Managing Inventories

Which of the following inventories are important for supply chain?

• Cycle & seasonal stock

• Safety/buffer stock

• Speculative stock

• Transit stock

Answer explanation

Cycle/Seasonal stock: Meets daily/seasonal demand.

Safety/Buffer stock: Prepare for uncertainty in demand.

Speculative stock: In anticipation of higher prices/costs or to counter potential supply shortages.

Trasit stock: Help to reduce lead time in various geographic region.

Which of the following are not considered inventory carrying costs?

• Opportunity costs

• Costs of material handling, tracking and management

• Insurance costs

• None of the above

Ordering costs decreases with higher inventory turnovers

• True

• False

Answer explanation

High inventory turnover result in higher frequency of ordering which adds to the ordering costs.

Which of the following formula is true for calculating inventory turnover?

• COGS/AVG Inventory @ costs

• Net sales/AVG Inventory @ price

• Unit sales/AVG inventory in units

• All of the above

Inventory turnover is a backward looking measure while days of supply is a forward looking measure.

• True

• False

Answer explanation

Inventory turnover are usually analysed after a certain period while days of supply can be estimated based on expected future demand.

In a periodic review system, a replenishment order is triggered when inventory decreases to a level known as the reorder point.

• True

• False

Answer explanation

Continuous: Order placed when inventory hit ROP.

Periodic: Order placed after every week/month.

EOQ is the order quantity at which annual inventory ordering

cost & annual inventory carrying cost are the same.

• True

• False

Assuming there is no variability, ROP = Demand per time period x average supplier lead time

• True

• False

Answer explanation

With variability: z score * std deviation of demand during lead time

Having a high service level policy is beneficial for companies

• True

• False

Answer explanation

High service level results in high inventory inventory carrying costs hence stock out costs needs to be balanced with holding costs.

Small disturbance in the flow of orders generated by a customer can produces successively larger disturbances at each upstream stage.

• True

• False

Answer explanation

Bullwhip effect.

Demand shock can result in intermediaries second guessing the order quantity of their upstream partners, resulting in mismatch of demand and supply.