Inventory Management Flashcards
The value of the inventory…
Which answer is correct or rather applies best:
… is the greatest at the middle process stages.
… typically increases towards the end customer.
… does not change towards the end customer.
… typically decreases towards the end customer.
B
The value of the inventory typically increases towards the end customer as the products contain more and more labour and capital inputs.
Inventories play several important roles in the economy. They help to manage the interdependencies between different steps in the value creation process, both internally and externally. Management of dependencies is also called coordination in business administration.
Which of the following statements can be derived from the inventory functions?
A) Quantity discounts reduce the number of products stored in the value chain.
B) Decoupling of production steps leads to a lower work-in-progress inventory level.
C) Cyclical markets help to empty inventories, resulting in low average inventory levels.
D) The longer the value chain and overall lead times, the greater the levels of inventory in the value chain.
E) High uncertainties on the production and demand side lead to low inventory levels.
D
The longer the value chain and lead times, the greater the risk of fluctuations in demand. Therefore, a larger stock is needed to absorb this uncertainty.
Quantity discounts lead to fluctuations in demand, which also result in larger inventories.
Inventories enable decoupling of the production steps. To enable decoupling inventory is needed.
Cyclical markets are associated with large fluctuations in demand and uncertainties. To cope with this risk, high inventory levels are needed.
High uncertainties always call for high inventory levels in order to prevent out-of-stock situations.
The starting point is a stocklist of a production company. The stocklist can be found in the following Excel file: 2.1.d_ABC_Analysis_A_Excercise.xlsxPreview the document
What percentage of the total expenditure is covered by A-products (top 20% products in respect to expenditure)?
Percentage of total expenditure covered by A-products:
55%
Which two aspects are central components of the Economic Order Quantity model?
Which answer is correct or rather applies best:
A Purchase price and sales price
B Satisfied and unsatisfied demand
C Production costs and setup costs
D Holding costs and order costs
D
The economic order quantity model uses the holding costs and order costs to calculate the optimal order quantity. These two costs are the basis of the EOQ model, as explained in the video.
How does a high loss of value (e.g. due to rapid obsolescence or perishability) of products affect the optimum order quantity?
A) Not at all
B) A high loss of value increases inventory holding costs. As the holding costs increase, less inventory is held. The optimum order quantity decreases.
C) A high loss of value increases the order costs. As the orders become more expensive less orders are placed. The optimum order quantity increases.
B
High inventory costs encourage lower stock levels that go hand-in-hand with placing more orders with a lower quantity. A high loss of value has no direct relationship with order costs.
Every branch of the supermarket chain Billig receives an average of 10 truck deliveries every day. In addition to the driver, two store employees are required for unloading and checking the delivery.
The supermarket chain Really-Cheap has recently introduced a technology that makes it easier to check and unload deliveries. This means that deliveries can be unloaded and checked by the driver and only one additional store employee.
How does this difference affect the optimum order quantity from the point of view of the stores of both supermarket chains (Assumption: all other relevant costs are the same)?
A Billig orders more often than Really-Cheap.
B Billig orders less often than Really-Cheap.
C No effect
B
The costs incurred by unloading and checking the deliveries belong to the order costs. The higher unloading and inspection costs mean that Billig orders less often than Really-Cheap.
The insulin pump company IPC buys 350,000 pump motors per year. The purchase price for an engine is CHF 24.70, the inventory holding costs are CHF 9 per unit per year. The costs per order are CHF 1150.
Calculate the optimum order quantity for the pump motors and the average inventory level. (Note: Even if the number of orders in reality can only be integer, we go without rounding for simplicity and use the decimal numbers).
Average inventory level:
4729
What is the “reorder point”?
A) The inventory level which is reached after the next delivery
B) The point in time of the next order
C) The inventory level which triggers the next order
D) The point in time at which the inventory is restocked after the next order
.
C
See previous video. The reorder point is not a point on the time axis, but on the scale that indicates the filling level of the inventory (of a particular product)
Which factors determine the reorder point in a simple EOQ model? (Multiple answers possible)
A The demand per unit of time B The optimum order quantity C The inventory holding costs D The order costs E The lead time
A;E
The reorder point in the EOQ model depends only on demand per time unit (e.g. per day) and the lead time. The ROP results from the product of “demand per unit of time” and the “lead time”. The costs and the optimal order quantity are irrelevant.
How is the lead time defined?
A Time elapsed from the placement of an order by the customer until the reception of the order by the supplier
B Time elapsed from the placement of an order by the customer until the reception of the goods in its inventory
C Time elapsed from the placement of an order by the customer until payment is received by the supplier
D Time elapsed from dispatch of the goods by the customer until reception by the supplier
E Time elapsed from the reception of an order by the supplier until the dispatch of the goods from its warehouse
B
What is the optimal reorder point with a lead time of LT = 0?
A ROP = average demand per time unite - inventory level
B ROP = optimum order quantity - 1
C ROP = 0
D ROP = optimum order quantity
C
If LT = 0, then there is no delay in delivery, i.e. the inventory restocks infinitely fast. This means that orders can be placed when the inventory is empty. All other answers are wrong.
Given a demand of 8 units per business day, an optimum order quantity of 625 units, order costs of CHF 122 per order, inventory holding costs of CHF 4.10 per unit and year and a lead time of 3 months with 22 business days each. What inventory level is the optimal reorder point?
Optimal reorder point:
528
22 business days per month x 3 months x 8 units per business day = 528 units
The company “MobileTech” has an annual demand of 2500 mobile phones. There are 250 business days per year. Until now, the lead time has been 5 business days. The supplier is building a new warehouse closer to the headquarters of “MobileTech”, shortening the lead time to 3 business days. By how many units does the Reorder point change?
Change in Reorder point:
20
=(52500/250)-(32500/250)
What is the main difference between the simple Economic Order Quantity (EOQ) Model and the Economic Production Quantity (EPQ) Model?
A The order costs are replaced by the setup costs of production
B The EPQ model assumes that the company will produce the goods itself.
C The order quantities equal the production rate of the previous step in the supply chain
D The holding costs now also include production costs
B
The EOQ focuses on ordering goods from suppliers. The EPQ focuses on producing its own supplies. Or to be more precise: The inventory no longer restocks infinitely fast when an order is received. Instead, inventory is received at a constant rate for a certain period of time. This is the main conceptual difference between the EOQ and the EPQ.
Evaluate the following statements on the Economic Production Quantity model.
Which answers are correct or rather apply best (multiple answers possible):
A The higher the production quantity, the higher are the annual holding costs (ceteris paribus).
B The smaller the production quantity, the higher are the annual holding costs (ceteris paribus).
C The higher the production quantity, the higher are the annual setup costs (ceteris paribus).
D The smaller the production quantity, the higher are the annual setup costs (ceteris paribus).
A;D
The smaller the production quantity, the more often it has to be produced. Since the setup costs are incurred with every production, this means that the annual setup costs are higher, when the production quantity is smaller. Inversely the larger the production quantity, the higher the average inventory. This leads to higher annual storage costs. Since these two relationships are correct, the other two answers are not correct.
