Chapter 7

Question 1

Inventory

Answer 1

a supply of items held by a firm to meet demand

Question 2

MRO Inventory

Answer 2

maintenance, repair, and operating supplies

Question 3

Transit Inventory

Answer 3

items being transported from one location to another

Question 4

Buffer (Safety) Stock

Answer 4

extra inventory held to guard against uncertainty in demand or supply

Question 5

Product Cost

Answer 5

the amount paid to suppliers for products that are purchased

Question 6

Carrying (holding) Costs

Answer 6

several expenses that are incurred due to the fact that inventory is held

Question 7

Order Cost

Answer 7

the expenses incurred in placing and receiving orders from suppliers

Question 8

Setup Cost

Answer 8

administrative expenses and the expenses of rearranging a work center to produce an item

Question 9

Stockout (Shortage) Cost

Answer 9

cost incurred when inventory is not available to meet demand

Question 10

Inventory Turnover

Answer 10

the ratio between average inventory and the level of sales

Question 11

Benefits of Low Inventory (3)

Answer 11

• Increased sales volume, fast moving inventory
• less risk of obsolescence
• decreased inventory holding costs

Question 12

Risks of Low Inventory (2)

Answer 12

• possible shortages

- higher cost of goods, not buying in bulk

Question 13

Days of Supply

Answer 13

the number of days of business operations that can be supported with the inventory on-hand

Question 14

Service Level

Answer 14

a measure of how well the objective of meeting customer demand is met

Question 15

Independent Demand Inventory Systems

Answer 15

inventory management systems used when the demand for an item is beyond the control of the company

Question 16

Dependent Demand Inventory Systems

Answer 16

management systems used when the demand for an item is derived from the demand for some other item

Question 17

Total Acquisition Cost =

Answer 17

Annual Ordering Cost + Annual Carrying Cost + Product Cost

=C0 (D/Q) + UC1 Q/2 + Product Cost

Question 18

Total Acqusition Cost (def.)

Answer 18

the sum of all relevant inventory costs incurred each year

Question 19

Economic Order Quantity=

Answer 19

sqrt(2DCo/UCi)

Question 20

Economic Order Quantity (def.)

Answer 20

the order quantity that minimizes the sum of annual inventory carrying cost and annual ordering cost

Question 21

EOQ Extensions

Answer 21

• No quantity discounts
• No lot size restrictions
• No partial deliveries
• No variability
• No Product interactions

Question 22

Demand During Lead Time (DDLT) (def.)

Answer 22

the amount of demand that occurs while awaiting receipt of an inventory replenishment order

Question 23

Service Level Policy

Answer 23

specification of the amount of risk of incurring a stockout that a firm is willing to incur

Question 24

Order Interval

Answer 24

a fixed time period that passes between inventory reviews

Question 25

ABC Analysis

Answer 25

the ranking of items of inventory according to importance

Question 26

Pareto's Law

Answer 26

a small percentage of items account for a large percentage of sales, profits, or importance to a company

Question 27

Cycle Counting

Answer 27

a process where each item in inventory is physically counted on a routine schedule

Question 28

Bullwhip Effect

Answer 28

a small disturbance generated by a customer produces successively larger disturbances at each upstream stage in the supply chain

Question 29

Vendor-Managed Inventory

Answer 29

the vendor is responsible for managing the inventory located at the customer's facility

Question 30

Components of Holding Costs (6)

Answer 30

``` opportunity costs cost of storage taxes insurance obsolescence, loss, and disposal materials handling, tracking, and management ```

Question 31

Enabling Economies of Buying (3)

Answer 31

price discounts economies associated with transporting larger quantities speculative holdings/futures

Question 32

Two Components of Inventory Performance Metrics

Answer 32

``` Asset Productivity (inventory turnover, days of supply) Service Level ```