L4M7 CHAPTER 2

Question 1

Which of the following should be considered when an organisation plans for disposing obsolescent and redundant stock?

Answer 1

Environmental issues &

Financial costs

Question 2

The amount of inventory available at the start of an accounting period is known as…?

Answer 2

Opening stock is the starting amount of inventory that a business has at a fixed moment in time. This could be the start of a financial year, another reporting period or ad hoc stocktake. The concept of opening stock must not be confused with raw materials

Question 3

What is closing stock?

Answer 3

Closing stock is the inventory held at the end of the period under consideration. Thus, the closing stock of one period is automatically the opening stock for the next.

Question 4

What is work in progress?

Answer 4

Work in progress is the stock part-way through a manufacturing process; in the service sectors the term is also used for anything between order and delivery.

Question 5

What is buffer stock?

Answer 5

Buffer stock (safety stock) is the stock held as a contingency or insurance against disruption or unexpected demand.

Question 6

What is meant by the term ‘obsolete stock’?

Answer 6

Stock which has become outdated.

Obsolescent stock is stock, usually finished goods, which is in good condition and satisfactory working but for which demand is irreversibly falling towards zero. Once this demand reaches zero the stock can be considered ‘obsolete’. It cannot be used or sold in its current state. Food ingredients (like candy canes) which are out of date are another example.

Question 7

Ranger Mobile Ltd is a emerging smartphone manufacturer. The manufacturer adopts the just-in-time method: First, the customers make orders, then it will decide which components to be purchased according to the bill of materials. These components are known as which of the following?

Answer 7

Dependent demand items.

Dependent demand is the requirement for stock items which are directly related to and therefore dependent upon the rate of production (examples are: raw materials, components, energy).

Independent demand is the requirement for stock items which are not directly related to, and is therefore independent of rate of production.

Question 8

Company XYZ is a candy manufacturer. Company XYZ makes a batch of 1,000 Christmas candy canes that are no longer edible after December 31. Company XYZ is able to sell 750 canes of the batch, but the other 250 are sitting in the warehouse. December 31 comes, and these candy canes are no longer sell-able. The batch of 250 candy canes belongs to which type of inventory?

Answer 8

Obsolete inventory

Obsolescent stock is stock, usually finished goods, which is in good condition and satisfactory working but for which demand is irreversibly falling towards zero. Once this demand reaches zero the stock can be considered ‘obsolete’. It cannot be used or sold in its current state. Food ingredients (like candy canes) which are out of date are another example.

Question 9

A pharmaceutical firm offers a new drug called NC-01. After analysing the market, the firm realises that the demand is largely variable. But they still have to forecast the customer demand for the next production cycle. The new drug NC-01 is best described as which type of item?

Answer 9

Independent demand type of item.
In this scenario, the new drug is finished good which is dependent on the demand of the market, and the firm needs to forecast before initiating the production process. The item is independent from the rate of production, therefore, it must be an independent demand item.

Independent demand is the requirement for stock items which are not directly related to, and is therefore independent of rate of production. Although it is called independent demand, it can still be influenced by economic factors external to the demand-supply model such as general consumer sentiment and consumers’ available disposal income. However, businesses that need to predict the number of products with independent demand need to sate their customers have it easier than businesses that must calculate the demand for products with dependent demand because there are fewer factors to consider.

Dependent demand is the requirement for stock item which is directly related to and therefore dependent upon the rate of production (examples are: raw materials, components, energy).

Question 10

Which of the following best describes what happens when order volumes from customers increase and multiply through the supply chain?

Answer 10

Forrester effect

The bullwhip effect (or Forrester effect) is a distribution channel phenomenon in which forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in customer demand as one moves further up the supply chain.

Seasonal demand: consumer interest in purchasing particular products only during a specific period within the calendar year.

OPITZ is a coding system used to form Groups in Group Technology philosophy of Manufacturing.

The Pareto Curve is the shape created when the bars of a Pareto Chart are progressively summed and the points joined together. The final curve ends at 100% of items in the chart, which means that you can then draw a line across at 80% and ‘bounce’ it down to find the bar which, when combined with all bars to its left, will give 80% of all items.

Question 11

In ABC analysis, category C is also known as…?

Answer 11

Long Tail Spend

Tail Spend is derived from ABC Analysis, Class A high value suppliers, Tail Spend is formed from class B & C suppliers, equates to 20% of the total spend, B is Mid Tail and C is Long tail. Effective Spend Analysis and tail spend management, ensures that procurement can focus on creating an optimum and efficient sourcing strategy.

Procurement Spend Analysis

Procurement organisations effectively identify and manage suppliers using a sourcing strategy. Tail suppliers normally have low strategic value and makes the category management, very difficult . Spend Analysis and Category Management are very closely aligned, Spend Analysis including ABC, provides the category manager, with spend visibility.

Spend Analysis and procurement metrics are used to create category plans, build supplier relationships, to maintain service levels and deliver the best possible price and quality for goods and services bought. The acquisition of Spend data and subsequent Spend Analysis, provides Category Managers access to a well-structured procurement process.

Question 12

Extra units that are held in inventory to reduce the risks of stock-out are called…?

Answer 12

Safety Stock (or buffer stock) is the stock level that limits stock shortages due to unforeseen events (forecasts not in line with demand, longer than expected supply time, etc…)

Demand variance is the degree to which the demand in a fixed period deviates from the average demand of the same period.

A reorder point is the unit quantity on hand that triggers the purchase of a predetermined amount of replenishment inventory.

The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules.

Question 13

Which of the following best describes category ‘A’ in ABC analysis in inventory management?

Answer 13

Items with high value.
ABC classifications are applied to stock and its management is based loosely on the Pareto principle, better known as the 80/20 rule.

The likely outcome of analysis of inventory (value importance):

Category A - about 20% of the stock items account for about 80% of the total inventory value. Items in category A have the highest value.

Category B - about 30% of items account for about 15% of total inventory value.

Category C - the remaining 50% of items account for 5% of the total inventory value.

Question 14

Which of the following is the definition of work in progress inventory?

Answer 14

Inventory introduced into production but not completed as of the stocktake date.

Work in progress is the stock part-way through a manufacturing process; in the service sectors the term is also used for anything between order and delivery.

Question 15

A company has obsolete inventories and it must write off these inventories. How does writing off inventories impact on the company’s financial statements?

Answer 15

Stock decreases
Profit decreases

An inventory write-off is a process of removing from the general ledger any inventory that has no value.

Using the direct write-off method, a business will record a credit to the inventory asset account and a debit to the expense account. For example, say a company with $100,000 worth of inventory decides to write off $10,000 in inventory at the end of the year. First, the firm will credit the inventory account with the value of the write-off to reduce the balance. The value of the gross inventory will be reduced as such: $100,000 - $10,000 = $90,000. Next, the inventory write-off expense account will be increased with a debit to reflect the loss.

The expense account is reflected in the income statement, reducing the firm’s net income and thus its retained earnings. A decrease in retained earnings translates into a corresponding decrease in the shareholders’ equity section of the balance sheet.

If the inventory write-off is immaterial, a business will often charge the inventory write-off to the cost of goods sold (COGS) account. The problem with charging the amount to the COGS account is that it distorts the gross margin of the business, as there is no corresponding revenue entered for the sale of the product. Most inventory write-offs are small, annual expenses. A large inventory write-off (such as one caused by a warehouse fire) may be categorized as a non-recurring loss.

Question 16

A manufacturer aims at increasing the service levels to 99% from 97% through expanding the safety stock. Safety stock can be used to accommodate which of the following?

Answer 16

Variability of demand
Variability of lead time

Safety stock is also known as buffer stock. As its name suggests, this type of stock provides some kind of ‘buffer’, which means safety stock will help the business to reduce the shocks induced by volatile demand or disruption on the supply chain. In other words, safety stock will reduces the probability of stockouts.

As it is only the buffer against uncertainty, safety stock level should be equal to the deviation of demand or replenishment time. Safety stock should be able to accommodate variance of demand and variance of lead time.

Question 17

When using ABC analysis to classify inventory, which factors must be considered?

Answer 17

Cumulative percentage of items
Cumulative percentage usage value of items

ABC analysis is applied to stock and its management. It is based loosely on the Pareto principles, better known as 80/20 rule. Pareto principle is the theory that 80% of outcome results from 20% of inputs. For example, 80% of sales are to the top 20% of customers; 80% of spend on inventory is accounted for by the top 20% of stock items.

The ABC concept is based on Pareto’s law. The following steps are carried out for the ABC analysis.

Step 1: Compute the annual usage value for every item in the sample by multiplying the annual requirements by the cost per unit.

Step 2: Arrange the items in descending order of the usage value calculated above.

Step 3: Make a cumulative total of the number of items and the usage value.

Step 4: Convert the cumulative total of the number of items and usage values into a percentage of their grand totals.

Step 5: Draw a graph connecting cumulative % items and cumulative % usage value. The graph is divided approximately into three segments, where the curve sharply changes its shape. This indicates the three segments A, B and C.

Question 18

Which of the following are the different types of inventory that a manufacturing company usually has?

Answer 18

Raw materials
Work in progress
Finished goods

The normal breakdown in a manufacturing organisation would be raw materials, components, work in progress and finished goods.

Following are the different types of inventory:

Raw materials are the basic materials that a manufacturing company buys from its suppliers, and that is used by the former to convert them into the final products by applying a set of manufacturing processes. For example, aluminum scrap is the raw material for a company that produces aluminum ingots. Flour is the raw material for a company that produces bread or pizza. Similarly, metal parts and ingots are the raw materials bought by a company that manufactures cars, and crude oil is the raw material for an oil refinery.

Work in progress inventory can also be called semi-finished goods. They are the raw materials that have been taken out of the raw materials store and are now undergoing the process of their conversion into the final products. These are the partly processed raw materials lying on the production floor. And they have also not reached the stage where they have been converted into the final product.

Finished goods are indeed the final products obtained after the application of the manufacturing processes on the raw materials and the semi-finished goods discussed above in the article. They are saleable, and their sale contributes fully to the revenue from the core operations of the company.

Question 19

Which of the following should be considered when an organisation plans for disposing obsolescent and redundant stock?

Answer 19

Environmental issues and Financial costs.
If the planning and mitigation measures fail and redundant or obsolete stock is identified, it needs to be removed from the current inventory location as quickly as possible. There are some methods to deal with these types of stock. The worst case scenario is disposal to landfill, which is inadvisable if it can be avoided, both from the environment point of view and the financial costs of such disposal.

For example, the problem of obsolete pesticides remains extremely serious and urgent. Many of the stocks identified continue to deteriorate thereby giving rise to an ever escalating source of severe pollution and posing a threat to human health, the environment and development in particular. To reduce the impact of obsolete pesticides on environment, FAO initiated a project in Yemen in which a total of 262 tonnes of obsolete pesticides were removed from 20 different sites and successfully disposed of between March and June 1996. The major field operation was completed in six weeks during which period almost all obsolete pesticides were brought to a central location and subsequently shipped to the United Kingdom for incineration.

Question 20

The amount of inventory available at the start of an accounting period is known as…?

Answer 20

Opening Stock is the starting amount of inventory that a business has at a fixed moment in time. This could be the start of a financial year, another reporting period or ad hoc stocktake. The concept of opening stock mush not be confused with raw materials

Closing stock is the inventory held at the end of the period under consideration. Thus, the closing stock of one period is automatically the opening stock for the next.

Work in progress is the stock part-way through a manufacturing process; in the service sectors the term is also used for anything between order and delivery.

Buffer stock (safety stock) is the stock held as a contingency or insurance against disruption or unexpected demand.

Question 21

The ABC approach involves classifying inventory items by unit cost, with expensive items classified as ‘A’ items and low cost items classified as ‘C’ items. Is this statement true?

Answer 21

No, ABC analysis considers the usage of each inventory item.

ABC analysis is an approach for classifying inventory items based on the items’ consumption values. Consumption value is the total value of an item consumed over a specified time period, for example a year. The approach is based on the Pareto principle to help manage what matters and is applied in this context:

A - items are goods where annual consumption value is the highest. Applying the Pareto principle (also referred to as the 80/20 rule where 80 percent of the output is determined by 20 percent of the input), they comprise a relatively small number of items but have a relatively high consumption value. So it’s logical that analysis and control of this class is relatively intense, since there is the greatest potential to reduce costs or losses.

B - items are interclass items. Their consumption values are lower than A items but higher than C items. A key point of having this interclass group is to watch items close to A item and C item classes that would alter their stock management policies if they drift closer to class A or class C. Stock management is itself a cost. So there needs to be a balance between controls to protect the asset class and the value at risk of loss, or the cost of analysis and the potential value returned by reducing class costs. So, the scope of this class and the inventory management policies are determined by the estimated cost-benefit of class cost reduction, and loss control systems and processes.

C - items have the lowest consumption value. This class has a relatively high proportion of the total number of lines but with relatively low consumption values. Logically, it’s not usually cost-effective to deploy tight inventory controls, as the value at risk of significant loss is relatively low and the cost of analysis would typically yield relatively low returns.

Question 22

Which of the following statements is true?

Answer 22

Number of independent demand items may be derived from the forecast.

Dependent demand is the requirement for stock item which is directly related to and therefore dependent upon the rate of production (examples are: raw materials, components, energy).

Independent demand is the requirement for stock item which is not directly related to, and is therefore independent of rate of production.

Independent demand can still be influenced by economic factors external to the demand-supply model such as general consumer sentiment and consumers’ available disposal income. However, businesses that need to predict the number of products with independent demand need to sate that their customers have it easier than businesses that must calculate the demand for products with dependent demand because there are fewer factors to consider.

‘Dependent demand items are not directly correlated with production rate’: As mentioned above, dependent demand items are directly correlated with production rate.

‘All indirect supplies are independent demand items’: Though most indirect supplies are independent demand, some are determined by the production rate, i.e. energy consumption of a major machinery.

‘Car engine is an example of independent demand items in a car assembly plant’: Car engine is a component in the car which is the finished good of a car assembly plant, it is a dependent demand item.

Question 23

A supermarket calculates that the average holding cost for an item is $1.50 per cubic meter per day. A beer pallet which has volume of 0.5 cubic meter will be stored for 5 days. What is the holding cost of this beer pallet?

Answer 23

The holding cost per day of the beer pallet is equal to 1.50/2=0.75 or 1.50*0.5=0.75

The beer pallet is stored for 5 days, the total holding cost is: 0.75*5=3.75.

Question 24

Which of the following is the correct statement about total ordering cost?

Answer 24

Total ordering cost is equal to the number of orders placed times the cost of placing an order or the ordering cost per order multiplied with the number of orders.

Typically, ordering costs include expenses for a purchase order, labor costs for the inspection of goods received, labor costs for placing the goods received in stock, labor costs for issuing a supplier’s invoice and labor costs for issuing a supplier payment. These costs are irrelevant from the size of the order and are incurred every time a firm places an order.

Question 25

Among different types of costs associated with inventory, the costs of obtaining purchase approvals are…?

Answer 25

Acquisition costs.

Direct and indirect costs of holding inventory include the following:

Acquisition costs: preparing the requisition, supplier selection and approvals, time and costs of the procurement process, etc.

Holding costs
Costs of stockouts

Question 26

GAP Ltd is a growing retail business. It spends a lot of money on buying stock for sale. However, the procurement process is still largely manual. This manual process contains a lot of tasks that are repeated for each procurement event and time consuming. The company management team decides to adopt procure-to-pay (P2P) software in order to eliminate duplicate activities and improve process efficiencies. Which type of cost is GAP targeting?

Answer 26

Acquisition costs.

Costs of holding inventory include the following:

• Acquisition cost
• Inventory holding cost
• Costs of stock-outs

Acquisition costs follow the typical procure-to-pay model. Benefits of procure-to-Pay (P2P) software include:

Vendor Management, which includes researching, selecting, engaging with, and evaluating the performance of suppliers who make up your supply chain.

Purchase Requisition Workflows, or the formal process of creating and submitting a purchase requisition (PR) for approval to meet a specific business need.

Purchase Order (PO) Workflows, covering the creation of a formal, detailed PO from the purchase requisition, including information on the quantity and quality of goods and services, as well as specific terms and conditions.

Receiving, which includes the acceptance of physical goods (or review of quality and completion for services) and entering the accepted order into inventory, tracking, and accounting systems.

Invoice Management, during which the invoice is compared to the original PO to verify pricing, quality, quantity, and terms have been met.

Accounts Payable Workflows, wherein the accounts payable department processes the invoice for payment, submits the payment to the vendor, and reconciles any related financial entries in the accounting system.

The software is intended to help reduce the acquisition costs.

Question 27

A manufacturer is making a plan for strategic safety stock. To do so, they must analyse the probability of a stock out occurring and the cost impacts if it does. Which are typical costs the manufacturer may incur in an ‘out of stock’ event?

Answer 27

Extra cost for urgent transportation
Cost of equipment downtime

The costs of stockouts or the costs of being out of inventory include:

Loss of production output
Costs of idle time and of fixed overheads spread over a reduced level of output
Costs of any action taken to deal with the stockout, such as buying from another stockist at an enhanced price, switching production, obtaining substitute materials

Loss of customer goodwill due to the inability to supply or late delivery.

Question 28

Which of the following best describes the relationship between a service level and safety stock?

Answer 28

A safety stock is not always required to achieve a required service level’.

Holding extra stocks will always improve customer service levels, or at least reduce the risk of them falling. This implies that if an organisation aims at higher service levels, they should have larger safety stock. However, increasing safety stock is not the only solution to improve service level. The widespread adoption of just-in-time (JIT) techniques particularly in the automotive industry has greatly reduced costs with increased service levels as well as the additional benefit of increased problem visibility.

Question 29

Among different types of costs associated with inventory, the opportunity cost of the investment tied up in inventory belongs to which of the following?

Answer 29

Holding costs.
Direct and indirect costs of holding inventory include the following:

Acquisition costs
Holding costs: There are 2 different types of holding costs: costs related to the value of the goods (including opportunity costs, costs of insurance, losses due to product deterioration, etc) and costs related to the physical characteristics of the inventory.

Costs of stockouts

Question 30

What is the meaning of opportunity cost?

Answer 30

Opportunity cost is an economics term that refers to the value of what you have to give up in order to choose something else. In a nutshell, it’s a value of the road not taken.

Question 31

Which of the following statements holds true about inventory holding costs?

Answer 31

Inventory holding costs depend upon the opportunity costs of tying up funds and the average value of the stock holding.

Holding costs (carrying costs) are the costs associated with the storage and handling of physical stock. There are two different types of holding costs:

Costs related to the value of the goods: financial costs (i.e. the interest on the working capital tied up in inventory, which may be the bank borrowing rate or the company’s target for return on capital); cost of insurance; losses due to product deterioration; losses due to obsolescence and redundancy of inventory; losses due to theft, accidental damage etc.

Costs related to the physical characteristics of the inventory include the following: storage space; power, heat and lighting of the store; movement equipment; labour costs; administration costs.

Question 32

Resevoir Inc runs several oil refineries across the country. These refineries require heavy investment, particularly in maintenance, repair and operating (MRO) inventory. But the inventory turnover rate of these MRO items are low, while some items have expired date, which increases the risks of obsolescence. Which of the following methods can address the issues of these MRO items?

Answer 32

Vendor-owned stock

Where stock turn (inventory turnover) is low and there are potential risks of redundancy or obsolescence, the buying organisation may adopt vendor owned stock. In this system, a supplier (vendor) maintains a stock of items ready to be used at the point of customer consumption. The supplier owns the stock until it is used by the purchaser; only then is the purchaser invoiced for it.

Just in case and larger safety stock would significantly increase the stock level, which may cause redundancy or obsolescence.

Forrester effect (or Bullwhip effect) is a distribution channel phenomenon in which forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in customer demand as one moves further up the supply chain.

Question 33

XYZ Ltd is a large retailer who offers a range of products with different margins. The warehouse manager suggests that different product groups should have different level of safety stock. The appropriate level of safety stock is typically determined by…?

Answer 33

Choosing a level of safety stock that assures a given level of service.

Safety stock is the stock held as a contingency or insurance against disruption or unexpected demand. Holding safety stock reduces the risks of stockouts, when an organisation is unable to meet an order or continue production due to lack of finished goods or input materials.

For single items, an extra investment in inventory (higher levels of safety stock) will always increase customer service levels. Conversely, higher service levels imply larger quantities of safety stocks and an increased investment in inventory. (Procurement and Supply Chain Management - 9th Edition)

However, high levels of safety stocks also increase the inventory cost. There must be a balance between inventory costs and customer service. Thus, calculating the should-be safety stock based on a determined service level has long been recommended by many professionals.

Question 34

A retailer wants to improve its service level in inventory management from 95% to 97%. Which of the following is the best course of action?

Answer 34

Increasing safety stock.

For single items, an extra investment in inventory (higher levels of safety stock) will always increase customer service levels. Conversely, higher service levels imply larger quantities of safety stocks and an increased investment in inventory.

Question 35

In inventory management, the cost of insurance and taxes are included in which group?

Answer 35

Inventory carrying costs.

Direct and indirect costs of holding inventory include the following:

1. Acquisition costs
2. Holding costs (carrying costs) are the costs associated with the storage and handling of physical stock. There are two different types of holding costs:
   a. Costs related to the value of the goods: financial costs (i.e. the interest on the working capital tied up in inventory, which may be the bank borrowing rate or the company’s target for return on capital); cost of insurance; losses due to product deterioration; losses due to obsolescence and redundancy of inventory; losses due to theft, accidental damage etc.
   b. Costs related to the physical characteristics of the inventory include the following: storage space; power, heat and lighting of the store; movement equipment; labour costs; administration costs.
3. Costs of stockouts

Question 36

An organisation may incur additional costs in stockout events. Which of the following is an example of costs of inventory stockouts?

Answer 36

The lost contribution margin on sales forgone as a result of customer dissatisfaction due to unavailability of goods.

Stockout is a situation where an inventory item is not available when required. The costs associated with a stockout include the following:

• Lost of production output - there will be no production until the stockout is resolved (new stock is acquired). For factory operating 24/7 with no spare capacity, this lost output will not be able to be recovered.
• Costs of machine downtime and of overhead spread over a reduced level of output
• Costs of any action required to deal with the stockout…
• Loss of customer goodwill through inability to supply or late delivery
• Loss of sales or new orders
• Loss of market creditability

Question 37

Which of the following are subjective forecasting techniques?

Answer 37

Delphi method
Test marketing

The most common subjective forecasting techniques include the following:

• Market surveys
• Employee surveys
• Expert knowledge (Delphi method is a method using expert knowledge)
• Test marketing

Cycle counting is a periodic analysis of inventory in a storage location which is conducted through the counting of samples instead of physically counting the entire inventory available, so as to quickly have an accurate estimate of the inventory available without causing a stop to the day to day working as is the case with physically counting every unit.

The Pareto principle (also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes.

Weighted moving averages assign a heavier weighting to more current data points since they are more relevant than data points in the distant past. The sum of the weighting should add up to 1 (or 100 percent).

Question 38

What are the contents of master production schedule in MRP system?

Answer 38

The contents of the MPS are many final products are to be made and when to make them.

A master production schedule (MPS) is a plan for individual commodities to be produced in each time period such as production, staffing, inventory, etc.
It is usually linked to manufacturing where the plan indicates when and how much of each product will be demanded.
This plan quantifies significant processes, parts, and other resources in order to optimize production, to identify bottlenecks, and to anticipate needs and completed goods. Since a MPS drives much factory activity, its accuracy and viability dramatically affect profitability. Typical MPSs are created by software with user tweaking.

Question 39

Which of the following is a main objective of just-in-time?

Answer 39

Waste reduction.

JIT, often referred to as the Toyota production system (TPS), originated in Toyota’s manufacturing plants in Japan in the early 1970s. It was first introduced by the organisation’s owner, Taiichi Ohno. The prime goal of JIT is the achievement of zero inventories.

The just-in-time objectives of eliminating waste can be summarised in the ‘five zeros: zero defects, zero set-up times, zero inventories, zero handling and zero lead times.

Question 40

What is the formula for calculating the re-order level?

Answer 40

Average unit in a lead-time + Required level of safety stock.

In management accounting, reorder level (or reorder point) is the inventory level at which a company would place a new order or start a new manufacturing run.

Reorder level depends on a company’s work-order lead time and its demand during that time and whether the company maintain a safety stock.

If a company maintains a safety stock, reorder level calculation changes are follows:

Reorder Level = Average Demand × Lead Time + Safety Stock

Question 41

XYZ Ltd is a highly profitable leading industrial distributor with over 60,000 products and an enviable record for customer service. After undertaking preliminary discussions it was decided to analyse the value-adding activities that contribute to XYZ’s flagship products. The company is conducting which of the following activities?

Answer 41

Value Stream Mapping

According to Hines and Rich, value stream refers to specific parts of the firm that actually add value to the specific product or service under consideration.
XYZ Ltd is mapping the value stream by analysing the value-adding activities that contribute to their most important product.

Postponement is a business strategy which maximizes possible benefit and minimizes risk by delaying further investment into a product or service until the last possible moment. An example of this strategy is Dell Computers’ build-to-order online store. One of the earliest references to the concept was in a paper by Zinn and Bowersox in the Journal of Business Logistics. They highlighted five types: Labelling, Packaging, Assembly, Manufacturing and Time postponements.

Kanban (看板) (signboard or billboard in Japanese) is a scheduling system for lean manufacturing and just-in-time manufacturing (JIT). Taiichi Ohno, an industrial engineer at Toyota, developed kanban to improve manufacturing efficiency. Kanban is one method to achieve JIT. The system takes its name from the cards that track production within a factory. For many in the automotive sector, kanban is known as the “Toyota nameplate system”.

Put simply, silo working occurs when several departments or groups within that organisation do not want to share information or knowledge with other individuals they work with.

Question 42

What lists all the components, ingredients, and materials required to produce the final product?

Answer 42

Bill of Materials.
A bill of materials (BOM) is a comprehensive inventory of the raw materials, assemblies, subassemblies, parts and components, as well as the quantities of each, needed to manufacture a product.

Master production schedule (MPS) plans items that have “direct” demand, or “independent demand.” With independent demand, the demand comes from sales orders, service orders, or forecasts, and the demand comes directly from customer—or forecasted—requirements. It is the list that provides the timing of the production schedule and shows how much each machine can produce, how many shifts are used, etc.

Question 43

For which of the following is the ‘delphi method’ used?

Answer 43

Forecasting demand.

Delphi method is a structured forecasting technique using a panel of experts and a number of rounds of questioning. Responses are shared after each round and the experts encouraged to reconsider their own responses. It is intended to achieve a consensus view.

Question 44

Multiple approval levels for a small purchase request is an example of which type of waste?

Answer 44

Over-processing.
Multiple approval levels for a small purchase request is an example of over-processing since this adds more unnecessary work to users and procurement professionals.

Lean thinking aims to remove wastes from work processes. Before diving into the 8 wastes, it is important to understand what waste is. Waste is any action or step in a process that does not add value to the customer. In other words, waste is any process that the customer does not want to pay for.

The original seven wastes (Muda) was developed by Taiichi Ohno, the Chief Engineer at Toyota, as part of the Toyota Production System (TPS). The seven wastes are Transportation, Inventory, Motion, Waiting, Overproduction, Overprocessing and Defects. They are often referred to by the acronym ‘TIMWOOD’. The 8th waste of non-utilized talent or ‘Skills’ of workers was later introduced in the 1990s when the Toyota Production System was adopted in the Western world. As a result, the 8 wastes are commonly referred to as ‘TIMWOODS’.

Question 45

The purchase-order lead time is the…?

Answer 45

Purchase order lead time (POLT) is the Period between placing an order and its delivery.

Purchase order lead time (POLT) refers to the number of days from when a company places an order for production inputs it needs, to when those items arrive at the manufacturing plant.

Question 46

Objective forecasting techniques must be based on which of the following?

Answer 46

Figures & Facts

Objective forecasting uses quantitative methods (facts and figures).

Subjective forecasting uses qualitative methods (surveys, opinions) which relay on perception and opinion.

Both methods have to make assumption about how closely (or not) the future will resemble the present and the past. Forecasting is never exact.

Question 47

In just in time production system, when is an upstream production triggered?

Answer 47

When downstream productions summon the upstream production.

Along with Jidoka, Just-in-time (JIT) production is one of the pillars of the two Toyota Production System. It is a production method that fundamentally changed the way large-scale production occurred in the 20th century, and is the basis for Lean Manufacturing (Lean for short), which is the school of thought many modern companies have modeled themselves after.

JIT production is often called a pull system because instead of using traditional push production where scheduling is done based on historical data and demand forecasting, production is scheduled based on actual customer orders. Rather than predicting demands from customers, the JIT method requires that actual customer demand exists. Production doesn’t begin before an order triggers it. This system not only reduces the amount of extra inventory, but also reduces the amount of work in progress at one time.

Question 48

Which of the following best describes available inventory (also known as inventory position)?

Answer 48

The amount of inventory on hand plus the amount of inventory on order

Available inventory (or Inventory position - IP) is equal to inventory on-hand plus quantity on order minus backorder (if any)

Question 49

Manufacturing resources planning (MRP II) was developed from material requirement planning (MRP). Which of the following is the additional input that is available in MRP II but does not appear in MRP?

Answer 49

Finance

MRP I was some of the first business software to be widely adopted during the 1970s. Manufacturers sought these systems in order to improve efficiency and accuracy when it came to basic processes such as production scheduling and inventory management.

By the 1980s, manufacturers realized they needed software that could also tie into their accounting systems and forecast inventory requirements. Enter MRP II, which included these integrations in addition to all the capabilities offered by MRP I.

Question 50

Which of the following statements is true of just-in-time (JIT) purchasing?

Answer 50

In JIT purchasing, raw materials (or goods) are purchased so that products are delivered just as needed for production or sales.

Just-in-time (JIT) purchasing is a systems approach for developing and operating the purchasing function. JIT purchasing along with the total quality management in many industries has been successful in reducing inventory and increasing the overall effectiveness of the purchasing function and hence the productivity of manufacturing.

The just-in-time objectives of eliminating waste can be summarised in the ‘five zeros: zero defects, zero set-up times, zero inventories, zero handling and zero lead times.

‘In JIT purchasing, raw materials (or goods) are purchased so that products are delivered just as needed for production or sales’ because it expresses that upstream activity (purchasing) only occurs as the downstream activity (production or sales) triggers.

Question 51

“Open stock plus purchases minus closing stock” is the formula of which of the following?

Answer 51

Cost of goods sold.

The amount of closing stock (properly valued) is used to arrive at the cost of goods sold in a periodic inventory system with the following calculation:

Opening stock + Purchases - Closing stock = Cost of goods sold

Question 52

Which of the following best describes what happens when order volumes from customers increase and multiply through the supply chain?

Answer 52

Forrester effect

The bullwhip effect (or Forrester effect) is a distribution channel phenomenon in which forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in customer demand as one moves further up the supply chain.

Seasonal demand: consumer interest in purchasing particular products only during a specific period within the calendar year.

OPITZ is a coding system used to form Groups in Group Technology philosophy of Manufacturing.

The Pareto Curve is the shape created when the bars of a Pareto Chart are progressively summed and the points joined together. The final curve ends at 100% of items in the chart, which means that you can then draw a line across at 80% and ‘bounce’ it down to find the bar which, when combined with all bars to its left, will give 80% of all items.

Question 53

One of the important outputs of an MRP system is the material requirement plan. This plan shows the net requirements for materials or components to make the final product. Which of the following best describes the net material requirements?

Answer 53

Gross requirements - Inventory level - Scheduled receipt.

The net requirements are worked out using the following equation:

Net requirements = Total requirements - Available inventory

Where:

Total requirements = Gross requirements

Available inventory = Inventory on-hand + Units on-order

In the other words: Net requirements = Gross requirements - Inventory on-hand - Units on-order

Inventory on-hand is also known as Inventory level, whereas Units on-order can be called Scheduled receipt.

Question 54

Lean principle focuses on eliminating eight types of waste. Waste in Lean manufacturing is defined as…?

Answer 54

Non value adding steps in a process.

Lean thinking aims to remove wastes from work processes. Before diving into the 8 wastes, it is important to understand what waste is. Waste is any action or step in a process that does not add value to the customer. In other words, waste is any process that the customer does not want to pay for.

The original seven wastes (Muda) was developed by Taiichi Ohno, the Chief Engineer at Toyota, as part of the Toyota Production System (TPS). The seven wastes are Transportation, Inventory, Motion, Waiting, Overproduction, Overprocessing and Defects. They are often referred to by the acronym ‘TIMWOOD’. The 8th waste of non-utilized talent or ‘Skills’ of workers was later introduced in the 1990s when the Toyota Production System was adopted in the Western world. As a result, the 8 wastes are commonly referred to as ‘TIMWOODS’.

Question 55

Which of the following best describe the function of MRP?

Answer 55

Planning and controlling of production and inventory.

Material requirement planning (MRP) is a production planning and material (inventory) control system used in manufacturing. Objectives of MRP are to ensure materials are available for production while minimising inventory and to plan production and procurement activities.

Question 56

Which of the following is an assumption of economic-order-quantity model?

Answer 56

No inventory stockouts occur.

Economic order quantity (EOQ) model is the method that provides the company with an order quantity. This order quantity figure is where the record holding costs and ordering costs are minimized. By using this model, the companies can minimize the costs associated with the ordering and inventory holding. In 1913, Ford W. Harris developed this formula whereas R. H. Wilson is given credit for the application and in-depth analysis on this model.

If the economic order quantity model is applied, the following assumptions should be met:

The rate of demand is constant, and total demand is known in advance.

The ordering cost is constant.

The unit price of inventory is constant, i.e., no discount is applied depending on order quantity.

Delivery time is constant.

Replacement of defective units is instantaneous.

There is no safety stock level, i.e., the minimum stock level is zero.

Restocking is made by the whole batch.

Because the demand and lead time are constant, no stockout events can occur.

Question 57

Which is the best definition of reorder point?

Answer 57

Reorder point is the level of inventory at which an order must be made.

Reorder point is the point either in time or in a process when the next order should be placed.

Question 58

MRP software is a powerful tool for managing material requirements of manufacturing processes. To keep the software function well, an organisation must have appropriate input data. Which of the following are the inputs of MRP software?

Answer 58

Inputs of MRP software are
- Bill of materials, Master production schedule & Inventory records

Material requirement planning is an electronic system for combining the following:

• Known demand
• Forecast demand. Known demand and forecasted demand are shown in master production schedule.
• Bill of materials for the final product
• Inventory records

A powerful benefit of MRP system is the capacity to produce exception reports, which show deviations from normal planning and performance. These enable anomalies to be investigated with a view to improve future forecasting.

Question 59

MRP system is the most suitable IT system to manage which type of items?

Answer 59

Dependent Demand Items.

Material requirement planning (MRP) is a production planning and material (inventory) control system used in manufacturing. Objectives of MRP are to ensure materials are available for production while minimising inventory and to plan production and procurement activities.

Bill of materials (BOM) is an important component of MRP. BOM is also known as product structurer. This lists all the items that comprise each assembly and sub-assembly that make up the final product or end item. Therefore, MRP is commonly used to manage dependent demand stock.

Question 60

Which of the following is the core idea of Lean manufacturing?

Answer 60

Waste Elimination

The core idea of lean manufacturing is actually quite simple…relentlessly work on eliminating waste from the manufacturing process. Waste is defined as any activity that does not add value from the customer’s perspective. According to research conducted by the Lean Enterprise Research Centre (LERC), fully 60% of production activities in a typical manufacturing operation are waste – they add no value at all for the customer.

On the other hand, agile manufacturing places an extremely strong focus on rapid response to the customer – turning speed and agility into a key competitive advantage.

Question 61

Which of the following are recognised as disadvantages of ERP systems?

Answer 61

Disadvantages of Enterprise Resource Planning (ERP) are - extensive employee training & High initial investment

Implementing a full ERP system is not an easy option. They are complex systems and the disadvantages include the following:

• The installation of the ERP system is costly. ERP consultants are very expensive take approximately 60% of the budget.
• The success depends on the skills and experience of the workforce, including education and how to make the system work properly.
• Resistance in sharing internal information between departments can reduce the efficiency of the software.
• The systems can be difficult to use.
• Change of staff, companies can employ administrators who are not trained to manage the ERP system of the employing company, proposing changes in business practices that are not synchronized with the system.
• Having an ERP system has many advantages, but does not guarantee the total success of the company. Organizational culture, know how to involve staff and anticipate changes that will suffer the organization using this system of administration, are important elements for the completion of the implementation.
• The effectiveness of the ERP system may decrease if there is resistance to share information between business units or departments. Due to strong changes that implementation of the ERP system brings in the culture of work, there may be poorly trained or disinterested in making use of the same staff…
• The benefits of having an ERP system are not presented immediately with the implementation of the software, they will be evident long after the system is running.
• The culmination of the implementation depends on the ability and skill of the workforce, also involves education and training, to make the system is correctly applied.

Question 62

Which of the following best defines ‘exponential moving average’?

Answer 62

A forecasting technique where each demand is multiplied by a weighting factor.

An exponential moving average (EMA) is a type of moving average (MA) that places a greater weight and significance on the most recent data points. The exponential moving average is also referred to as the exponentially weighted moving average. An exponentially weighted moving average reacts more significantly to recent price changes than a simple moving average (SMA), which applies an equal weight to all observations in the period.

Question 63

MRP software is applied to schedule which of the following?

Answer 63

Production process.

Material Requirements Planning (MRP) software manages material requirements for manufacturing processes.

Question 64

Which of the following is the Japanese word for ‘billboard’ or ‘signboard’?

Answer 64

Kanban

Kanban (看板) (signboard or billboard in Japanese) is a scheduling system for lean manufacturing and just-in-time manufacturing (JIT).

Poka-yoke (ポカヨケ, [poka yoke]) is a Japanese term that means “mistake-proofing” or “inadvertent error prevention”. A poka-yoke is any mechanism in any process that helps an equipment operator avoid (yokeru) mistakes (poka). Its purpose is to eliminate product defects by preventing, correcting, or drawing attention to human errors as they occur.

Kaizen is a concept referring to business activities that continuously improve all functions and involve all employees from the CEO to the assembly line workers. Kaizen (改善) is the Sino-Japanese word for “improvement”. Kaizen also applies to processes, such as purchasing and logistics, that cross organizational boundaries into the supply chain.

Muda (無駄, on’yomi reading) is a Japanese word meaning “futility; uselessness; wastefulness”, and is a key concept in lean process thinking, like the Toyota Production System (TPS) as one of the three types of deviation from optimal allocation of resources (the others being mura and muri). Waste reduction is an effective way to increase profitability.

Question 65

“A measure of the ability of an organisation to supply customers without delay” is the best definition of which of the following:

Answer 65

Service level.

In inventory management, service level is the expected probability of not hitting a stock-out during the next replenishment cycle or the probability of not losing sales.

Key performance indicators (KPIs) can be used to analyse data based on performance objectives and set actionable goals for improvement. KPIs can be developed in conjunction with suppliers as well as others, and can be used to measure the essential elements of the process.

Safety stock is the amount of inventory a business needs to have to achieve a certain level of risk mitigation when it comes to stockouts.

Reorder level (or reorder point) is the inventory level at which a company would place a new order or start a new manufacturing run.

Question 66

Which of the following is NOT an improvement available in ERP II in comparison with ERP?

Answer 66

ERP II systems are closed and silo-working.

The main improvements from ERP to ERP II are the following:

• ERP II is web enabled as compared to Conventional ERP Which is not.
• ERP is restricted to provide selected exhaustive or rigorous or wide-spread coverage in its modules. But as compared to ERP, ERP II provides the true and accurate blend of the macro and the micro and affords customers with curative actions/measures after identifying the slip-up/error or fault;
• ERP was embattled more headed for manufacturing or industrialization and the dilemma or difficulty is conquer in ERP II by endowing clarification for all kind of industries and sectors.
• ERP is not in the position or could not possibly integrate/incorporate diverse functions from diverse departments/divisions but ERP II could possibly do so as well as from different industries as compared to conventional ERP.
• For WEB and WAP connectivity ERP II grip CRM and SCM Functionalities.
• ERP II be obliged the function and purpose to an external/outdoor one and smooth the progress of better networks than remaining as internal/interior application.

Question 67

In the periodic review system, the order quantity is the same for each order. Is this statement true?

Answer 67

No, the inventory position at each review point differs from each other.

Fixed-Time Period System (or Periodic Review system) is the inventory management system in which inventory is checked in fixed time periods, T, and the quantity ordered varies. The system also contains a target inventory level, R, which is restored when an order is received. The order quantity is calculated as:

Q = R – IP

where: Q = order quantity

R = target inventory level

IP = inventory position

Inventory position (IP) is equal to inventory on-hand plus quantity on order minus backorder (if any)

The order quantity varies because the inventory position at each review point differs from each other.

Question 68

Which of the following is a forecasting technique?

Answer 68

Moving average.

Moving average: a calculation to analyse data by creating series of averages of different subset of full data set. It is commonly used with time series data to smooth out short-term fluctuation and highlight long-term trends or cycle

Last in, first out (LIFO) is a method used to account for inventory that records the most recently produced items as sold first. Under LIFO, the cost of the most recent products purchased (or produced) are the first to be expensed as cost of goods sold (COGS)—which means the lower cost of older products will be reported as inventory.

ABC analysis is a method of analysis that divides the subject up into three categories: A, B and C.

There is no technique called time-weighted series.

Question 69

What is the stock turn for a store holding products to the value of £250,000 with annual sales of these products amounting to £1,000,000?

Answer 69

The stock turn will be 4.

Calculating Inventory Turnover (Stock Turn)

As with a typical turnover ratio, inventory turnover details how much inventory is sold over a period. To calculate the inventory turnover ratio, cost of goods (COGS) is divided by the average inventory for the same period.

Cost of Goods Sold ÷ Average Inventory or Sales ÷ Inventory

In this exercise, the stock turn equal to sales divided by inventory, or 1,000,000:250,000 = 4.

Question 70

With D is the annual demand (units), S is cost per order, H is annual carrying cost per unit; the formula for Economic Order Quantity is….?

Answer 70

Square root of (2D*S/H)

D=demand
S=cost per order
H=annual carrying cost

Question 71

XYZ Ltd has been adopting MRP system for years. The system helps the company improve efficiency greatly and generates huge cost-savings. However, MRP system is only limited to production process management and XYZ management team would like to have better insights into resources required across the organisation as a whole. Which software system would help XYZ management team achieve the above objective?

Answer 71

ERP or ERP II

Enterprise resource planning (ERP) is the integrated management of main business processes, often in real time and mediated by software and technology. ERP provides an integrated and continuously updated view of core business processes using common databases maintained by a database management system. ERP systems track business resources—cash, raw materials, production capacity—and the status of business commitments: orders, purchase orders, and payroll. The applications that make up the system share data across various departments (manufacturing, purchasing, sales, accounting, etc.) that provide the data. ERP facilitates information flow between all business functions and manages connections to outside stakeholders.

Manufacturing resource planning (MRP II) is defined as a method for the effective planning of all resources of a manufacturing company. Ideally, it addresses operational planning in units, financial planning, and has a simulation capability to answer “what-if” questions and extension of closed-loop MRP. This is not exclusively a software function, but the management of people skills, requiring a dedication to database accuracy, and sufficient computer resources. It is a total company management concept for using human and company resources more productively.

A master production schedule (MPS) is a plan for individual commodities to be produced in each time period such as production, staffing, inventory, etc. It is usually linked to manufacturing where the plan indicates when and how much of each product will be demanded. This plan quantifies significant processes, parts, and other resources in order to optimize production, to identify bottlenecks, and to anticipate needs and completed goods. Since a MPS drives much factory activity, its accuracy and viability dramatically affect profitability.

Procure-to-pay (P2P) is a term used in the software industry to designate a specific subdivision of the procurement process. The procure-to-pay systems enable the integration of the purchasing department with the accounts payable (AP) department. Some of the largest players of the software industry agree on a common definition of procure-to-pay, linking the procurement process and financial department.

Question 72

Which of the following best describes the term ‘periodic review’?

Answer 72

Items are reviewed as part of an imprest system.

Fixed-Time Period System (or Periodic Review system) is the inventory management system in which inventory is checked in fixed time periods, T, and the quantity ordered varies.

The imprest system is a form of financial accounting system. The most common imprest system is the petty cash system. The base characteristic of an imprest system is that a fixed amount is reserved, which after a certain period of time or when circumstances require, because money was spent, it will be replenished.

Question 73

What is the different between gross material requirements plan (gross MRP) and a net material requirements plan (net MRP)?

Answer 73

The gross MRP considers available inventory whereas the net MRP does not.

Material requirement planning (MRP) is a production planning and material (inventory) control system used in manufacturing. Objectives of MRP are to ensure materials are available for production while minimising inventory and to plan production and procurement activities.

MRP software combines the master production schedule, the bill of materials and the inventory information to work out the net requirements (net MRP) of what to purchase or produce and when.

These net requirements are worked out using the following equation:

Net requirements = Total requirements - Available inventory

Where:

Total requirement = Gross requirements (gross MRP)

Available inventory = Inventory on hand + Units on order

In the other words, Gross MRP = Net MRP + Available inventory

Question 74

XYZ Ltd organises a meeting in order to decide on the safety stock level of a strategic material which is used in XYZ latest product - DMD. To do this, they must forecast the future demand for this new product. In the meeting, external consultants are invited to join with cross-functional team. Each person of the group anonymously replies to questionnaires and subsequently receives feedback in the form of a statistical representation of the “group response,” after which the process repeats itself. The goal is to reduce the range of responses and arrive at something closer to expert consensus. XYZ Ltd is using which forecasting method?

Answer 74

Delphi method.

Delphi method was developed in the 1950s, originally to forecast the impact of technology on warfare. The method entails a group of experts who anonymously reply to questionnaires and subsequently receive feedback in the form of a statistical representation of the “group response,” after which the process repeats itself. The goal is to reduce the range of responses and arrive at something closer to expert consensus. The Delphi Method has been widely adopted and is still in use today. Delphi method is a subjective forecasting technique

Holt-Winters forecasting is a way to model and predict the behavior of a sequence of values over time—a time series. Holt-Winters is one of the most popular forecasting techniques for time series. It’s decades old, but it’s still ubiquitous in many applications, including monitoring, where it’s used for purposes such as anomaly detection and capacity planning.

Time series analysis is a statistical technique that deals with time series data, or trend analysis. Time series data means that data is in a series of particular time periods or intervals.

Objective forecasting approaches are quantitative in nature and lend themselves well to an abundance of data. There are three categories of objective forecasting methods: time series, causal/econometric, and artificial intelligence.

Question 75

Which of the following costs does the EOQ minimise?

Answer 75

Total cost of annual inventory cost.

Formula Q = square root of 2DS/H

Q= EOQ
D= Demand in units (on an annual basis)
S= Order cost (per purchase order)
H= Holding cost  (per unit, per year)

Question 76

Which of the following is essential to effective implementation of just-in-time?

Answer 76

Strong links between the supplier and the buying organisation.

For JIT manufacturing to succeed, companies must have steady production, high-quality workmanship, glitch-free plant machinery, and reliable suppliers.

JIT production systems cut inventory costs because manufacturers do not have to pay storage costs. Manufacturers are also not left with unwanted inventory if an order is canceled or not fulfilled.