Introduction to Operations & Supply Chain Management, 5e (Bozarth)
Chapter 11 Managing Inventory throughout the Supply Chain
11.1 The Role of Inventory
1) The inventory that companies hold to protect themselves against uncertainties in either demand or
replenishment time is called:
A) safety stock.
B) anticipation inventory.
C) hedge inventory.
D) smoothing inventory.
2) Individual links in the supply chain can stabilize their production at the most efficient level by using:
A) safety stock.
B) anticipation inventory.
C) linkage inventory
D) smoothing inventory.
3) Inventory that is “in the pipeline” moving from one link in the supply chain to another is:
A) anticipation inventory.
B) transportation inventory.
C) smoothing inventory.
D) hedge inventory.
4) The mismatch between the timing of customer demand and supply chain lead times is what drives the
need for:
A) safety stock.
B) anticipation inventory.
C) cycle stock.
D) hedge inventory.
5) Tata Motors assembles cars from their own parts and subassemblies and also controls the mining and
fabrication of the materials used to create those parts. When Anand ordered his luxury sedan with the
platinum dashboard he knew he wouldn’t be taking delivery of his dream car the next week. Rather, he
would be waiting a while thanks to:
A) a mismatch between supply chain lead time and customer demand.
B) a mismatch between overall demand levels and productive capacity.
C) a mismatch between demand and the most efficient production volume.
D) a mismatch between demand and the most efficient shipment volume.
6) Which of the following relationships illustrates the role of dependent demand inventory?
A) A business purchases a new car when the old one wears out.
B) A tire maker buys cleaning supplies.
C) An automaker purchases four tires for each car they produce.
D) A winemaker buys grapes from farmers in the Columbia Valley.
7) Cycle stock can occur at more than one point in a supply chain.
8) Retailers never need to hold dependent demand inventory items as hedge inventory.
9) Companies do not plan to use safety stock.
10) Gordon went to the grocery store and bought a bag of carrots. He needed only three for his cottage
pie recipe, but they came twelve to a bag so he diced three and tossed the rest in the crisper compartment
of his stainless steel refrigerator. As he screamed his insults at his children and sous chefs they reminded
themselves that he wasn’t upset with them, rather he was concerned about the high level of ________
stock he was holding.
11) Extra inventory that is held to protect against uncertainties in either demand or replenishment time is
called ________.
12) Inventory items with demand levels that are beyond an organization’s complete control are called
________.
13) Describe any four types of inventory and the drivers that spur their need.
14) Draw a graph that displays both cycle and safety stock for four inventory cycles. Label all elements of
the graph and explain the shape and magnitude of each curve.
15) Distinguish between independent demand and dependent demand inventory and provide an
example of each from the same company, same product line.
11.2 Periodic Review Systems
1) The beef jerky driver shows up every Monday to take orders from his convenience store customers.
One fine Monday morning he stops in the Quik-E Mart and notes that there are only three sticks on the
shelves. Consulting his route sheet, he discovers that the restocking level is 40. The order quantity is
therefore:
A) 3 sticks.
B) 37 sticks.
C) 40 sticks.
D) Cannot be determined with the information given.
2) A hospital’s biomedical repair shop uses a 4-week periodic system to maintain the inventory on the
blood pressure cuff repair parts. They use an average 40 adult arm cuffs with a standard deviation of 6
cuffs during their reorder leadtime. Cuffs aren’t the most critical item they carry, but the manager would
like to avoid the embarrassment of a stockout at least 95% of the time. What should their restocking level
be?
A) 40 cuffs
B) 46 cuffs
C) 50 cuffs
D) 52 cuffs
3) The order quantity in a periodic review system rises as the on-hand inventory level falls.
4) The restocking level increases as the service level falls.
5) In a periodic review system, each time inventory is replenished it is supplemented up to the ________.
6) A recently-divorced father checks the level of Boil and Serve macaroni and cheese in his pantry the last
day of every month. He uses an average of 20 boxes per month (his reorder lead time) with a standard
deviation of 5 boxes and wants to avoid the embarrassment and deprivation of a stockout 99% of the
time. Lead time is essentially zero since he can pick up a box on the way home from work each day. What
should his restocking level be?
11.3 Continuous Review Systems
1) Which of these conditions is NOT necessary for the continuous review system to be valid?
A) The item has a constant demand.
B) The item has a constant lead time.
C) The item has a constant price.
D) The item has a constant safety stock.
2) The cashier waved the can of golden hominy across the holographic bar code reader and it emitted a
piercing beep. At the same time the customer‘s bill was rising, the grocery store’s inventory was
automatically being reduced by 1 can of golden hominy down to 3 cans. This was the bare minimum
amount of hominy the store manager dared carry in inventory, so the computer system automatically
sent a message to the hominy man, who loaded a few cases onto his delivery truck for tomorrow
morning’s trip to replenish the store. This is a classic example of:
A) a periodic review system.
B) safety stock.
C) a continuous review system.
D) cycle stock.
3) If annual demand increases by 100%, the average inventory held in a system governed by the EOQ
model is:
A) increased 100%.
B) decreased by 100%.
C) decreased by 50%.
D) increased by 40%.
4) A law firm always orders 50 cases of paper from their office supply company. They incur an annual
holding cost of $15 per case and have an ordering cost of $25 each time they place an order. If their
annual demand is 480 cases, how much could they save annually by switching to their economic order
quantity?
A) $15
B) $25
C) $40
D) $80
5) The campus bookstore sells 4,000 sets of graduation regalia each year. Placing an order from their
supplier costs $25 regardless of order quantity, so they usually place a large order (a half year’s supply) at
a time. It costs $5 per year to hold a cap and gown in inventory, primarily insurance costs for the highly
flammable material. What is their optimal order quantity?
A) 150
B) 200
C) 1,000
D) 2,000
6) The campus bookstore sells 4,000 sets of graduation regalia each year. Placing an order from their
supplier costs $25 regardless of order quantity, so they usually place a large order (a half year’s supply) at
a time. It costs $5 per year to hold a cap and gown in inventory, primarily insurance costs for the highly
flammable material. What is the total cost if they order at their optimal order quantity?
A) $1,650
B) $1,500
C) $1,000
D) $2,000
7) The campus bookstore sells 4,000 sets of graduation regalia each year. Placing an order from their
supplier costs $25 regardless of order quantity, so they usually place a large order (a half year’s supply) at
a time. It costs $5 per year to hold a cap and gown in inventory, primarily insurance costs for the highly
flammable material. What is the difference in the total cost if they order at their optimal order quantity
compared to their current policy?
A) $4,550
B) $5,050
C) $3,550
D) $4,050
8) The campus bookstore sells 4,000 sets of graduation regalia each year. Placing an order from their
supplier costs $25 regardless of order quantity, so they usually place a large order (a half year’s supply) at
a time. It costs $5 per year to hold a cap and gown in inventory, primarily insurance costs for the highly
flammable material. What is the difference in their holding cost if they order at their optimal order
quantity compared to their current policy?
A) $4,500
B) $4,400
C) $4,200
D) $4,000
9) A manufacturer replenishes their packaging materials according to the economic order quantity model.
They use 25,000 cases of packaging materials per year and order 500 cases at a time. Their cost to carry a
case in inventory for a year is $12. How much does it cost them to place an order with their supplier?
A) $12
B) $60
C) $720
D) $5
10) Which of these conditions is likely to cause a decrease in the probability of a stockout?
A) higher lead time variance
B) lower lead time
C) higher demand level variance
D) lower service level
11) Safety stock increases when:
A) probability of a stockout increases.
B) average demand increases.
C) delivery speed increases.
D) demand fluctuations decrease.
12) Central Perk orders their organic coffee filters from a South American supplier that mails them as
inexpensively (hence, as slowly) as possible. Central Perk uses 80 filters a day with a standard deviation
of 5 days. It would be disastrous if they ran out of these filters, years ago customers caught them using
paper towels from the men’s room and business suffered. They have set their service level at 99% in
hopes of avoiding a similar situation. It takes a fortnight (14 days) to receive a shipment and the standard
deviation of the shipping time is two days. What is their reorder point?
A) 1120 filters
B) 1450 filters
C) 1495 filters
D) 1515 filters
13) Central Perk orders their organic coffee filters from a South American supplier that mails them as
inexpensively (hence, as slowly) as possible. Central Perk uses 80 filters a day with a standard deviation
of 15 days. It would be disastrous if they ran out of these filters, years ago customers caught them using
paper towels from the men’s room and business suffered. They have set their service level at 99.5% in
hopes of avoiding a similar situation. It takes a fortnight to receive a shipment and the standard deviation
of the shipping time is five days. What is their reorder point?
A) 1865 filters
B) 1962 filters
C) 2074 filters
D) 2158 filters
14) A university orders all office supplies, including red grading pens, out of a catalog from the same
supplier. Conservative estimates of the demand for these red pens are 12,000 pens per year. There is a $25
charge for placing an order and the university has a $10 annual cost for holding these pens. Prices for the
pens are based on the quantity purchased, so if less than 100 are ordered, the unit price is $2.50, if 100 to
299 are ordered, the unit price is $2.40, if 300 to 499 are ordered, the unit price is $2.30, and if 500 or more
are ordered, the unit price is $2.20. What order quantity will result in the lowest total annual cost to the
university?
A) 100
B) 245
C) 300
D) 500
15) A haberdashery orders ties from manufacturers overseas to satisfy their demand rate of 5,000 units
per year that has been stable for the past decade. Placing an order costs 15 euro and holding each cravat
in inventory for a year costs 2 euro. The manufacturer offers price breaks for large orders: ordering
between 1 and 99 cravats earns the haberdashery a price of 3.5 euro, but ordering 100 to 999 carries a 3.4
euro price. An order of 1000 cravats or more drops the price to 3.3 euro. What’s the optimal order
quantity for the haberdashery?
A) 99
B) 274
C) 382
D) 999
16) Willard offers infestation services for friendly tenants according to the following price schedule: for
up to 99 mice, the price is $1.05 each, for 100 up to 499 mice the price is $1.00 each, and for any order
exceeding 500 mice, the cost is $0.95. He has a flat $250 delivery fee regardless of order quantity. Crystal
will need 10,000 mice this year and face a $1 holding cost. What is her optimal order quantity?
A) 99
B) 100
C) 500
D) 2236
17) Willard offers infestation services for friendly tenants according to the following price schedule: for
up to 99 mice, the price is $1.05 each, for 100 up to 499 mice the price is $1.00 each, and for any order
exceeding 500 mice, the cost is $0.95. He has a flat $1 delivery fee regardless of order quantity. Crystal
will need 10,000 mice this year and face a $1 holding cost. What is her optimal order quantity?
A) 99
B) 100
C) 500
D) 2236
18) A company that orders at their economic order quantity should experience a decline in the number of
orders per year as their order quantity increases if their annual demand stays constant.
19) In order for the continuous review system to work, demand must be known and constant.
20) Decreases in the standard deviation of demand reduce the amount of safety stock that should be held.
21) In order to find the lowest cost ordering policy in a quantity discount model, you must compare the
holding cost, ordering cost, and the price per unit for various order quantities.
22) In order to find the lowest cost ordering policy in a quantity discount model, you always compute the
EOQ and confirm whether this amount can be purchased for the lowest cost.
23) In a(n) ________ review system, orders are placed at a constant time interval, but in a(n) ________
review system, a constant order is placed at a variable time level.
24) A replenishment order for inventory is made when a reorder point is reached in a(n) ________
inventory system.
25) A company using the basic EOQ model has annual ________ costs equal to annual ________ costs.
26) Cavalier Enterprises elects to hold no safety stock. Their service level is therefore ________.
27) Derive the economic order quantity model, beginning with a definition of terms and graph of cost
curves.