CPSM Inventory Management 3 — Questions and Answers
Question 1: Which inventory replenishment system triggers an order when stock falls to a predetermined level, regardless of time?
- Periodic review system
- Continuous review system (Correct answer)
- Just-in-time system
- Material requirements planning
Correct answer: Continuous review system
A continuous (perpetual) review system monitors inventory constantly and places an order when stock hits the reorder point.
Question 2: A company experiences demand of 500 units/week with a lead time of 3 weeks and carries 1,500 units of safety stock. What is the reorder point?
- 1,500 units
- 3,000 units (Correct answer)
- 3,000 units
- 3,000 units
Correct answer: 3,000 units
Reorder point = (Average demand × Lead time) + Safety stock = (500 × 3) + 1,500 = 3,000 units.
Question 3: Which costing method assigns the cost of the most recently purchased inventory to cost of goods sold first?
- FIFO
- LIFO (Correct answer)
- Weighted average
- Standard cost
Correct answer: LIFO
LIFO (Last-In, First-Out) assigns the newest inventory costs to COGS, leaving older costs in ending inventory.
Question 4: What does the 'bullwhip effect' describe in supply chain inventory management?
- Demand variability that amplifies upstream through the supply chain (Correct answer)
- A technique to reduce safety stock
- A method for calculating EOQ
- Seasonal demand smoothing
Correct answer: Demand variability that amplifies upstream through the supply chain
The bullwhip effect is the phenomenon where small demand fluctuations at the retail level cause increasingly large swings in upstream orders.
Question 5: Which inventory metric measures how many times average inventory is sold and replaced over a given period?
- Days Sales of Inventory (DSI)
- Inventory turnover ratio (Correct answer)
- Fill rate
- Service level
Correct answer: Inventory turnover ratio
Inventory turnover ratio = COGS ÷ Average inventory, showing how often inventory cycles through in the period.
Question 6: A firm uses a periodic review (P) system. Which parameter is set in advance in this system?
- Reorder point
- Order quantity
- Review interval (Correct answer)
- Safety stock level only
Correct answer: Review interval
In a periodic review system, the review interval (P) is fixed, and the order quantity varies to bring inventory up to a target level.
Question 7: Which type of inventory is held specifically to decouple two stages of production or supply from each other?
- Cycle stock
- Safety stock
- Pipeline inventory
- Decoupling (buffer) inventory (Correct answer)
Correct answer: Decoupling (buffer) inventory
Decoupling inventory separates adjacent production stages so each can operate independently at its own pace.
CPSM Inventory Management 3
Which inventory replenishment system triggers an order when stock falls to a predetermined level, regardless of time?