Inventory Management Concepts
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Questions and Answers

What does an inventory model with only one order typically result in?

  • Either sold-out items or surplus unsold items for salvage (correct)
  • Guaranteed profitability from each sale
  • Regular replenishment throughout the period
  • Consistent inventory levels throughout the period

    • What is the primary function of safety stock in inventory management?

  • To ensure maximum sale prices
  • To reduce stockouts during periods of higher-than-expected demand (correct)
  • To increase the inventory turnover rate
  • To simplify the ordering process

    • What characterizes a continuous review inventory system?

  • Orders are placed at fixed intervals
  • Inventory levels are checked weekly
  • The inventory position is monitored on a continuous basis (correct)
  • There is no requirement for reorder points

    • How does incremental analysis help determine the optimal order quantity?

    <p>By comparing costs of ordering versus not ordering additional units</p> Signup and view all the answers

    What distinguishes a periodic review inventory system from a continuous review system?

    <p>Inventory is reviewed at predetermined intervals rather than continuously</p> Signup and view all the answers

    What does economic order quantity (EOQ) aim to minimize?

    <p>Annual holding cost plus annual ordering cost</p> Signup and view all the answers

    Which of the following best defines holding cost?

    <p>Cost incurred from inventory maintenance, including capital and insurance</p> Signup and view all the answers

    What is the reorder point in inventory management?

    <p>The inventory position when a new order should be placed</p> Signup and view all the answers

    What does lead-time demand refer to?

    <p>Units demanded during the lead-time period</p> Signup and view all the answers

    Which situation describes a shortage or stockout?

    <p>Demand that cannot be met from current inventory</p> Signup and view all the answers

    Which of the following is NOT a characteristic of a deterministic inventory model?

    <p>Probabilities are associated with demand values</p> Signup and view all the answers

    What is a common outcome associated with goodwill costs?

    <p>Loss of future profits due to unsatisfied demand</p> Signup and view all the answers

    What do quantity discounts encourage from customers?

    <p>Acquiring larger quantities of a product</p> Signup and view all the answers

    Study Notes

    Inventory Management Concepts

    • Economic Order Quantity (EOQ): The order quantity minimizing annual holding and ordering costs.

    • Constant Demand Rate: An assumption where the same amount is demanded each period.

    • Holding Cost: Costs associated with maintaining inventory (capital, insurance, taxes, storage). Often expressed as a percentage of inventory investment or a cost per unit.

    • Cost of Capital: The cost of obtaining investment capital, a component of holding cost. Usually expressed as an annual percentage rate.

    • Ordering Cost: Fixed costs (staff, paperwork, freight) associated with placing an order.

    • Inventory Position: Current inventory on hand plus inventory on order.

    • Reorder Point: Inventory position triggering a new order.

    • Lead Time: Time between ordering and receiving inventory.

    • Lead-Time Demand: Units demanded during the lead time.

    • Cycle Time: Period between placing consecutive orders.

    • Constant Supply Rate: Inventory builds at a steady pace over time.

    • Lot Size: Order quantity in production inventory models.

    • Setup Cost: Fixed costs (labor, materials) associated with a new production run.

    • Shortage/Stockout: Unsatisfied demand due to unavailable inventory.

    • Backorder: An order received when no inventory is available; later filled.

    • Goodwill Cost: Cost of a backorder, lost sale, or shortage; includes loss of future profit.

    • Quantity Discounts: Lower unit costs for larger order quantities.

    • Deterministic Inventory Model: Demand is known and certain.

    • Probabilistic Inventory Model: Demand is uncertain; probabilities must assess demand.

    • Single-Period Inventory Model: One order is placed; either all is sold or unsold items are salvaged.

    • Incremental Analysis: Comparing ordering a unit vs not ordering to determine optimal quantity.

    • Lead-Time Demand Distribution: Probability distribution of demand during lead time.

    • Safety Stock: Inventory to reduce stockouts due to higher than expected demand.

    • Continuous Review System: Inventory position is continuously monitored; reorder when the reorder point is reached.

    • Periodic Review System: Inventory position is checked at fixed intervals; reorders placed only at those intervals.

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    Description

    This quiz covers essential concepts of inventory management including Economic Order Quantity, holding costs, ordering costs, and reorder points. Test your understanding of how these elements work together to optimize inventory and reduce costs in a business setting.

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