Inventory Management

Question 1

What is the primary goal of inventory management?

Answer 1

To balance the expense of maintaining inventory with the goal of fulfilling customer needs.

Question 2

Name three types of costs associated with inventory trade-offs.

Answer 2

Order costs, holding costs, and out-of-stock costs.

Question 3

What is ABC analysis in inventory management?

Answer 3

A method that categorizes inventory items based on their importance and value to the business.

Question 4

What is the Economic Order Quantity (EOQ) model used for?

Answer 4

Determining the optimal order quantity to minimize total ordering cost (gross cost associated with one order) and holding costs (keep things in your warehouse )

Question 5

What factors determine the reorder point in the EOQ model?

Answer 5

Lead time and demand per unit of time.

Question 6

What is the purpose of safety stock?

Answer 6

To buffer against demand and supply uncertainties, reducing the risk of stockouts.

Question 7

How does the Economic Production Quantity (EPQ) differ from EOQ?

Answer 7

EPQ focuses on optimal production lot size for in-house production, while EOQ is for ordering from suppliers.

Question 8

What does the Newsvendor Model address?

Answer 8

Optimal inventory levels for seasonal or perishable products under demand uncertainty.

Question 9

Define salvage value in inventory management.

Answer 9

The value recovered from unsold inventory at the end of a sales period.

Question 10

What is the formula for critical ratio (CR) in the Newsvendor Model?

Answer 10

CR = Underage Cost / (Underage Cost + Overage Cost).

Question 11

What is the (r, Q) approach in inventory management?

Answer 11

An approach where reorders are triggered at a specific reorder point and a fixed quantity Q is ordered.

Question 12

Why is safety stock critical in inventory management?

Answer 12

It helps ensure customer demand is met despite demand or supply fluctuations.

Question 13

Explain the concept of decoupling in inventory.

Answer 13

Building inventory to ensure that stages of production do not depend entirely on previous stages.

Question 14

What is the impact of quantity discounts on order quantities?

Answer 14

They encourage larger order quantities to take advantage of cost savings.

Question 15

What does the Pareto Principle imply in inventory management?

Answer 15

80% of the value comes from 20% of the inventory items.

Question 16

What is lead time in inventory management?

Answer 16

The time from order placement to the receipt of goods in inventory.

Question 17

What is service level in inventory management?

Answer 17

The ability to meet customer demand, expressed as a percentage (e.g., 95% service level).

Question 18

What are holding costs in inventory management?

Answer 18

Costs associated with storing and maintaining inventory, including warehousing and depreciation.

Question 19

Why do we need inventory?

Answer 19

• Fundamental trade-off
• Expensive inventory
• Fulfillment of customer needs at any moment in time in an environment of uncertainty

Question 20

Inventory classification by Location

Answer 20

1. Raw materials : goods received from supplier
2. Work in progress : at some point within the operations process
3. Finished goods : goods ready for dispatch to the customer

Question 21

What is the primary purpose of buffer and safety inventory?

Answer 21

To cope with randomness in demand and supply

Question 22

What does cycle inventory help with?

Answer 22

Keeping supply while other products are produced in a system with multiple products from one operation

Question 23

How does decoupling inventory function?

Answer 23

It matches the rate of processing at different points in the production process

Question 24

What is the purpose of quantity game inventory?

Answer 24

To enable bulk and other discounts

Question 25

Why is pipeline/movement inventory necessary?

Answer 25

To compensate for transportation and distribution times

Question 26

The optimal reorder point (ROP) with a lead time of LT = 0 is:
ROP = 0, what does it mean ?

Answer 26

If the lead time is zero, it means that an order can be fulfilled immediately, so there’s no need to maintain any inventory level before the next order arrives.