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39) A(n) ________ is a system that allows employees to place orders when inventory visibly reaches a
certain marker.
40) A(n) ________ system is a visual system in which an item’s inventory is stored at two different
locations.
41) When considering reorder points and inventory position, if an item has an inventory position of 200
units, an order will be placed only if the reorder point is ________.
42) Apply your understanding of forecasting to the idea of developing a reorder point for uncertain
demand. What could be done to make a reorder point more accurate?
Answer: The reorder point is determined by the average demand during lead time plus the amount of
safety stock needed. Safety stock is a function of the service level and the variance in both the demand
43) Compare and contrast the Q and P systems of inventory control.
Answer: The primary advantages of the P system are: the convenience of administration of the system
44) What is a base-stock system?
45) What is a two-bin system and how does it work?
46) Jimmy‘s Egg is a specialty restaurant featuring 47 different kinds of omelettes in three different sizes.
They use 60 dozen cases of eggs a day that they order from an egg factory with a lead time of five days.
One fine day they stock their chiller and note that there are only 25 dozen cases of eggs remaining. They
have a backorder of 15 cases and an open order of 200 cases. What is their inventory position? Should
they place an order?
47) A store has collected the following information on one of its products:
Demand = 4,500 units/year
Standard deviation of weekly demand = 12 units
Ordering costs = $40/order
Holding costs = $3/unit/year
Cycle-service level = 90% (z for 90% = 1.28)
Lead-time = 2 weeks
Number of weeks per year = 52 weeks
a. If a firm uses the continuous review system to control the inventory, what would be the order quantity
and reorder point?
b. The firm decided to change to the periodic review system to control the item‘s inventory. For the most
recent review, an inventory clerk checked the inventory of this item and found 300 units. There were no
scheduled receipts or backorders at the time. How many units should be ordered? (Hint: Use the EOQ
model to derive P, the time between reviews.)
48) A store has collected the following information on one of its products:
Demand = 10,000 units/year
Standard deviation of weekly demand = 25 units
Ordering costs = $30/order
Holding costs = $4/unit/year
Cycle-service level = 95% (z for 95% = 1.65)
Lead-time = 2 weeks
Number of weeks per year = 50 weeks
a. If a firm uses the continuous review system to control the inventory, what would be the order quantity
and reorder point?
b. The firm decided to change to the periodic review system to control the item‘s inventory. For the most
recent review, an inventory clerk checked the inventory of this item and found 200 units. There were no
scheduled receipts or backorders at the time. How many units should be ordered? (Hint: Use the EOQ
model to derive P, the time between reviews.)
49) A store has collected the following information on one of its products:
Demand = 4,000 units/year
Ordering costs = $15/order
Holding costs = $2/unit/year
Lead-time = 5 days weeks
Number of weeks per year = 50 weeks
If a firm uses the continuous review system to control the inventory, what would be the order quantity?
50) The Hastings Company is a nation-wide wholesaler for small electronic devices. One of its most
popular items is a new GPS unit called the WAMI-1,000. Hastings has gathered the following
information, and has asked you to develop a continuous review inventory control system for this item:
Order quantity for each order placed with manufacturer = 10,000 units
Average demand = 1,000 units/week
Standard deviation of weekly demand = 200 units
Average lead time = 5 weeks
Standard deviation of lead time: 1.5 weeks
Cycle-service level = 90% (z for 90% = 1.28)
a. What is the standard deviation of demand during lead time?
b. What is the safety stock level that should be carried for the WAMI-1,000?
c. What is the reorder point for the WAMI-1,000?
d. Summarize the actions Hastings should take using your new inventory system.
e. If Hastings decides to increase its cycle-service level from 90% to 95% (z for 95% = 1.65), how does this
change the actions that should be taken?
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51) The medical staff on Shudder Island uses an average of 60 vials of thorazine every day. This demand
is normally distributed with a standard deviation of 15 vials. Since this is an important item, they have
decided on a 98% service level. Ferries run infrequently, so the lead time for delivery is 12 days on
average with a standard deviation of 2 days. Lead time is also normally distributed.
a. What is the expected demand during lead time?
b. What is the standard deviation of demand during lead time?
c. What is the average safety stock?
d. What is the reorder point?
e. If the company desired to lower the reorder point, which of these initiatives would lower it by the
greatest amount – reducing the lead time by 10%, reducing the standard deviation of lead time by 10%, or
reducing the service level by 10%?
Answer:
a. Expected demand during lead time
= 60 × 12 = 720
52) The Hastings Company is a nation-wide wholesaler for small electronic devices. One of its most
popular items is a new GPS unit called the WAMI-1,000. Hastings has gathered the following
information, and has asked you to develop a continuous review inventory control system for this item:
Order quantity for each order placed with manufacturer = 50,000 units
Average demand = 5,000 units/week
Standard deviation of weekly demand = 1,000 units
Average lead time = 4 weeks
Standard deviation of lead time: 1 week
Cycle-service level = 90% (z for 90% = 1.28)
a. What is the standard deviation of demand during lead time?
b. What is the safety stock level that should be carried for the WAMI-1,000?
c. What is the reorder point for the WAMI-1,000?
d. Summarize the actions Hastings should take using your new inventory system.
e. If Hastings decides to increase its cycle-service level to from 90% to 99% (z for 99% = 2.33), how does
this change the actions that should be taken?
9.7 Periodic Review System
1) A periodic review system is a system in which an item’s inventory position is reviewed periodically
rather than continuously.
2) A mom and pop gas station near a remote lake popular with anglers is more likely to use a periodic
review system than a chain of department stores.
3) An inventory system answers two important questions: when to order and how much to order. Which
of the following statements correctly explains how a Q system (continuous review system) or a P system
(periodic review system) answers these questions?
A) Under a Q system, a fixed quantity is ordered every P time period.
B) Under a Q system, an order is placed to replenish the inventory position up to the target level T when
the inventory position reaches the reorder point R.
C) Under a P system, a fixed quantity Q is ordered when the inventory position reaches the reorder point
R.
D) Under a P system, an order is placed to replenish the inventory position up to the target level T every
P time periods.
4) Which one of the following statements is best?
A) A P system requires more safety stock than a Q system.
B) A P system lends itself more to quantity discounts than does a Q system.
C) A P system requires more administrative control and computer support than does a Q system.
D) In a periodic review system, the value of Q is kept the same from one cycle to another.
5) Which one of the following statements represents an advantage of the P system over the Q system?
A) Less safety stock is carried to achieve the same service level.
B) The replenishment intervals can be more easily individualized for items.
C) Orders can be more easily combined to the same supplier.
D) A P system is more suitable for quantity discounts and capacity limitations.
6) Which one of the following statements represents an advantage of a Q system over the P system?
A) A perpetual inventory system is not mandatory.
B) Orders for multiple items from the same supplier can be combined more easily.
C) Fixed replenishment intervals are possible, which can be, administratively, quite convenient.
D) The Q system is more suited for quantity discounts and physical limitations.
7) Which one of the following statements about inventory control systems is best?
A) A single-bin system is essentially a P system, with the target inventory and current inventory position
established visually.
B) A base-stock system minimizes ordering and setup costs by placing orders more infrequently.
C) The base-stock system is mostly used for inexpensive items because it maximizes cycle inventory costs.
D) Visual systems are intended for use with high-value items, such as jet engines, that don’t experience a
steady demand.