CDPP Inventory Management & Optimization — Questions and Answers
Question 1: What is safety stock and how is it calculated?
- Extra inventory held to protect against uncertainty in demand and supply lead times (Correct answer)
- Stock that is stored in a secure vault
- The minimum stock level required by safety regulations
- Expired or damaged inventory that must be disposed of
Correct answer: Extra inventory held to protect against uncertainty in demand and supply lead times
Safety stock is buffer inventory maintained to protect against demand variability and supply lead time uncertainty, typically calculated based on service level, demand variability, and lead time variability.
Question 2: What is the Economic Order Quantity (EOQ) model?
- A formula calculating the optimal order quantity that minimizes total holding and ordering costs (Correct answer)
- The maximum quantity allowed per government trade regulations
- The quantity of goods that can fit in one shipping container
- The minimum order amount required by suppliers
Correct answer: A formula calculating the optimal order quantity that minimizes total holding and ordering costs
EOQ calculates the order size that minimizes the total cost of inventory by balancing ordering costs (which decrease with larger orders) against holding costs (which increase with larger orders).
Question 3: What is ABC analysis in inventory management?
- Classifying inventory into A (high value), B (medium value), and C (low value) categories for prioritized management (Correct answer)
- An alphabetical sorting system for warehouse locations
- A method for grading product quality from A to C
- A three-step inventory counting process
Correct answer: Classifying inventory into A (high value), B (medium value), and C (low value) categories for prioritized management
ABC analysis classifies items based on their annual consumption value: A items (top 20% of items, ~80% of value) receive the most attention, while C items (bottom 50%, ~5% of value) receive the least.
Question 4: What is the bullwhip effect in supply chain management?
- The amplification of demand variability as you move upstream in the supply chain (Correct answer)
- A physical whip used in warehouse operations
- The effect of wind on transportation vehicles
- A stock market volatility pattern
Correct answer: The amplification of demand variability as you move upstream in the supply chain
The bullwhip effect occurs when small fluctuations in consumer demand get progressively amplified at each upstream stage of the supply chain, leading to excessive inventory and production swings.
Question 5: What is a service level in inventory planning?
- The probability of not stocking out during a replenishment cycle, typically expressed as a percentage (Correct answer)
- The quality of customer service at retail locations
- The number of service personnel per customer
- A measurement of delivery speed to end consumers
Correct answer: The probability of not stocking out during a replenishment cycle, typically expressed as a percentage
Service level represents the desired probability of having sufficient stock to meet demand during the lead time period, such as a 95% service level meaning a 95% chance of not stocking out.
Question 6: What is vendor-managed inventory (VMI)?
- A practice where the supplier monitors and manages inventory levels at the customer's location (Correct answer)
- Inventory managed exclusively by vending machines
- Inventory owned by the vendor but stored at a third party
- A vendor evaluation scoring methodology
Correct answer: A practice where the supplier monitors and manages inventory levels at the customer's location
In VMI, the supplier takes responsibility for monitoring the customer's inventory levels and making replenishment decisions, often resulting in better availability and lower total supply chain costs.
CDPP Inventory Management & Optimization
What is safety stock and how is it calculated?