CPIM Inventory Management 5 — Questions and Answers
Question 1: A company implements cross-docking in its distribution network. What is the primary inventory benefit?
- Increased safety stock at the distribution center
- Elimination or reduction of storage time, reducing inventory holding costs (Correct answer)
- Higher inventory accuracy through more frequent counting
- Improved supplier lead times through better communication
Correct answer: Elimination or reduction of storage time, reducing inventory holding costs
Cross-docking transfers inbound goods directly to outbound transportation with minimal storage, reducing inventory holding time and costs.
Question 2: What is the 'bullwhip effect' and how does it impact inventory levels upstream in the supply chain?
- Demand signals shrink as they move upstream, reducing upstream inventory
- Small demand fluctuations amplify as they move upstream, causing excessive upstream inventory (Correct answer)
- Inventory levels remain stable throughout the supply chain
- Lead time reductions cause downstream inventory to increase
Correct answer: Small demand fluctuations amplify as they move upstream, causing excessive upstream inventory
The bullwhip effect causes demand variability to amplify upstream, leading suppliers to hold excessive inventory to buffer against perceived demand spikes.
Question 3: Which approach to inventory valuation assigns an average unit cost to all items of the same type regardless of purchase date?
- FIFO
- LIFO
- Weighted average cost (Correct answer)
- Specific identification
Correct answer: Weighted average cost
Weighted average cost calculates a blended average of all unit costs, applying this single average cost to all issues and ending inventory.
Question 4: In CPIM, what distinguishes 'independent demand' from 'dependent demand' for inventory purposes?
- Independent demand is forecasted; dependent demand is calculated from parent item demand (Correct answer)
- Independent demand is for raw materials; dependent demand is for finished goods
- Independent demand fluctuates; dependent demand is always stable
- Independent demand uses MRP; dependent demand uses ROP systems
Correct answer: Independent demand is forecasted; dependent demand is calculated from parent item demand
Independent demand (finished goods) must be forecasted because it comes from external customers; dependent demand (components) is calculated using BOM explosion from parent item requirements.
Question 5: What is the primary risk of using a consignment inventory arrangement for a buyer?
- The buyer owns the inventory and bears carrying costs before it is used
- The buyer may become dependent on a single supplier with limited negotiating power (Correct answer)
- The buyer must forecast demand more accurately under consignment
- The buyer loses the ability to return unsold goods to the supplier
Correct answer: The buyer may become dependent on a single supplier with limited negotiating power
Consignment arrangements can create supplier dependency, as the buyer may lack alternative sources when the supplier controls replenishment and pricing.
Question 6: How does Just-in-Time (JIT) inventory philosophy impact safety stock levels?
- JIT increases safety stock to prevent any production disruptions
- JIT aims to minimize or eliminate safety stock by improving process reliability (Correct answer)
- JIT requires higher safety stock at downstream points only
- JIT has no impact on safety stock levels
Correct answer: JIT aims to minimize or eliminate safety stock by improving process reliability
JIT philosophy views safety stock as waste (muda) and focuses on eliminating the variability that makes safety stock necessary rather than buffering against it.
Question 7: Which formula correctly calculates the total annual inventory cost in the EOQ model?
- Total cost = Ordering cost only + Holding cost only
- Total cost = (D/Q × S) + (Q/2 × H) (Correct answer)
- Total cost = D × S + H only
- Total cost = Q × S + D/2 × H
Correct answer: Total cost = (D/Q × S) + (Q/2 × H)
Total annual inventory cost = Annual ordering cost (D/Q × S) + Annual holding cost (Q/2 × H), where D=demand, Q=order qty, S=order cost, H=holding cost per unit.
CPIM Inventory Management 5
A company implements cross-docking in its distribution network.
What is the primary inventory benefit?