Supply Chain Management Inventory Management 3 — Questions and Answers
Question 1: What is the primary goal of a Just-in-Time (JIT) inventory system?
- Maximize warehouse storage capacity
- Minimize inventory by receiving goods only as they are needed in production (Correct answer)
- Ensure maximum safety stock at all times
- Automate the purchasing process
Correct answer: Minimize inventory by receiving goods only as they are needed in production
JIT aims to reduce inventory holding costs by scheduling material arrivals to coincide precisely with production or customer demand.
Question 2: Which metric measures the number of days a company holds inventory before it is sold?
- Days Sales Outstanding (DSO)
- Days Inventory Outstanding (DIO) (Correct answer)
- Days Payable Outstanding (DPO)
- Cash Conversion Cycle (CCC)
Correct answer: Days Inventory Outstanding (DIO)
Days Inventory Outstanding (DIO) = (Average Inventory ÷ COGS) × Number of Days, indicating how long inventory is held before being sold.
Question 3: A retailer notices that demand for a product spikes dramatically right before holidays due to consumer buying patterns. This phenomenon is an example of:
- Safety stock consumption
- Seasonal demand variability (Correct answer)
- Bullwhip effect
- Lead time variability
Correct answer: Seasonal demand variability
Seasonal demand variability refers to predictable fluctuations in demand tied to calendar periods such as holidays or seasons.
Question 4: Which inventory model is most appropriate when demand is variable and replenishment lead times are uncertain?
- Fixed-order quantity model with safety stock (Correct answer)
- Economic Order Quantity (EOQ) without safety stock
- Periodic review model with no buffer
- FIFO rotation model
Correct answer: Fixed-order quantity model with safety stock
A fixed-order quantity model with safety stock accounts for demand and lead time variability by maintaining a buffer to prevent stockouts.
Question 5: What is 'consignment inventory'?
- Inventory owned by the buyer and stored at the supplier's facility
- Inventory owned by the supplier but stored at the buyer's location until sold (Correct answer)
- Returned goods awaiting credit approval
- Excess inventory transferred between distribution centers
Correct answer: Inventory owned by the supplier but stored at the buyer's location until sold
In a consignment arrangement, the supplier retains ownership of goods stored at the buyer's location; the buyer pays only when items are sold or used.
Question 6: The 'two-bin system' is a simple replenishment method where:
- Two suppliers fill orders simultaneously to ensure supply continuity
- Items are stored in two bins; when the first bin is empty, a reorder is triggered using the second bin (Correct answer)
- Inventory is split equally between two warehouses
- Two purchase orders are placed simultaneously to avoid stockouts
Correct answer: Items are stored in two bins; when the first bin is empty, a reorder is triggered using the second bin
The two-bin system uses a visual trigger — when the active bin is depleted, the reserve bin is used while a replenishment order is placed.
Question 7: Which of the following costs is NOT typically included in total inventory holding costs?
- Storage and warehousing costs
- Insurance and taxes on inventory
- Obsolescence and spoilage costs
- Supplier's production labor costs (Correct answer)
Correct answer: Supplier's production labor costs
Holding costs encompass storage, insurance, obsolescence, and capital costs borne by the buyer — not the supplier's internal production expenses.
Supply Chain Management Inventory Management 3
What is the primary goal of a Just-in-Time (JIT) inventory system?