Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

COMM225 > Lesson 4: Inventory Management > Flashcards

Lesson 4: Inventory Management Flashcards

1
Q

What is inventory?

A

All the stocks in a system for the purpose of sales or future use is known as inventory.

Inventory is equivalent to capital and thus must be treated very carefully. Keeping the Inventory in the system is costly and thus the right stock of inventory should be kept. Too much inventory is undesirable, but not enough inventory may affect the service level and may attract penalties associated with services.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is inventory management?

A

Inventory management is all about maintaining the right amount to balance between the costs associated to under and overstock inventories.
(All about replenishing the inventory at the right interval and quantity)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the primary purpose of inventory?

A

To fulfill the demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

How does inventory management help and protect?

A

Protects against risks associated with above average demand; Helps in availing bulk order discounts; Protects against quality issues in manufacturing; Protects against price fluctuations; Decouples the operations/supply chain.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the three costs associated with inventory?

A
  • Maintain Inventory
  • Order Inventory
  • No Inventory
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the costs related to maintaining inventory?

A

Costs related to storage, handling, insurance, capital cost i.e. interest, etc.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the costs related to ordering inventory?

A

Costs related to preparing/inspecting invoices, sending payments, inventory counting, receiving, etc.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the costs related to no inventory?

A

Costs related to shortage which could be lowering the value of brand/reputation, lost sales, etc.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are the inventory costs?

A
  • Holding costs
  • Ordering costs
  • Setup costs
  • Shortage costs
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is holding costs?

A

Cost to carry an item in inventory (insurance, bank interest, rent, security, etc.).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is ordering costs?

A

Cost of placing an order (not including purchase price), receiving it and paying for it (preparing the order, handling the invoice, making the payments, arranging the transport, etc.).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are setup costs?

A

Time spent preparing equipment for the job by adjusting machines, changing tools, etc.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are shortage costs?

A

Costs when demand excess supply; often unrealized profit per unit, loss of goodwill.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the ABC classification?

A

In order to manage the inventory of these items smoothly and economically, we classify these items into various categories. Typically, we use sales data of these items and classifies based on the revenue share. In general, we use 80-20 rule i.e. we identify top revenue earners and put in an A category. In general, total revenue of A category items should be around 80% of the total. In terms of numbers, these items could represent only 15-20% of total items.

Total revenue of A+B items should be around 95% and total revenue of A+B+C items should be 100%.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

True or False:

An important function of inventories in manufacturing is to decouple operations.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

True or False:
The two main concerns of inventory management relate to the costs of ordering and holding inventories and the level of customer service (item availability).

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

True or False:

A lower inventory turnover ratio indicates more efficient use of inventories.

A

False

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

True or False:
The principal objective of inventory management is to maximize customer service levels by ensuring items are available at all times.

A

False

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

True or False:
The overall objective of inventory management is to achieve satisfactory levels of customer service by having sufficient quantities while keeping inventory costs reasonable.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

True or False:
Two fundamental decisions that buyers or inventory analysts must make about each item held in the inventory are the timing and size of orders.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

True or False:
Two fundamental decisions that buyers or inventory analysts must make about each item held in the inventory are the timing and size of orders.

A

False

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

True or False:

The A-B-C approach involves classifying inventory items based on their unit cost.

A

False

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Which of the following would not generally be considered as one of the functions for holding inventories?

  • Decoupling successive operations
  • Protecting against stock-outs
  • Minimizing holding costs
  • Hedging against price increases
  • Smoothing seasonal production
A

Minimizing holding costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Which of the following is not a function of inventory?

  • Preventing decoupling of operations
  • Taking advantage of quantity discounts
  • Hedging against price increases
  • Allowing for time, while goods are transported
  • Preventing shortages
A

Preventing decoupling of operations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Effective use of inventories would be implied from which of the following?

  • Understocking and overstocking of inventory items
  • The right goods in sufficient quantities
  • Low inventory turnover
  • High numbers of days of inventory
  • High number of back orders
A

The right goods in sufficient quantities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

In an A-B-C inventory system, the typical percentage of the number of types of items in inventory that represent the A classification items is about:

  • 15-20%
  • 20-30%
  • 40-50%
  • 70-80%
  • More than 90%
A

15-20%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

With an A-B-C system, an item that had a high demand quantity but a low annual dollar volume would probably be classified as:

  • (A) Very important
  • (B) Moderately important
  • (C) Least important
  • (A) or (B)
A

(C) Least important

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is an inventory policy?

A

Inventory policy is a set of rules to refill and maintain the inventory.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What is inventory management all about?

A

Using an appropriate inventory policy or Inventory model to carefully balance the inventory availability and costs.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What is ordering cost?

A

Ordering cost is a fixed cost that incurs during the ordering process. So, if we place more orders, then we spend more on ordering costs.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What is holding cost?

A

Holding costs are those associated with storing inventory that remains unsold.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What is Economic Order Quantity (EOQ)?

A

The Economic Order Quantity, or EOQ, is the optimal order size that minimizes the total inventory related costs, both for ordering and for holding.

33
Q

What are the assumptions we make based on our simple inventory model?

A
  • Annual demand is known and deterministic
  • Demand is uniform throughout the year (this model is linear)
  • Lead time is deterministic and known
  • Price is fixed and remains the same throughout the year
  • Supplier is able to fulfill any order quantity
34
Q

What are the EPQ (Economic Production Quantity) Assumptions?

A
  • Demand is uniformly spread throughout the planning period
  • Holding cost is associated with in stock inventory
  • Production rate is constant
  • Setup cost is associated with setting up the production
35
Q

True or False:

Ordering costs are usually expressed as a variable cost equal to a percentage of the total purchase cost of an order.

A

False

36
Q

True or False:

Inspection of goods for quality and quantity upon arrival is part of ordering cost.

A

True

37
Q

True or False:

The EOQ approach minimizes the annual ordering cost of inventory.

A

False

38
Q

True or False:

Warehousing costs, insurance costs, and spoilage costs are all associated with holding costs.

A

True

39
Q

True or False:

The basic EOQ model assumes that the demand varies widely throughout the year.

A

False

40
Q

True or False:

Holding or carrying cost is directly proportional to order size, as order size increases, so does the holding cost.

A

True

41
Q

True or False:

Using the EOQ model, the higher an item’s holding costs, the more frequently it will be ordered.

A

True

42
Q

True or False:

In the basic EOQ model, at the optimal order quantity annual holding cost is equal to the annual ordering cost.

A

True

43
Q

True or False:

Annual ordering cost is a function of order size.

A

True

44
Q

True or False:
In the model, if usage and production/delivery rates are equal, there will be no inventory build-up, and thus the order quantity for batches or lots cannot be calculated.

A

True

45
Q

Which is not considered a holding cost?

  • Opportunity cost of funds
  • Building depreciation
  • Preparing purchase orders
  • Insurance
  • Warehousing costs
A

Preparing purchase orders

46
Q

Which of the following is not included in ordering cost?

  • Taking an inventory count to determine how much needs to be ordered
  • Moving delivered goods to temporary storage
  • Time spent paying invoices
  • Inspecting incoming goods
  • Cost of the items purchased
A

Cost of the items purchased

47
Q

The basic EOQ model is most relevant for which one of the following?

  • Determining fixed order quantities
  • Ordering items with dependent demand
  • Determining fixed interval order quantities
  • Determination of safety stock
  • Ordering perishable items
A

Determining fixed order quantities

48
Q

In the basic EOQ model, if annual demand doubles, the effect on the EOQ is that:

  • it is four times its previous amount
  • it increases by about 40%
  • it doubles
  • it is about 70% of its previous amount
  • it is half its previous amount
A

it increases by about 40%

49
Q

In the basic EOQ model, if lead time increases from five to 10 days, the EOQ will:

  • decrease by a factor of two
  • increase by the same ratio as lead time
  • increase, but not double
  • double
  • remain the same
A

remain the same

50
Q

Relative to the basic EOQ model, the introduction of quantity discounts will cause the optimum order quantity to be:

  • always smaller
  • always unchanged
  • always greater
  • smaller or unchanged
  • unchanged or greater
A

unchanged or greater

51
Q

In the quantity discount model, in order for the EOQ of the lowest curve to be optimum, it must:

  • have the lowest total cost
  • be in a feasible range
  • have the largest quantity compared to other EOQs
  • have the smallest quantity compared to other EOQs
A

be in a feasible range

52
Q

The time interval between ordering and receiving an order is called:

  • Order interval
  • Order cycle
  • Lead time offset
  • Purchase lead time
  • Order delay
A

Purchase lead time

53
Q

Given the same demand, setup/ordering costs, and holding costs, the EPQ will be _________ the EOQ.

A

Given the same demand, setup/ordering costs, and holding costs, the EPQ will be GREATER THAN the EOQ.

54
Q

What is the assumption for basic inventory model?

A

The price of the item is fixed.

(Discount on bigger orders require a new way to compute EOQ known as EOQ with quantity discounts).

55
Q

What is basic EOQ?

A

We order the exact EOQ by ignoring the discount.

56
Q

What is modified EOQ?

A

We increase the order quantity to get a disount.

57
Q

What is the quantity discount procedure phases?

A

Phase 1: Cheapest Price

Phase 2: Compare all Discounts

58
Q

What is the “cheapest price” phase 1 steps?

A
  1. Choose the cheapest price.
  2. Compute EOQ.
  3. If EOQ fulfills the discount condition, then this is the best solution. Otherwise, go Phase 2.
59
Q

What is the “compare all discounts” phase 2 steps?

A
  1. Compute EOQ.

If EOQ fulfills the price condition, then compute the total inventory cost and purchasing cost.

Otherwise, compute the inventory cost and purchasing cost at the minimum quantity applicable for the price.

Choose the order quantity that gives the lowest total inventory and purchasing cost.

60
Q

True or False:

Total cost in the EOQ with quantity discount model is calculated in the same way as it is in the basic EOQ model.

A

False

61
Q

True or False:

In the EOQ with quantity discounts model, a graph of the total cost curves will have the same EOQ for each curve.

A

False

62
Q

True or False:

In the EOQ with quantity discount model, the optimum quantity will always be found on the lowest total cost curve.

A

False

63
Q

True or False:

The reorder point (ROP) models determine the point at which the inventory, in terms of quantity must be reordered.

A

True

64
Q

True or False:

The EOQ with quantity discounts model focuses on purchase cost and does not account for holding and ordering costs.

A

False

65
Q

What is the single period model for?

A

A model for ordering perishables and other items with limited useful lives.
(ex. newspaper)

66
Q

What is continuous stocking levels?

A

Identifies optimal stocking levels. Optimal stocking level balances unit shortage and excess cost. (ordering a precise quantity minimizes the excess and shortage costs).

67
Q

What is discrete stocking levels?

A

Desired level is equaled or exceeded. Compare service level to cumulative probability of demand. (quantities are defined in intervals and thus we may need to order more than the required amount i.e. maintaining more than the required service level).

68
Q

True or False:

The single period model can be very helpful in determining when to order.

A

False

69
Q

True or False:

The single period model can be very helpful in determining how much to order.

A

True

70
Q

True or False:

Service level in a single period model is the ratio of shortage cost to the sum of shortage and excess cost.

A

True

71
Q

True or False:

The single-period model for inventory management is well suited for planning orders for perishables.

A

True

72
Q

True or False:
When the inventory item is a spare part for a production machine, shortage cost in the single period model refers to the cost of lost production.

A

True

73
Q

True or False:
In the single period model, the service level is the probability that demand will not exceed the stocking level in any period.

A

True

74
Q

True or False:
In the single-period model, with discrete stocking levels, the service level must equal or exceed the ratio Cs/(Cs + Ce).

A

True

75
Q

Which of these products would be most likely to involve the use of a single period model for ordering?

  • Hammers
  • Frozen corn
  • Fresh fish
  • Gold coins
  • Calculators
A

Fresh fish

76
Q

Which inventory model is most appropriate if unused or unsold items cannot be carried over to subsequent periods?

  • Reorder point
  • Single period
  • Economic order quantity
  • Quantity discount
  • Economic production quantity
A

Single period

77
Q

In the single period model, if excess cost is double shortage cost, the approximate stock-out risk, assuming an optimum service level, is:

  • 100%
  • 33%
  • 5%
  • 50%
  • 67%
A

67%

78
Q

In a single period model, if shortage cost is four times excess cost, then the optimum service level is:

  • 80%
  • 100%
  • 20%
  • 60%
  • 40%
A

80%

COMM225 (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions