CPP Inventory & Supply Chain Management 2 — Questions and Answers
Question 1: A company's annual demand for an item is 10,000 units, ordering cost is $50 per order, and holding cost is $2 per unit per year. What is the Economic Order Quantity (EOQ)?
- 500 units
- 707 units (Correct answer)
- 1,000 units
- 250 units
Correct answer: 707 units
EOQ = √(2DS/H) = √(2×10,000×50/2) = √500,000 ≈ 707 units.
Question 2: Which supply chain strategy involves producing goods only when a customer order is received, minimizing finished goods inventory?
- Make-to-stock (MTS)
- Make-to-order (MTO) (Correct answer)
- Assemble-to-order (ATO)
- Engineer-to-order (ETO)
Correct answer: Make-to-order (MTO)
Make-to-order (MTO) means production begins only after a confirmed customer order, keeping finished goods inventory near zero.
Question 3: What does the term 'bullwhip effect' describe in supply chain management?
- Supplier consolidation reducing order variability
- Demand variability amplification moving upstream in the supply chain (Correct answer)
- Inventory reduction through lean practices
- Price fluctuations caused by commodity markets
Correct answer: Demand variability amplification moving upstream in the supply chain
The bullwhip effect describes how small demand fluctuations at the retail level are amplified into large order swings at the supplier level.
Question 4: A buyer calculates that a product has a holding cost rate of 25% of unit value. If the unit cost is $40, what is the annual holding cost per unit?
- $5
- $8
- $10 (Correct answer)
- $12
Correct answer: $10
Annual holding cost per unit = 25% × $40 = $10.
Question 5: Which inventory classification method groups items into categories A, B, and C based on annual dollar usage?
- Just-in-time analysis
- ABC analysis (Correct answer)
- VED analysis
- FSN analysis
Correct answer: ABC analysis
ABC analysis categorizes inventory by annual dollar value, with 'A' items representing the highest value requiring closest management.
Question 6: In a vendor-managed inventory (VMI) arrangement, who is responsible for monitoring stock levels and triggering replenishment?
- The buyer's procurement team
- A third-party logistics provider
- The supplier (Correct answer)
- The warehouse manager
Correct answer: The supplier
In VMI, the supplier monitors the buyer's inventory levels and initiates replenishment orders without requiring buyer action.
Question 7: Which metric measures the number of times inventory is sold and replaced over a specific period?
- Days sales outstanding (DSO)
- Inventory turnover ratio (Correct answer)
- Fill rate
- Carrying cost percentage
Correct answer: Inventory turnover ratio
Inventory turnover ratio = Cost of Goods Sold ÷ Average Inventory, showing how many times stock cycles through in a period.
CPP Inventory & Supply Chain Management 2
A company's annual demand for an item is 10,000 units, ordering cost is $50 per order, and holding cost is $2 per unit per year.
What is the Economic Order Quantity (EOQ)?