MRP Inventory Control & Supply Chain Management 2 — Questions and Answers
Question 1: A company's annual demand is 10,000 units, ordering cost is $50, 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 inventory classification method assigns items to categories A, B, and C based on their annual dollar value?
- FIFO analysis
- ABC analysis (Correct answer)
- XYZ analysis
- VED analysis
Correct answer: ABC analysis
ABC analysis categorizes inventory by annual dollar value, with A items representing the highest value (typically 70-80% of total value but only 10-20% of items).
Question 3: In supply chain management, what does the term 'bullwhip effect' describe?
- Demand variability amplification upstream in the supply chain (Correct answer)
- Cost reduction through bulk purchasing
- Supplier consolidation strategy
- Inventory shrinkage due to theft
Correct answer: Demand variability amplification upstream in the supply chain
The bullwhip effect describes how small demand fluctuations at the retail level become increasingly amplified as orders move upstream through the supply chain.
Question 4: A warehouse uses cycle counting. If it has 5,000 SKUs and counts 20 items per day, approximately how many days does one full cycle take?
- 100 days
- 150 days
- 250 days (Correct answer)
- 500 days
Correct answer: 250 days
5,000 SKUs ÷ 20 items/day = 250 days for one complete cycle count.
Question 5: Which supply chain strategy positions inventory closer to end customers to reduce lead times, often used in e-commerce?
- Centralized warehousing
- Cross-docking
- Forward deployment (Correct answer)
- Drop shipping
Correct answer: Forward deployment
Forward deployment places inventory in regional fulfillment centers near customers to reduce last-mile delivery times.
Question 6: What is the primary purpose of safety stock in an inventory system?
- Reduce ordering frequency
- Buffer against demand variability and supply uncertainty (Correct answer)
- Maximize warehouse utilization
- Lower unit purchase costs
Correct answer: Buffer against demand variability and supply uncertainty
Safety stock is held as a buffer to protect against stockouts caused by unexpected demand spikes or supplier delivery delays.
Question 7: In a vendor-managed inventory (VMI) arrangement, who is responsible for replenishment decisions?
- The retailer's purchasing department
- A third-party logistics provider
- The supplier/vendor (Correct answer)
- An independent auditor
Correct answer: The supplier/vendor
In VMI, the supplier monitors customer inventory levels and takes responsibility for replenishment decisions, reducing the buyer's ordering burden.
MRP Inventory Control & Supply Chain Management 2
A company's annual demand is 10,000 units, ordering cost is $50, and holding cost is $2 per unit per year.
What is the Economic Order Quantity (EOQ)?