Supply Chain Management Inventory Management 4 — Questions and Answers
Question 1: What does 'stockout cost' represent in inventory management?
- The cost of disposing of expired inventory
- Revenue or goodwill lost when demand cannot be met due to insufficient inventory (Correct answer)
- The expense of placing an emergency purchase order
- Penalties paid to suppliers for late payments
Correct answer: Revenue or goodwill lost when demand cannot be met due to insufficient inventory
Stockout costs include lost sales, backorder costs, customer dissatisfaction, and potential long-term loss of customer loyalty when inventory is unavailable.
Question 2: In an EOQ model, what happens to the optimal order quantity if holding costs double while all other variables remain constant?
- EOQ doubles
- EOQ increases by approximately 41%
- EOQ decreases by approximately 29% (Correct answer)
- EOQ remains unchanged
Correct answer: EOQ decreases by approximately 29%
Since EOQ = √(2DS/H), doubling H results in EOQ being divided by √2, reducing it by approximately 29%.
Question 3: Which inventory replenishment strategy involves placing orders at fixed time intervals regardless of current inventory levels?
- Continuous review system (Q system)
- Periodic review system (P system) (Correct answer)
- Economic Order Quantity model
- Just-in-Time replenishment
Correct answer: Periodic review system (P system)
The periodic review (P) system triggers orders at predetermined time intervals, with order quantity adjusted to bring stock up to a target level.
Question 4: A supply chain manager wants to reduce the bullwhip effect. Which action would be MOST effective?
- Increase safety stock at every tier of the supply chain
- Share real-time point-of-sale demand data with upstream suppliers (Correct answer)
- Place larger, less frequent orders to reduce transaction costs
- Switch all suppliers to a LIFO inventory system
Correct answer: Share real-time point-of-sale demand data with upstream suppliers
Sharing real-time downstream demand data reduces information distortion as orders travel upstream, directly addressing the root cause of the bullwhip effect.
Question 5: What is 'shrinkage' in the context of retail inventory management?
- Physical reduction in item size during storage
- Inventory loss due to theft, damage, administrative errors, or supplier fraud (Correct answer)
- Reduction in order quantity during demand downturns
- Compression of lead times through supplier negotiations
Correct answer: Inventory loss due to theft, damage, administrative errors, or supplier fraud
Shrinkage is the difference between recorded inventory and actual physical inventory, caused by shoplifting, employee theft, damage, or clerical errors.
Question 6: Which of the following is an advantage of maintaining higher safety stock levels?
- Lower holding costs
- Reduced risk of stockouts during demand or supply uncertainty (Correct answer)
- Improved inventory turnover ratio
- Decreased warehouse space requirements
Correct answer: Reduced risk of stockouts during demand or supply uncertainty
Higher safety stock acts as a buffer against demand spikes and supply delays, reducing the probability and cost of stockouts.
Question 7: A company uses a 'push' inventory system. This means inventory is:
- Replenished based on actual downstream demand signals
- Produced and distributed based on forecasts, pushing product to distribution points (Correct answer)
- Managed entirely by the retailer without supplier involvement
- Ordered only when customers place confirmed purchase orders
Correct answer: Produced and distributed based on forecasts, pushing product to distribution points
Push systems rely on demand forecasts to produce and distribute inventory in advance, rather than waiting for actual customer demand to trigger replenishment.
Supply Chain Management Inventory Management 4
What does 'stockout cost' represent in inventory management?