Test-Bank-for-Heizer-Operations-Management-9e

69.The proper quantity of safety stock is typically determined by

a.minimizing an expected stockout cost

b.carrying sufficient safety stock so as to eliminate all stockouts

c.meeting 95% of all demands

d.setting the level of safety stock so that a given stockout risk is not exceeded

e.minimizing total costs

d (Probabilistic models with constant lead time, moderate)

70.If demand is not uniform and constant, then stockout risks can be controlled by

a.increasing the EOQ

b.placing an extra order

c.raising the selling price to reduce demand

d.adding safety stock

e.reducing the reorder point

d (Probabilistic models with constant lead time, moderate)

71.If daily demand is normally distributed with a mean of 15 and standard deviation of 5, and lead time is constant at 4 days, 90 percent service level will require safety stock of approximately

a.7 units

b.10 units

c.13 units

d.16 units

e.26 units

c (Probabilistic models and safety stock, moderate) {AACSB: Analytic Skills}

72.If daily demand is constant at 10 units per day, and lead time averages 12 days with a standard deviation of 3 days, 95 percent service requires a safety stock of approximately

a.28 units

b.30 units

c.49 units

d.59 units

e.114 units

c (Probabilistic models and safety stock, moderate) {AACSB: Analytic Skills}

73.In a safety stock problem where both demand and lead time are variable, demand averages 150 units per day with a daily standard deviation of 16, and lead time averages 5 days with a standard deviation of 1 day. The standard deviation of demand during lead time is approximately

a.15 units

b.100 units

c.154 units

d.500 units

e.13,125 units

c (Probabilistic models and safety stock, moderate) {AACSB: Analytic Skills}

321

74.The fixed-period inventory model requires more safety stock than the fixed-quantity models because

a.a stockout can occur during the review period as well as during the lead time

b.this model is used for products that have large standard deviations of demand

c.this model is used for products that require very high service levels

d.replenishment is not instantaneous

e.setup costs and holding costs are large

a (Probabilistic models and safety stock, moderate)

75.A disadvantage of the fixed-period inventory system is that

a.it involves higher ordering costs than the fixed quantity inventory system

b.additional inventory records are required

c.the average inventory level is decreased

d.since there is no count of inventory during the review period, a stockout is possible

e.orders usually are for larger quantities

d(Fixed-period systems, moderate)

76.An advantage of the fixed-period inventory system is that

a.the supplier will be more cooperative

b.there is no physical count of inventory items when an item is withdrawn

c.no inventory records are required

d.orders usually are for smaller order quantities

e.the average inventory level is reduced

b (Fixed-period systems, moderate)

FILL-IN-THE BLANK

77.Amazon's original concept of operating without inventory has given way to a model in which Amazon is a world-class leader in _______________.

warehouse management and automation (Global company profile, easy)

78.Inventory that separates various parts of the production process performs a ___________ function. decoupling (Functions of inventory, easy)

79._____________ inventory is material that is usually purchased, but has yet to enter the manufacturing process.

Raw material (Functions of inventory, easy)

80.______________ is a method for dividing on-hand inventory into three classifications based on annual dollar volume.

ABC analysis (Inventory management, easy)

81._____________ is a continuing reconciliation of inventory with inventory records.

Cycle counting (Inventory management, easy)

82._____________ is the time between placement and receipt of an order.

Lead time (Inventory models for independent demand, easy)

322

83.In an economic order quantity problem, the total annual cost curve is at its _____________ where holding costs equal setup costs.

minimum (Inventory models for independent demand, easy)

84.For a given level of demand, annual holding cost is larger as the order quantity is _____________. larger (Inventory models for independent demand, easy)

85.A(n) __________ model gives satisfactory answers even with substantial variations in its parameters.

robust (Inventory management, moderate)

86.In the production order quantity model, the fraction of inventory that is used immediately and not stored is represented by the ratio of_____________.

demand rate to production rate (Inventory models for independent demand, easy)

87._____________ is extra stock that is carried to serve as a buffer.

Safety stock (Inventory management, easy)

88.In a quantity discount problem, if the savings in product cost is smaller than the increase in the sum of setup cost and holding cost, the discount should be _____________.

rejected or refused (Inventory models for independent demand, easy)

89.____________ is the complement of the probability of a stockout.

Service level (Probabilistic models with constant lead time, moderate)

90.If a safety stock problem includes parameters for average daily demand, standard deviation of demand, and lead time, then _____________ is variable and ___________ is constant. demand, lead time (Probabilistic models and safety stock, easy)

91.When demand is constant and lead time is variable, safety stock computation requires three inputs: the value of z, _____________, and the standard deviation of lead time.

daily demand (Probabilistic models and safety stock, moderate)

92.A(n) ____________ system triggers inventory ordering on a uniform time frequency. fixed-period (Fixed-period systems, moderate)

SHORT ANSWERS

93.Explain what "decoupling" means in the context of inventory management.

Decoupling means to separate various parts of the production process. Each of the parts can then function at its own best pace. (Functions of inventory, moderate)

94.What are the main reasons that an organization has inventory?

Reasons to carry inventory include decoupling or separating parts of the production process, decoupling the firm from fluctuations in demand and providing a stock of goods that will provide a selection for customers, taking advantage of quantity discounts, and providing a hedge against inflation. (Introduction, moderate)

323

95.List the four types of inventory.

The four types of inventory are raw material, work-in-process, maintenance/repair/operating supply (MRO), and finished goods. (Functions of inventory, easy)

96.What is MRO an acronym for? What is the function of MRO inventories?

MRO inventories are devoted to maintenance/repair/operating supplies. They exist because the need and timing for maintenance and repair of some equipment are unknown. (Functions of inventory, easy)

97.Describe ABC inventory analysis in one sentence. What are some policies that may be based upon the results of an ABC analysis?

ABC inventory analysis is a method for dividing on-hand inventory into three classifications based on annual dollar volume. Some policies include: purchasing resources expended on supplier development should be higher for individual A items than for C items; A items should have tighter physical inventory control, and forecasting A items may warrant more care. (Inventory management, moderate)

98.What is cycle counting?

Cycle counting is an audit to reconcile inventory with inventory records. (Inventory management, easy)

99.Define shrinkage. List three or more examples of shrinkage.

Shrinkage is retail inventory that is unaccounted for between receipt and sale. Examples will vary, but may include inventory damaged prior to sale, stolen prior to sale, and inventory "lost" due to sloppy paperwork. (Inventory management, easy)

100.What are the techniques to control service inventories?

Techniques to control service inventories include good personnel selection, training, and discipline; tight control of incoming shipments; and effective control of all goods leaving the facility. (Inventory management, moderate)

101.When is a good time for cycle-counting personnel to audit a particular item?

In deciding when to verify inventory through cycle counting, the important considerations are (a) the verification takes place according to a formal schedule, and (b) inventory records of particularly important items are verified more often, those of less important items, less often. As the text suggests, the schedule can be weekly, monthly, or any other criteria, such as when an item goes to zero or when the item is to be ordered. (Inventory management, moderate)

102.Several inventory models assume "independent demand." Explain what that term means and why the assumption is important.

Independent demand means that demand for one particular item does not affect, and is not affected by, demand for a different item. When item demands are dependent, such as when wheels are demanded for assembly onto lawnmowers, independent ordering with EOQ may not be appropriate.

103.List the typical components that constitute inventory holding or carrying costs.

Typical components of inventory holding or carrying costs include housing costs, material handling costs, labor cost from extra handling, investment costs, pilferage, scrap, and obsolescence. (Inventory models, moderate)

324

104.Describe the costs associated with ordering and maintaining inventory.

Costs that are associated with ordering and maintaining inventory include initial purchase cost of the item, holding cost (insurance, space, heat, light, security, warehouse personnel, etc.), obsolescence or deterioration cost (particularly important in perishable goods or in a product that is undergoing rapid technological evolution), and ordering or setup cost (cost of forms, clerical processing, etc., or cost of machine setup). (Inventory models, moderate)

105.List the typical cost components that constitute ordering costs in inventory systems.

Typical components of ordering costs include cost of supplies, forms, order processing, clerical support, and so forth. (Inventory models, moderate)

106.Compare the assumptions of the production order quantity model to those of the basic EOQ model.

All are the same, except the assumption that receipt of inventory is instantaneous, which holds for EOQ, but not POQ. (Inventory models for independent demand, moderate)

107.In some inventory models, the optimal behavior occurs where ordering costs and carrying costs are equal to one another. Provide an example of a model where this "rule" does not hold; explain how the model's results are optimal anyway.

This rule will not hold in all instances of quantity discount models. In order to take advantage of a discount, it may be cheaper to order a quantity that is not an EOQ. The goal in quantity discount models is to minimize the sum of ordering, carrying, and purchase costs. (Inventory models for independent demand, moderate)

108.In the basic economic order quantity model and in the production order quantity model, optimal behavior occurs where annual setup costs equal annual holding costs. Is this a coincidence, or a fundamental element of these models? Answer in a well-constructed paragraph.

This equality is not a coincidence. It follows from the objective of both models, which is the minimization of total inventory costs for that product. In both of these models, total cost

minimization occurs where the setup cost and holding cost elements intersect. The formulas for Q* and Q*P follow from that point of equality. (Inventory models for independent demand, moderate)

109.What are the assumptions of the EOQ model?

The more important assumptions of the basic EOQ model are demand is known and constant over time, the lead time, that is, the time between the placement of the order and the receipt of the goods, is known and constant, the receipt of the inventory is instantaneous; i.e., the goods arrive in a single batch, at one instant in time, quantity discounts are not possible, the only variable costs are the cost of setting up or placing an order and the cost of holding or storing inventory over time, and if orders are placed at the right time, stockouts or shortages can be completely avoided. (Inventory models for independent demand, moderate)

110.Assume two inventory problems with identical demand, holding cost, and setup cost. In one, goods arrive instantly, but in the other goods arrive at a measurable rate. Which of these problems will have the larger optimal order quantity? Why?

The problem with instantaneous delivery is an EOQ problem, and its optimal order quantity is Q*. The problem with noninstantaneous delivery is a POQ problem, with optimal order quantity Q*P. The POQ problem will yield a higher order quantity than the basic model, other things equal, because the maximum inventory level (and thus the effective carrying charge) is less. Maximum inventory is less because some items are used immediately and never enter inventory. (Inventory models for independent demand, moderate)

325

111.How sensitive is the EOQ to variations in demand or costs?

The EOQ is relatively insensitive to small changes in demand or setup or carrying costs because the cost curve is relatively flat around the EOQ. For example, if demand increases by 10%, EOQ will increase by approximately 5%. (Inventory models for independent demand, moderate)

112.What is a reorder point?

A reorder point is the inventory level (point) at which action is taken (an order placed) to replenish the stocked item. (Inventory models for independent demand, easy)

113.Define service level.

The service level is the percentage of demand met by available stock; it is the complement of the probability of a stockout. (Probabilistic models and safety stock, moderate)

114.What happens to the cost of the inventory policy when the service level increases?

The cost of the inventory policy increases dramatically with increases in service level. (Probabilistic models and safety stock, moderate)

115.How would a firm go about determining service level?

Service level is a difficult parameter to determine. Basically, the firm uses its subjective judgment to balance the cost of additional inventory against the cost of lost goodwill due to stockouts or shortages. (Probabilistic models and safety stock, moderate)

116.What is a fixed-period system?

It is a system in which inventory orders are made at regular time intervals. (Fixed-period systems, easy)

117.Describe the difference between a fixed-quantity and a fixed-period inventory system?

In a fixed-quantity inventory system, when the quantity on hand reaches the reorder point, an order is placed for the specified quantity. In a fixed-period inventory system, an order is placed at the end of the period. The quantity ordered is that needed to bring on-hand inventory up to a specified level. (Fixed-period systems, moderate)

PROBLEMS

118.Lead time for one of Montegut Manufacturing's fastest moving products is 4 days. Demand during this period averages 100 units per day. What would be an appropriate re-order point?

Re-order point = demand during lead time = 100 units/day * 4 days = 400 units. (Inventory models for independent demand, easy) {AACSB: Analytic Skills}

326

119.Montegut Manufacturing produces a product for which the annual demand is 10,000 units. Production averages 100 per day, while demand is 40 per day. Holding costs are $2.00 per unit per year; set-up costs $200.00. If they wish to produce this product in economic batches, what size batch should be used? What is the maximum inventory level? How many order cycles are there per year? How much does management of this good in inventory cost the firm each year?

This problem requires economic order quantity, noninstantaneous delivery.

Annual inventory management costs total 5.48 $200 +(1095.45/ 2) $2 = $2,190.89 or

$2,191.

(Inventory models for independent demand, moderate) {AACSB: Analytic Skills}

120.Your company has compiled the following data on the small set of products that comprise the specialty repair parts division. Perform ABC analysis on the data. Which products do you suggest the firm keep the tightest control over? Explain.

R11 and U44 represent over 80% of the firm's volume in this area. R11 is classified A, U44 is classified B, and all others are C. The tightest controls go to R11, then U44 because of their high percentage of sales volume.

(Inventory management, moderate) {AACSB: Analytic Skills}

327

121. Perform an ABC analysis on the following set of products.

The table below details the contribution of each of the eight products. Item G473 is clearly an A item, and items A211, B390, and H921 are all C items. Other classifications are somewhat subjective, but one choice is to label E707 and D100 as A items, and F660 and C003 as B items.

(Inventory management, moderate) {AACSB: Analytic Skills}

122.Thomas' Bike Shop stocks a high volume item that has a normally distributed demand during the reorder period. The average daily demand is 70 units, the lead time is 4 days, and the standard deviation of demand during the reorder period is 15.

a.How much safety stock provides a 95% service level to Thomas?

b.What should the reorder point be?

a.SS = 1.65 x 15 = 24.75 units or 25 units

b.ROP = (70* 4) + 25 = 305 units.

(Probabilistic models and safety stock, moderate) {AACSB: Analytic Skills}

328

123.The annual demand, ordering cost, and the inventory carrying cost rate for a certain item are D = 600 units, S = $20/order and I = 30% of item price. Price is established by the following quantity discount schedule. What should the order quantity be in order to minimize the total annual cost?

The firm should order 250 units at a time, paying $4.10 per unit. Holding costs are much larger than ordering costs, but this is offset by the unit price reduction. The annual total cost is $2,661.75. The EOQ value for the $4.50 price has an annual cost of $2,880.

(Inventory models for independent demand, moderate) {AACSB: Analytic Skills}

124.The new office supply discounter, Paper Clips, Etc. (PCE), sells a certain type of ergonomically correct office chair which costs $300. The annual holding cost rate is 40%, annual demand is 900, and the order cost is $20 per order. The lead time is 4 days. Because demand is variable (standard deviation of daily demand is 2.4 chairs), PCE has decided to establish a customer service level of 90%. The store is open 300 days per year.

a.What is the optimal order quantity?

b.What is the safety stock?

c.What is the reorder point?

(b)Safety Stock is SS = 1.29 2.4 4 =6.19 or 6 chairs.

(c)ROP= lead time demand + safety stock = (3 chairs/day * 4) + 6.19 = 18 chairs. (Inventory models for independent demand, and Probabilistic models and safety stock,

moderate) {AACSB: Analytic Skills}

329

125.Central University uses $123,000 of a particular toner cartridge for laser printers in the student computer labs each year. The purchasing director of the university estimates the ordering cost at $45 and thinks that the university can hold this type of inventory at an annual storage cost of 22% of the purchase price. How many months' supply should the purchasing director order at one time to minimize the total annual cost of purchasing and carrying?

First, calculate the EOQ from the data provided. In this problem, the "units" are dollars, and the "price" of each is 1.

One month's usage is 123000/12 = $10,250. EOQ = 7094. Month’s usage = 7094/10250 = 0.69, or about three week’s usage. (This is supported by the order frequency of 17 per year). (Inventory models for independent demand, difficult) {AACSB: Analytic Skills}

126.The soft goods department of a large department store sells 175 units per month of a certain large bath towel. The unit cost of a towel to the store is $2.50 and the cost of placing an order has been estimated to be $12.00. The store uses an inventory carrying charge of 27% per year. Determine the optimal order quantity, order frequency, and the annual cost of inventory management. If, through automation of the purchasing process, the ordering cost can be cut to $4.00, what will be the new economic order quantity, order frequency, and annual inventory management cost? Explain these results.

Annual demand is 175 x 12 = 2100. At S=$12, the EOQ is 273 units, and there are about 8 orders per year. Annual costs of inventory management are $184.44. These results are detailed in the calculations below.

At S=$4, EOQ falls to 158, and order frequency rises to 13. Annual inventory management costs fall to $106.48. The lower order cost encourages smaller, more frequent orders.

(Inventory models for independent demand, difficult) {AACSB: Analytic Skills}

127.A firm that makes electronic circuits has been ordering a certain raw material 250 ounces at a time. The firm estimates that carrying cost is 30% per year, and that ordering cost is about $20 per order. The current price of the ingredient is $200 per ounce. The assumptions of the basic EOQ model are thought to apply. For what value of annual demand is their action optimal?

This problem reverses the unknown of a standard EOQ problem.

(Inventory models for independent demand, difficult) {AACSB: Analytic Skills}

330