CPP Inventory & Supply Chain Management 3 — Questions and Answers
Question 1: What is the primary purpose of safety stock in inventory management?
- To reduce ordering frequency
- To buffer against demand variability and supply uncertainty (Correct answer)
- To take advantage of quantity discounts
- To minimize carrying costs
Correct answer: To buffer against demand variability and supply uncertainty
Safety stock is held as a buffer to prevent stockouts caused by unexpected demand spikes or supplier delivery delays.
Question 2: Which supply chain model uses actual downstream demand data to pull inventory through the supply chain rather than pushing based on forecasts?
- Push system
- Pull system (Correct answer)
- Hybrid MRP system
- Kanban-disabled MRP
Correct answer: Pull system
A pull system (e.g., Kanban) replenishes inventory based on actual consumption signals rather than forecasted demand.
Question 3: A purchasing professional evaluates a supplier's On-Time Delivery (OTD) rate of 72%. What does this indicate?
- 72% of orders arrived early
- 72% of orders were delivered within the agreed timeframe (Correct answer)
- 28% of orders were cancelled
- 72% of orders met quality specifications
Correct answer: 72% of orders were delivered within the agreed timeframe
OTD rate measures the percentage of orders delivered on or before the promised date, so 72% means 28% were late.
Question 4: In supply chain risk management, 'single sourcing' creates which type of risk?
- Price risk from competition
- Concentration risk due to dependence on one supplier (Correct answer)
- Quality risk from multiple standards
- Currency risk from international sourcing
Correct answer: Concentration risk due to dependence on one supplier
Single sourcing creates concentration risk because supply disruption at one supplier can halt the buyer's entire supply of that item.
Question 5: Which warehousing strategy reduces handling by moving goods directly from inbound receiving to outbound shipping with minimal or no storage?
- Drop shipping
- Cross-docking (Correct answer)
- Consignment stocking
- Postponement
Correct answer: Cross-docking
Cross-docking transfers inbound shipments directly to outbound vehicles at a distribution point, eliminating storage time.
Question 6: What does 'Days Inventory Outstanding (DIO)' measure?
- Average number of days to collect payment from customers
- Average number of days inventory is held before being sold (Correct answer)
- Number of days until the next scheduled delivery
- Average supplier lead time in days
Correct answer: Average number of days inventory is held before being sold
DIO = (Average Inventory ÷ COGS) × 365, representing how many days on average inventory sits before being sold.
Question 7: A company switches from quarterly ordering to monthly ordering for a key component. What is the most likely direct effect on inventory costs?
- Holding costs increase, ordering costs decrease
- Holding costs decrease, ordering costs increase (Correct answer)
- Both holding and ordering costs decrease
- Neither cost changes significantly
Correct answer: Holding costs decrease, ordering costs increase
More frequent ordering reduces average inventory held (lower holding costs) but increases the number of orders placed (higher ordering costs).
CPP Inventory & Supply Chain Management 3
What is the primary purpose of safety stock in inventory management?