Financial Management for Project Managers Inventory Management 5 — Questions and Answers
Question 1: Which inventory management technique uses demand forecasts and bill-of-materials data to calculate future inventory requirements for manufacturing projects?
- Economic Order Quantity (EOQ)
- Material Requirements Planning (MRP) (Correct answer)
- ABC Analysis
- Vendor-Managed Inventory (VMI)
Correct answer: Material Requirements Planning (MRP)
MRP uses the master production schedule, bill of materials, and current inventory records to plan when and how much material to order.
Question 2: A project manager implements Vendor-Managed Inventory (VMI). Which party is responsible for determining replenishment quantities and timing under this arrangement?
- The buyer's procurement department
- A third-party logistics provider
- The supplier (Correct answer)
- An automated ERP system
Correct answer: The supplier
In VMI, the supplier monitors the buyer's inventory levels and takes responsibility for replenishment decisions, reducing the buyer's ordering burden.
Question 3: Which of the following costs is considered a 'stockout cost' in inventory management?
- Insurance premiums on stored goods
- Warehouse lease payments
- Lost sales due to unavailable products (Correct answer)
- Annual physical inventory count labor
Correct answer: Lost sales due to unavailable products
Stockout costs include lost sales, emergency procurement premiums, expediting fees, and damage to customer relationships caused by inventory shortages.
Question 4: A project manager is evaluating a supplier offering a 3% discount for orders exceeding 1,000 units (current EOQ is 400 units). Which analysis framework should guide this decision?
- ABC analysis
- Quantity discount model (Correct answer)
- Safety stock calculation
- Cash conversion cycle analysis
Correct answer: Quantity discount model
The quantity discount model compares total costs (purchase price + ordering + holding) at different order quantities to determine if the discount justifies the larger order.
Question 5: A project experiences 'inventory shrinkage.' Which of the following is NOT a typical cause of shrinkage?
- Employee theft
- Vendor fraud and short shipments
- Increasing safety stock levels (Correct answer)
- Administrative errors in record-keeping
Correct answer: Increasing safety stock levels
Shrinkage refers to unexplained inventory losses from theft, damage, or errors; intentionally increasing safety stock is a management decision, not a source of shrinkage.
Question 6: Under consignment inventory arrangements, when does the buying company recognize the inventory as an asset on its balance sheet?
- When the consigned goods arrive at the buyer's warehouse
- When the buyer sells or consumes the goods (Correct answer)
- When the consignment agreement is signed
- When the supplier invoices the buyer
Correct answer: When the buyer sells or consumes the goods
Consigned inventory remains the supplier's asset until sold or used by the buyer; the buyer records it only upon sale or consumption.
Question 7: A project manager calculates the Cash Conversion Cycle (CCC). Which change would most directly shorten the CCC?
- Increasing Days Inventory Outstanding (DIO)
- Extending Days Sales Outstanding (DSO)
- Reducing Days Payable Outstanding (DPO)
- Reducing Days Inventory Outstanding (DIO) (Correct answer)
Correct answer: Reducing Days Inventory Outstanding (DIO)
CCC = DIO + DSO − DPO; reducing DIO means inventory is converted to sales faster, directly shortening the cash conversion cycle.
Financial Management for Project Managers Inventory Management 5
Which inventory management technique uses demand forecasts and bill-of-materials data to calculate future inventory requirements for manufacturing projects?