ch.13 OP MGMT Essay

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One important use of inventories in manufacturing is to decouple operations through the use of work in process inventories.
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TRUE Decoupling operations is an important use of inventories.
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The objective of inventory management is to minimize the cost of holding inventory.
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FALSE The objective of inventory management is to allow satisfactory customer service while keeping costs down.
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A retail store that carries twice the inventory as its competitor will provide twice the customer service level.
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FALSE There is a limit to how high service level can go; if the competitor’s service level is 90%, the retailer can’t double that.
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The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs reasonable.
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TRUE This is the overall objective of inventory management.
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The two main concerns of inventory control relate to the costs and the level of customer service.
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TRUE These are the essential facets of inventory control.
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To provide satisfactory levels of customer service while keeping inventory costs within reasonable bounds, two fundamental decisions must be made about inventory: the timing and size of orders.
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TRUE These are the fundamental decisions regarding inventory control.
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In the EOQ formula, holding costs under 10% are expressed as percentages, above 10% are expressed as annual unit costs.
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FALSE Holding costs are expressed in monetary terms, whether as a set value or as a percentage of the per-unit cost.
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DVD recorders would be an example of independent demand items.
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TRUE Components of the DVD recorders would be dependent demand items.
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Reorder point models are primarily used for dependent demand items.
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FALSE Reorder point models are primarily used for independent demand items.
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An example of inventory holding cost is the cost of moving goods to temporary storage after receipt from a supplier.
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FALSE These are ordering costs.
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Decoupling operations applies to the railroad industry.
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FALSE Decoupling refers to buffering operations in manufacturing.
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Interest, insurance, and opportunity costs are all associated with holding costs.
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TRUE These are holding costs.
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The A-B-C approach involves classifying inventory items by unit cost, with expensive items classified as ‘A’ items and low cost items classified as ‘C’ items.
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FALSE A-B-C approach classifies inventory according to some measure of importance.
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An inventory buffer adds value and lowers cost in all supply chains.
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FALSE Many buffers increase costs across supply chains.
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In the A-B-C approach, C items typically represent about 15 percent of the number of items, but 60 percent of the dollar usage.
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FALSE C items typically represent about 60 percent of the number of items and about 15 percent of the dollar usage.
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EOQ inventory models are basically concerned with the timing of orders.
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FALSE EOQ models are concerned with the size of orders.
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The average inventory level is inversely related to order size.
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FALSE The average inventory level is positively related to order size.
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The average inventory level and the number of orders per year are inversely related: As one increases, the other decreases.
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TRUE These are inversely related.
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The EOQ should be regarded as an approximate quantity rather than an exact quantity. Thus, rounding the calculated value is acceptable.
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TRUE The total cost function is relatively flat, so rounding costs little.
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Carrying cost is a function of order size; the larger the order, the higher the inventory carrying cost.
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TRUE Larger order quantities lead to higher inventory carrying cost.
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Understocking an inventory item is a sure sign of inadequate inventory control.
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FALSE Having an occasional stockout is not necessarily a sign of inadequate inventory control.
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Annual ordering cost is inversely related to order size.
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TRUE Annual ordering cost decreases as order size increases.
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The total cost curve is relatively flat near the EOQ.
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TRUE Thus approximating the EOQ can be a very good solution.
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Because price isn’t a factor in the EOQ formula, quantity discounts won’t affect EOQ calculations.
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FALSE If quantity discounts are offered, the EOQ might vary based on different holding costs.
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In the quantity discount model, if holding costs are given as a percentage of unit price, a graph of the total cost curves will have the same EOQ for each curve.
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FALSE Total cost curves will differ across the price levels.
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In the quantity discount model, the optimum quantity will always be found on the lowest total cost curve.
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FALSE The optimum quantity might actually be when the discount is passed up.
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ROP models indicate to managers the time between orders.
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FALSE ROP models indicate when, with regard to on-hand inventory, orders should be placed.
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When to order can be calculated by the ROP and expressed as a quantity.
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TRUE ROP models indicate when, with regard to on-hand inventory, orders should be placed.
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The rate of demand is an important factor in determining the ROP.
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TRUE The demand rate multiplied by the lead time is a major part of the ROP.
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The inventory value of the supply chain exceeds the inventory value of the organization’s work in process inventory.
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TRUE There can be raw materials and finished goods inventory at the organization. Other organizations in the supply chain will have inventories, too.
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Safety stock is held because we anticipate future demand.
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FALSE Safety stock is held because we anticipate fluctuations in future demand or in lead time
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Variability in demand and/or lead time can be compensated for by safety stock.
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TRUE Safety stock can be used to accommodate these.
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Solving quality problems can lead to lower inventory levels.
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TRUE Leaning out the organization can be facilitated by solving quality problems.
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ROP models assume that demand during lead time is composed of a series of dependent daily demands.
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FALSE ROP models assume that demand during lead time is composed of a series of independent daily demands.
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Profit margins tend to be inversely related to inventory turns.
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TRUE This is typically the case.
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In the fixed-order interval model, the order size is the same for each order.
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FALSE Order size varies from order to order in a fixed-order interval model.
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The fixed-order interval model requires a continuous monitoring of inventory levels.
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FALSE The fixed-order interval model leads to periodic monitoring of inventory levels.
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Discrete stocking levels are used when an organization doesn’t want visibility of inventory levels.
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FALSE Discrete stocking refers to having to stock a discrete number of units.
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The fixed-order interval model requires a larger amount of safety stock than the ROP model for the same risk of a stockout.
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TRUE Fixed-order intervals typically carry more safety stock.
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The single-period model can be very helpful in determining when to order.
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FALSE The single-period model helps determine how many to order.
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The single-period model can be very helpful in determining how much to order.
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TRUE The single-period model helps determine how many to order.
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Monitoring inventory turns over time can be used as a measure of performance.
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TRUE Greater turnover often implies better performance.
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A single-period model would be used mainly by organizations going out of business.
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FALSE The single-period model applies to many regularly occurring circumstances.
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The basic EOQ model ignores the purchasing cost.
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TRUE Only if quantity discounts are offered does purchasing cost enter into EOQ analysis.
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When the item is offered for resale, shortage costs in the single-period model can include a charge for loss of customer goodwill.
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TRUE Greater loss of goodwill would equate with a higher shortage cost.
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In the single-period model, the service level is the probability that demand will not exceed the stocking level in any period.
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TRUE If demand exceeds the stocking level, a stockout as occurred.
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A quantity discount will lower the reorder point.
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FALSE The reorder point is independent of quantity discounts.
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It is critical that the exact quantity calculated in the EOQ model be ordered.
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FALSE Because the total cost curve is flat, modest rounding of the EOQ is permissible.
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Safety stock eliminates all stock outs.
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FALSE Safety stock only ensures that a given likelihood of stock outs.
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The calculation of safety stock requires knowledge of demand and lead time variability.
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TRUE Both of these play a role in the calculation of safety stock.
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The two basic issues in inventory are how much to order and when to order.
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TRUE Quantity and timing are the two basic issues in inventory management.
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Cycle counting can be used in motorcycle inventory control.
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TRUE Cycle counting can also be used in automobile inventory control.
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Using the EOQ model, the higher an item’s carrying costs, the more frequently it will be ordered.
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TRUE As carrying costs increase, the optimal order quantity decreases.
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The cycle time represents the time between reorder point and receipt of order.
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FALSE The cycle time represents the time between orders.
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The cost of placing an order is a function of order size.
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FALSE The cost of placing an order is typically unrelated to order size.
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All stock outs must be avoided.
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FALSE Most of the time it would be too costly to avoid all stockouts.
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In the basic EOQ model, annual holding cost is one-half of the total annual cost for all items purchased.
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FALSE Annual holding cost equals half the product of the order quantity and the per-unit-per-year holding cost.
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Quantity discounts are generally given for large number of orders.
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FALSE Quantity discounts are given for smaller, but larger, orders.
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The larger the number of orders placed, the larger the average level of inventory.
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FALSE More orders means smaller quantities, which means lower average inventory.
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A non-linear cost related to order size is the cost of:
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receiving; Receiving cost is a non-linear cost associated with order size.
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In a two-bin inventory system, the amount contained in the second bin is equal to the:
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ROP; The second bin equals the amount needed during lead time in addition to any safety stock.
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When carrying costs are stated as a percentage of unit price, the minimum points on the total cost curves:
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Do not line u; Curves aren’t symmetrical if holding cost differs across price breaks.
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Dairy items, fresh fruit and newspapers are items that:
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are subject to deterioration and spoilage; Deterioration and spoilage increase holding costs.
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Which of the following is least likely to be included in order costs?
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temporary storage of delivered goods; Storage costs are holding costs.
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In an A-B-C system, the typical percentage of the number of items in inventory for A items is about:
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10; Class A items represent a relatively small portion of items.
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In the A-B-C classification system, items which account for fifteen percent of the total dollar-volume for a majority of the inventory items would be classified as:
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C items; These would be class C items.
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In the A-B-C classification system, items which account for sixty percent of the total dollar-volume for few inventory items would be classified as:
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A items
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The purpose of “cycle counting” is to:
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reduce discrepancies between inventory records and actual; Cycle counting is intended to improve inventory record accuracy.
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The EOQ model is most relevant for which one of the following?
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determining fixed order quantities; The EOQ is a fixed-quantity approach.
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Which is not a true assumption in the EOQ model?
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No more than 3 items are involved; EOQ can be used across multiple items.
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In a supermarket, a vendor’s restocking the shelves every Monday morning is an example of:
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fixed order interval; This would be a weekly interval model.
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A cycle count program will usually require that ‘A’ items be counted:
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more frequently than annually.; Class A items are counted more frequently.
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A risk avoider would want ______ safety stock.
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More; Greater risk aversion is associated with more safety stock.
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In the basic EOQ model, if annual demand doubles, the effect on the EOQ is:
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It increases by about 40 percent.; The EOQ does not increase linearly with demand.
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In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will:
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remain the same; The EOQ is independent of lead time.
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In the basic EOQ model, an annual demand of 40 units, an ordering cost of $5, and a holding cost of $1 per unit per year will result in an EOQ of:
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20; Use the base EOQ formula
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In the basic EOQ model, if D = 60 per month, S = $12, and H = $10 per unit per month, EOQ is:
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12; Use the base EOQ formula.
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In the basic EOQ model, if annual demand is 50, carrying cost is $2, and ordering cost is $15, EOQ is approximately:
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28 ;Use the base EOQ formula.
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Which of the following is not true for Economic Production Quantity model?
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There are no ordering or setup costs.; There are ordering or setup costs in the EPQ model.
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Given the same demand, setup/ordering costs, and carrying costs, the EOQ calculated using incremental replenishment will be ____________ if instantaneous replenishment was assumed:
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greater than the EOQ; The EPQ will be smaller than the EOQ.
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The introduction of quantity discounts will cause the optimum order quantity to be:
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unchanged or greater; Quantity discounts cannot make the optimum quantity be smaller.
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A fill rate is the percentage of _____ filled by stock on hand.
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Demand; The fill rate is the percentage of demand filled directly from on-hand inventory.
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In the quantity discount model, with carrying cost stated as a percentage of unit purchase price, in order for the EOQ of the lowest curve to be optimum, it must:
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be in a feasible range; If not feasible, that quantity will have to be adjusted upward and then total cost calculated.
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Which one of the following is not generally a determinant of the reorder point?
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purchase cost; Purchase cost does not enter into reorder point calculations.
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If no variations in demand or lead time exist, the ROP will equal:
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expected usage during lead time; The ROP will be the demand rate times the lead time.
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If average demand for an inventory item is 200 units per day, lead time is three days, and safety stock is 100 units, the reorder point is:
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700 units; The ROP will be the safety stock added to the product of the demand rate and the lead time.
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Which one of the following is implied by a “lead time” service level of 95 percent?
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The probability is 95 percent that demand during lead time will not exceed the amount on hand at the beginning of lead time. ; A stock only occurs if demand during lead time exceeds the ROP.
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Which one of the following is implied by an “annual” service level of 95 percent?
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None of the above. ; The annual service level is usually greater than the cycle service level, and thus the risk of a stockout during lead time is much smaller than 5 percent.
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Daily usage is exactly 60 gallons per day. Lead time is normally distributed with a mean of 10 days and a standard deviation of 2 days. What is the standard deviation of demand during lead time?
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60 x 2; The standard deviation of demand during lead time is the square root of squared demand times the squared standard deviation of lead time.
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Lead time is exactly 20 days long. Daily demand is normally distributed with a mean of 10 gallons per day and a standard deviation of 2 gallons. What is the standard deviation of demand during lead time?
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2 times the square root of 20 ; The standard deviation of demand during lead time equals the daily standard deviation of demand times the square root of the lead time.
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All of the following are possible reasons for using the fixed order interval model except:
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The required safety stock is lower than with an EOQ/ROP model. ; Safety stock is higher in a fixed order interval model.
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Which of these products would be most apt to involve the use of a single-period model?
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fresh fish; The perishability of fresh fish makes it more appropriate for a single-period model.
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In a single-period model, if shortage and excess costs are equal, then the optimum service level is:
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.50 ; The ratio of shortage cost to shortage plus excess cost is 0.5.
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In a single-period model, if shortage cost is four times excess cost, then the optimum service level is ___ percent.
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80 ; The ratio of shortage cost to shortage plus excess cost is 0.8.
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In the single-period model, if excess cost is double shortage cost, the approximate stockout risk, assuming an optimum service level, is ___ percent.
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67; The ratio of shortage cost to shortage plus excess cost is 0.67.
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If, in a single-period inventory situation, the probabilities of demand being 1, 2, 3, or 4 units are .3, .3, .2, and .2, respectively. If two units are stocked, what is the probability of selling both of them?
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.7 ; Both units will be sold if demand is for 2, 3 or 4 units.
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The management of supply chain inventories focuses on:
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both internal and external inventories;Supply chain inventory involves both internal and external inventories.
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An operations strategy for inventory management should work towards:
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decreasing lot sizes; If lot sizes can be reduced, operations become leaner.
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Cycle stock inventory is intended to deal with ________.
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expected demand; Cycle stock is intended to deal with expected demand, while safety stock is intended to reduce stockouts resulting from demand uncertainty.
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An operations strategy which recognizes high carrying costs and reduces ordering costs will result in:
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greatly decreased order quantities; Processes will be leaned leading to smaller order quantities.
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The need for safety stocks can be reduced by an operations strategy which:
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decreases lead time variability; Reduced lead time variability will reduce the size of safety stocks.
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If average demand for an item is 20 units per day, safety stock is 50 units, and lead time is four days, the ROP will be:
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130; Multiply the demand rate by the lead time and add the safety stock.
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With an A-B-C system, an item that had a high demand but a low annual dollar volume would probably be classified as:
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C; Low dollar volume items tend to be classified as C items.
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The fixed order interval model would be most likely to be used for this situation:
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Grouping orders can save shipping costs.; If ordering costs can be saved by grouping orders, the fixed order interval model is especially attractive.
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Which item would be least likely to be ordered under a fixed order interval system?
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auto parts at an assembly plant; Auto parts at an assembly plant would be unlikely candidates for a fixed order interval system.
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Which one of these would not be a factor in determining the reorder point?
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the EOQ; The ROP is independent of the EOQ.

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