hand, such as storage and handling,
taxes, insurance, and shrinkage.
22) ________ occurs when inventory is stolen by employees and customers or when the inventory cannot
be sold at full value owing to model changes or low demand.
23) A(n) ________ is an order that cannot be satisfied, resulting in the loss of a sale.
24) A(n) ________ occurs when a customer order cannot be filled as promised or demanded but is filled
later.
25) ________ is the cost of preparing a purchase order for a supplier or a production order for
manufacturing.
26) What are the components of holding cost?
27) Although lower inventories and a just-in-time approach receive considerable attention in the business
media, some organizations prefer high levels of inventory. Why would they want to hold a large
inventory?
Answer: In the retail sector, some firms target a high level of inventory due to customer service
considerations. If an item is in stock, then the customer can rely on finding it whenever they decide to
9.2 Types of Inventory
1) Dependent demand items are those items for which demand is influenced by market conditions and is
not related to inventory decisions for any other item held in stock.
2) An experienced operations manager can tell at a glance whether an item should be classified as safety
stock, anticipation inventory, or cycle stock.
3) Independent-demand items are those items for which demand is influenced by market conditions and
is not related to inventory decisions for any other items held in stock.
4) Inventories needed for the production of services and goods (inputs to a firm’s transformation
processes) are called:
A) quarantined materials.
B) work-in–process.
C) raw materials.
D) finished goods.
5) Items, such as components or assemblies, needed to manufacture a final product are called:
A) quarantined materials.
B) work-in-process.
C) raw materials.
D) finished goods.
6) Items sold to a firm’s customers are called:
A) quarantined materials.
B) work-in-process.
C) raw materials.
D) finished goods.
7) Which of these statements about pipeline inventory is best?
A) Shorter lead times create more pipeline inventory.
B) Changing an item‘s lot size does not directly affect the average level of the pipeline inventory.
C) Pipeline inventory exists to avoid customer service problems.
D) Pipeline inventory is used to even out volatile fluctuations in supply or demand.
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Scenario 9.1
Shipments of Product A from a distribution center to a retailer are made in lots of 350. The retailer’s
average demand for Product A is 75 units per week. The lead time from distributor to retailer is 3 weeks.
The retailer pays for the shipments when they leave the distributor. The distributor has agreed to reduce
the lead time to 2 weeks if the retailer will purchase quantities of 400 per shipment instead of 350 units
per shipment.
8) Refer to Scenario 9.1. With the change in purchased quantities, the average cycle inventory will:
A) decrease by 75 units.
B) increase by 50 units.
C) decrease by 25 units.
D) increase by 25 units.
9) Refer to Scenario 9.1. With the change in lead time, the pipeline inventory will:
A) decrease by 75 units.
B) increase by 50 units.
C) decrease by 25 units.
D) increase by 25 units.
10) Refer to Scenario 9.1. The net impact on the retailer will be:
A) no net change in average cycle and pipeline inventories.
B) a net average increase in cycle and pipeline inventories of 50 units.
C) a net average decrease in cycle and pipeline inventories of 75 units.
D) a net average decrease in cycle and pipeline inventories of 50 units.
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Scenario 9.2
Shipments of Product X from a plant to a wholesaler are made in lots of 600. The wholesaler’s average
demand for X is 100 units per week. The lead time from the plant to the wholesaler is 4 weeks. The
wholesaler pays for the shipments when they leave the plant.
11) Refer to Scenario 9.2. What is the total of the wholesaler’s current cycle plus pipeline inventories?
A) 300 units
B) 100 units
C) 700 units
D) 400 units
12) Refer to Scenario 9.2. If the plant reduces its lead time from 4 to 2 weeks and keeps its 600 unit lot size,
what is the wholesaler’s new total cycle plus pipeline inventories?
A) 300 units
B) 500 units
C) 700 units
D) 200 units
13) Refer to Scenario 9.2. If the plant reduces its shipment lot size from 600 to 400 units and keeps its 4
week lead time, what is the wholesaler’s new total cycle plus pipeline inventories?
A) 600 units
B) 300 units
C) 500 units
D) 400 units
14) Refer to Scenario 9.2. Which of the following situations results in the wholesaler’s total cycle plus
pipeline inventories amounting to 550 units?
A) The plant shipment lot size of 400 and plant–to-wholesaler lead time of 2 weeks
B) The plant shipment lot size of 500 and plant-to-wholesaler lead time of 3 weeks
C) The plant shipment lot size of 400 and plant–to-wholesaler lead time of 3 weeks
D) The plant shipment lot size of 600 and plant-to–wholesaler lead time of 4 weeks
15) Refer to Scenario 9.2. Which of the following situations results in the wholesaler’s total cycle plus
pipeline inventories amounting to 400 units?
A) The plant shipment lot size of 500 and plant–to-wholesaler lead time of 3 weeks
B) The plant shipment lot size of 400 and plant–to-wholesaler lead time of 3 weeks
C) The plant shipment lot size of 600 and plant–to-wholesaler lead time of 4 weeks
D) The plant shipment lot size of 400 and plant-to–wholesaler lead time of 2 weeks
16) ________ are inventories needed for the production of goods and services; they are considered to be
the inputs to the transformation process.
17) ________ consists of items such as components or assemblies needed for a final product in
manufacturing.
18) ________ inventory is the portion of total inventory that varies directly with lot size.
19) The ________ determines the frequency and quantity to order.
20) ________ inventory is the surplus inventory that a company holds to protect against uncertainties in
demand, lead-time, and supply.
21) As safety stock increases, the holding cost of that inventory item ________.
22) ________ inventory is the inventory moving from point to point in the materials flow system.
23) When considering dependent / independent demand, in the example of tires and automobiles, the
original equipment tires represent ________-demand items, while automobiles represent a(n) ________–
demand item.
24) What are the three types of inventory? For which inventory type is a stockout most critical?
25) What are the types of inventory from the perspective of how it is created? Where is each type most
likely to exist in the supply chain?
1) Repeatability is an undesirable feature of some orders because they must be repeated until the order is
filled correctly.
2) The primary lever to reduce anticipation inventory is to place orders closer to the time when they must
be received.
3) Which of the following is not a lever for reducing cycle inventories?
A) place purchased item orders at fixed intervals
B) reduce lot sizes for items moving in the supply chain
C) streamline methods for placing orders and making machine set ups
D) increase repeatability to eliminate the need for changeovers
4) The manager at Crystal Mountain Ski Resort lowers the price of lift tickets to $2 during July and
August, a traditionally slow period for skiing. This secondary lever impacts:
A) safety stock inventory.
B) cycle inventory.
C) pipeline inventory.
D) anticipation inventory.
5) Which of the following does not increase repeatability?
A) parts standardization
B) customization
C) group technology
D) flexible automation
6) One of the secondary levers for reducing pipeline inventory is to:
A) offer seasonal pricing plans.
B) increase capacity cushions.
C) accept only large orders.
D) select more responsive suppliers.
7) ________ are the basic tactics for reducing cycle, safety stock, anticipation, and pipeline inventories in
supply chains.
8) A ________ lever is one that must be activated if inventory is to be reduced.
9) ________-demand items are items for which demand is influenced by market conditions and is not
related to the inventory decisions for any other item held in stock.
10) What are the secondary levers for cycle inventory?
11) What are the secondary levers for safety stock inventory?
12) What are the secondary levers for pipeline inventory?
13) What are the key issues when implementing and operating an inventory control system?
1) A stock-keeping unit (SKU) is an individual item or product that has an identifying code and is held in
inventory somewhere along the supply chain.
2) A stock-keeping unit (SKU) is a specially designed container for holding a specific amount of an
inventory item somewhere along the supply chain.
3) ABC analysis is a process for categorizing SKUs according to dollar usage so that managers can focus
on items with the highest dollar value.
4) When using ABC analysis, class C SKUs should be reviewed frequently.
5) Cycle counting is an inventory-control method whereby storeroom personnel physically count a small
percent of the total number of items each day.
6) In the context of an ABC inventory classification, use Table 9.1 to ascertain the veracity of this
statement. Items in series U are the most C-like of all inventory SKUs.
7) What is generally true about class A SKUs in ABC analysis? They represent about:
A) 20 percent of all SKUs.
B) 30 percent of all SKUs.
C) 20 percent of the dollar usage.
D) 50 percent of the dollar usage.
8) What is generally true about class A SKUs in ABC analysis? They represent about:
A) 50 percent of all SKUs.
B) 80 percent of all SKUs.
C) 20 percent of the dollar usage.
D) 80 percent of the dollar usage.
Table 9.1
Inventory records show the following:
Series
Unit Cost
Count
Q
$1,751.34
6
R
$462.00
22
S
$88.44
63
T
$382.73
14
U
$96.42
24
V
$38.04
51
W
$34.23
17
9) Use Table 9.1 to identify the best statement.
A) Items in series V and Q fall in the same category of an ABC analysis.
B) Items in series W and S fall in the same category of an ABC analysis.
C) Items in series W and Q fall in the same category of an ABC analysis.
D) Items in series S and V should be in the Class B of an ABC analysis.
10) What is generally true about class B SKUs in ABC analysis? They represent about:
A) 20 percent of all SKUs and about 80 percent of the dollar usage.
B) 80 percent of all SKUs and about 20 percent of the dollar usage.
C) 30 percent of all SKUs and about 15 percent of the dollar usage.
D) 50 percent of all SKUs and about 95 percent of the dollar usage.
11) What is generally true about class C SKUs in ABC analysis? They represent about:
A) 20 percent of all SKUs.
B) 50 percent of all SKUs.
C) 15 percent of the dollar usage.
D) 50 percent of the dollar usage.
12) What is generally true about class C SKUs in ABC analysis? They represent about:
A) 20 percent of all SKUs.
B) 30 percent of all SKUs.
C) 5 percent of the dollar usage.
D) 50 percent of the dollar usage.
13) ABC analysis is closely related to:
A) three-bin analysis.
B) EOQ analysis.
C) repeatability analysis.
D) Pareto analysis.
14) In ABC analysis, class ________ SKUs represent the smallest number of SKUs but the greatest dollar
usage.
15) In an ABC analysis, class ________ SKUs, which typically make up about ________% of the SKUs,
account for about 80% of the dollar usage.
16) In an ABC analysis, class ________ SKUs, which typically make up about ________% of the SKUs,
account for only about 15% of the dollar usage.
17) In an ABC analysis, class ________ SKUs, which typically make up ________% of the SKUs, account
for only about 5% of the dollar usage.
18) Inventory manager George Costanza knows too well that shrinkage occurs so he goes to the stock
room every day to do a spot check of a few pre-selected items, physically counting them to verify that his
count agrees with the number indicated by their computerized inventory system. This method of
inventory control is known as ________.
19) What is ABC analysis and how does it work?
9.5 Economic Order Quantity
1) EOQ should be used if you use a make-to-order strategy and the customer specifies that the entire
order be delivered in one shipment.
2) EOQ should be used if you follow a make-to-stock strategy and the item has relatively stable demand.
3) The EOQ is the smallest lot size that a supplier will allow a customer to order.
4) As the annual demand increases, other factors remaining constant, the EOQ also increases.
5) Considering the EOQ model, smaller lots are justified when holding costs are decreased.
6) Considering the EOQ model, a reduction in ordering costs justifies reducing the lot size ordered.