Coyle Supply Chain Management: A Logistics Perspective, 9th Edition Chapter 9 Test Bank

CHAPTER 9 TEST QUESTIONS True-False 1. Inventory management is not as important as it once was due to other factors that have come into play. ANSWER: False, Page 313 2. Inventory and the GDP grew at the same rate from 1994 through 2010. ANSWER: False, Page 315 3. Inventory plays a dual role in organizations. Inventory impacts the cost of goods sold as well as supporting the balance sheet, a new concept only recently receiving attention. ANSWER: False, Page 315 4. Batching economies and cycle stocks are the same. ANSWER: True, Page 317 5. Purchase economies and transportation economies are not complementary. ANSWER: False, Page 317 6. Setting safety stock levels for an organization is now a science. ANSWER: False, Page 318 7. A reason to hold inventory arises when an organization anticipates that an unusual event might occur that will negatively impact its source of supply. ANSWER: True, Page 322 8. Many companies can make a case for using a formal logistics organization to help resolve inventory objective conflicts. ANSWER: True, Page 323 9. Capital cost is also called interest or opportunity cost. ANSWER: True, Page 324 10. Storage space costs are not variable. ANSWER: False, Page 325 11. Ordering cost refers to the expense of placing an order for additional inventory and does not include the cost or expense of the product itself. ANSWER: True, Page 328 12. The reorder point depends on the orders in-house at that time. ANSWER: False, Page 339 13. EOQ can only be used for push inventory. ANSWER: False, Page 338 14. Most organizations would not operate under conditions of certainty for a variety of reasons .

9-1

Coyle Supply Chain Management: A Logistics Perspective, 9th Edition Chapter 9 Test Bank
ANSWER: True, Page 348 In comparison with the basic EOQ approach, the fixed interval model does not require close surveillance of inventory levels. ANSWER: True, Page 356 15. 16. JIT, MRP, MRP II, and DRP all incorporate some version of the basic EOQ model into their philosophies. ANSWER: True, Page 357 17. JIT was developed in the U.S. and copied by the Japanese. ANSWER: False, Pages 359 18. JIT is often used to force inventory back up the pipeline and therefore does not reduce inventory. ANSWER: False, Page 360 19. MRP has been known for some time but lacked interest until recently. ANSWER: True, Pages 361 20. MRPII will not allow an organization to integrate financial planning with operations and logistics. ANSWER: False, Page 366 21. The ABC analysis is based on Paretos Law. ANSWER: True, Page 371 Multiple Choice 22. Inventory as an asset on the balance sheet and a __________ on the income statement. a. liability b. footnote c. statement d. variable expense ANSWER: d, Page 313 23. Inventory and the GDP grew by ______ amounts between 1994 and 2010. a. the same b. different c. inversely proportional d. exponential ANSWER: b, Page 315 24. Batching economies or cycle stocks usually arise from three sources. Which of these is not a source? a. procurement b. transportation c. production d. demand

9-2

Coyle Supply Chain Management: A Logistics Perspective, 9th Edition Chapter 9 Test Bank
ANSWER: d, Page 317 25. WIP inventories a. not included on the balance sheet. b. are associated with manufacturing. c. are the same as VMI inventories. d. are not impacted by EOQ. ANSWER: b, Page 318 26. Seasonal stocks are not influenced by a. EOQ. b. weather. c. transportation. d. holidays. ANSWER: a, Page 321 27. Which department does not have any impact on inventory? a. finance b. manufacturing c. corporate governance d. marketing ANSWER: c, Pages 322-323 28. Capital cost focuses on the cost of capital tied up in ________and the resulting lost opportunity from investing that capital elsewhere. a. plants b. inventory c. distribution centers d. WIP ANSWER: b, Page 324 29. Ordering cost refers to the expense of placing an order and a. includes the cost of capital. b. relates to the material management concept. c. does not include the cost of the product. d. not receiving it. ANSWER: c, Page 328 30. In the event of a stockout one of the things that could happen is a. the vendors plant shuts down. b. the cost of capital is increased. c. the SCOR process would come into play. d. extra shipping cost may be incurred. ANSWER: d, Page 331 31. Dependent demand relates to a. demand for another inventory item or product. b. the spare parts needed to fill the order. c. VMI inventories.

9-3

Coyle Supply Chain Management: A Logistics Perspective, 9th Edition Chapter 9 Test Bank
d. the cost of capital for the firm. ANSWER: a, Page 337 32. An organization selling its products FOB destination holds the title to the goods until: a. picked up by the trucker b. products reach the customers facility c. the customer is invoiced d. the customer receives the goods into their inventory system ANSWER: b, Page 335 33. JIT is a _______ system. a. push b. Paretos Law c. MRP d. pull ANSWER: d, Page 338 34. A DRP system is usually coupled with a _______ system in an attempt to manage the flow and timing of both inbound materials and outbound finished goods. a. Kan Ban b. VMI/ Consignment c. MRP d. JIT ANSWER: c, Page 367 Essay 35. Batching economies or cycle stocks usually arise from three sources. Name them, and discuss one of them in detail. ANSWER: The three sources are procurement, production, and transportation. In the procurement area, it is not unusual for a seller to have a schedule of prices that reflects the quantity purchased. In other words, larger purchased volumes result in lower prices per unit and vice versa. Purchase discounts are also prevalent for personal consumption items. What is not consumed immediately will have to be stored. When organizations buy raw materials and supplies, particularly in our global economy, they are often offered price discounts for larger quantities. The tradeoff logic suggests that the price discount savings have to be compared to the additional cost of carrying inventory. This is a relatively straightforward analysis. In spite of the analytic framework available for analyzing discount tradeoffs, sometimes organizations just focus on the price savings and do not justify the discount against the additional inventory carrying cost. A related discount situation occurs with transportation services. Transportation firms usually offer rate or price discounts for shipping larger quantities. In the motor carrier industry, a common example is the lower rate or price per pound for shipping truckload quantities versus less-than-truckload quantities. The motor carrier saves money in pick-up, handling, and delivery costs with the truckload shipment, and these are reflected in a lower rate or price to the shipper. The larger shipment quantities to justify the discount have the same effect as the purchase quantitiesthat is, cycle stocks. The tradeoff requirement is the same. Do the costs savings from the larger shipment offset the additional inventory carrying cost?

9-4

Coyle Supply Chain Management: A Logistics Perspective, 9th Edition Chapter 9 Test Bank
Note that purchase economies and transportation economies are complementary. That is, when organizations buy larger quantities of raw materials or supplies, they can ship larger quantities, which can result in transportation discounts. Therefore, they are frequently the recipients of two discounts for the same item purchased, which can make the tradeoff evaluation positive. One of the big challenges is that many organizations might not calculate their carrying costs accurately. The third batching economy is associated with production. Many organizations feel that their production costs per unit are substantially lower when they have long production runs of the same product. Long production runs decrease the number of changeovers to a production line but increase the amount of cycle stock that must be stored until they are sold. Traditionally, organizations rationalized long productions runs to lower unit costs without really evaluating the resulting inventory carrying costs, which can be high for finished goods. There is also a related concern about obsolescence of finished goods when high inventories are kept. (Page 317) 36. Discuss how seasonality can affect inventory. ANSWER: Organizations that are faced with seasonality issues are constantly challenged when determining how much inventory to accumulate. Organizations that process agriculture products are a good example of supply seasonality. While the supply of the raw material is available during only one part of the year, demand is stable throughout the year. Therefore, the finished product usually has to be stored until it is sold. That is, when the raw material is available, it needs to be converted to finished product. This scenario often involves high storage costs and high obsolescence costs. An alternative scenario might be to store the raw material, or some preprocessed version of it, and use it to make the finished product as the demand dictates. Sometimes seasonality can impact transportation, particularly if domestic water transportation is used. Another example would be the seasonality of the construction industry in the United States and its impact on the availability of flatbed tractor trailers. Although construction takes place in many areas of the United States year round, the northern states experience a slowdown in construction activity during the winter months. As spring approaches in the north, construction activity increases dramatically. The peak springtime construction season places a heavy demand on a fixed capacity of flatbed trailers to move construction supplies. (Page 321) 37. Discuss how logistics interfaces with finance, marketing and manufacturing from an inventory standpoint. ANSWER: Marketing The primary mission of marketing is to identify, create, and help satisfy demand for an organizations products or services. In a product-oriented environment, the presence of the correct levels and types of inventory is crucial to fulfilling this mission. As such, marketing tends to have a favorable view on holding sufficient, or extra, inventory to ensure product availability to meet customer needs. Marketings desire to hold inventory is also driven by new product offerings and continued market growth objectives. Manufacturing In many organizations, manufacturing operations are measured by how efficiently they can produce each unit of output. This situation typically means that manufacturing operations tend to be optimized when they have long production runs of a single product while minimizing the number of changeovers. These long productions runs will result in high inventory levels but low labor and machine costs per unit. Within industries faced with seasonal demand patterns, manufacturing is optimized by producing product even though demand

9-5

Coyle Supply Chain Management: A Logistics Perspective, 9th Edition Chapter 9 Test Bank
for the product does not exist at the time of production. Adding the complexity of production scheduling to accommodate product line growth and brand extensions to this seasonality can result in significantly high inventories to create low manufacturing costs. Finance Inventories impact both the income statement and balance sheet of an organization. Inventories create both an asset and liability on the balance sheet as well as a cash flow impact on the income statement. As such, finance usually looks favorably at low inventories to increase inventory turns, reduce liabilities and assets, and increase cash flow to the organization . (Pages 322-323) 38. Discuss capital cost and include both the hurdle rate and WACC in your answer. ANSWER: Sometimes called the interest or opportunity cost, capital cost focuses on the cost of capital tied up in inventory and the resulting lost opportunity from not investing that capital elsewhere. For example, all organizations borrow money from external sources to fund operations. This money might be in the form of equity (from stock issues) or debt (borrowing from banks). In either case, borrowed money has a cost associated with it. For equity, it is dividends; for debt, it is interest payments. In either case, an organization incurs a cost for borrowing money. If an organization decides to use this money to buy raw materials, build manufacturing plants, and hire labor to produce finished products for storage, then this inventory carries this borrowed money cost while sitting waiting to be sold. As such, capital tied up in inventory still requires dividend or interest payments to the funding source. The opportunity cost of this inventory is the return on capital the organization might have realized if it had invested in another opportunity rather than in raw materials, plants, and labor. The capital cost is frequently the largest component of inventory carrying cost. An organization usually expresses it as a percentage of the dollar value of the inventory held. In practice, determining an acceptable number to use for capital cost is not an easy task. One way of calculating capital cost for inventory decision making might use an organizations hurdle rate, the minimum rate of return on new investments. In this way, the organization makes inventory decisions in the same way that it does for investing in new facilities, advertising, and so on. Another way of calculating capital cost is for an organization to use its weighted average cost of capital (WACC). WACC is the weighted average percent of debt service of all external sources of funding, including both equity and debt. This method reflects the direct debt service costs of having capital tied up in inventory. (Page 324) 39. Discuss dependent versus independent demand as it is related to inventory. ANSWER: Demand for a given inventory item is termed independent when such demand is unrelated to the demand for other items. Conversely, demand is defined as dependent when it is directly related to, or derives from, the demand for another inventory item or product. For example, the demand for a laptop computer is independent, while the demand for its computer chip is dependent. This dependency can be vertical (the laptop needs the chip for assembly) or horizontal (the laptop needs an instruction manual for final delivery to customer). So, for many manufacturing processes, basic demand for raw materials, component parts, and subassemblies depends on the demand for the finished product. In contrast, the demand for the

9-6

Coyle Supply Chain Management: A Logistics Perspective, 9th Edition Chapter 9 Test Bank
end-use items, which are typically sold to a customer, is independent of the demand for any other higher-order manufactured item. An important point to remember is that developing inventory policies for items exhibiting independent demand requires that forecasts be developed for these items. Alternatively, forecasting is less relevant for items having dependent demand, since the required quantities for these items depend entirely on the demand for the end-use product. So, once the difficult task of forecasting demand for end-use items is completed, determining the demand for dependent items requires simple calculations based on the bill of materials for that item. (Pages 337-338) 40. What are push and pull systems, and name at least one inventory management system that is a push or pull system. ANSWER: The pull approach relies on customer orders to move product through a logistics system, while the push approach uses inventory replenishment techniques in anticipation of demand to move products. A principal attribute of pull systems is that they can respond quickly to sudden or abrupt changes in demand because they produce to an order and have very little, if any, finished goods inventory. This is especially true for products where the final addition of value can be postponed. Alternatively, push systems produce to inventory in anticipation of demand, thus making their ability to adapt to changing demand volumes and preferences limited. Pull systems usually run on short-term forecasts, allowing them the flexibility to adapt to swings in demand. On the other hand, push systems use longer-term forecasts that allow for scale economies in manufacturing but result in high finished goods inventories. These high levels of finished goods inventories can make shelf life a problem in push systems, while this is not an issue for pull systems. Characteristically, JIT is a pull system since organizations place orders for more inventory only when the amount on hand reaches a certain minimum level, thus pulling inventory through the logistics system as needed. Having established a master production schedule, MRP develops a time-phased approach to inventory scheduling receipt. Because they generate a list of required materials in order to assemble or manufacture a specific amount of finished products, MRP and MRP II approaches are push based. (Page 338) 41. Define and discuss the Just-In-Time approach, and include the four elements necessary for it to be successful. ANSWER: Generally, JIT systems are designed to manage lead times and to eliminate waste. Ideally, product should arrive exactly when an organization needs it, with no tolerance for late or early deliveries. Many JIT systems place a high priority on short, consistent lead times. However, in a true JIT system, the length of the lead time is not as important as the reliability of the lead time. The JIT concept is an Americanized version of the Kanban system, which the Toyota Motor Company developed in Japan. Kanban refers to the cards attached to carts delivering small amounts of needed components and other materials to locations within manufacturing facilities.

9-7

Coyle Supply Chain Management: A Logistics Perspective, 9th Edition Chapter 9 Test Bank
Each card precisely details the necessary replenishment quantities and the exact time when the replenishment activity must take place. Production cards (kan cards) establish and authorize the amount of product to be manufactured; requisition cards (ban cards) authorize the withdrawal of needed materials from the supply operation. Given knowledge of daily output volumes, these activities can be accomplished manually, without the need for computer assistance. Experience indicates that effectively implementing the JIT concept can dramatically reduce parts and materials inventories, work-in-process inventories, and finished product. In addition, the Kanban and JIT concepts rely heavily on the quality of the manufactured product and components and on a capable and precise logistics system to manage materials and physical distribution. Four major elements underlie the JIT concept: zero inventories; short, consistent lead times; small, frequent replenishment quantities; and high quality, or zero defects. JIT is an operating concept based on delivering materials in exact amounts and at the precise times that organizations need themthus minimizing inventory costs. JIT can improve quality and minimize waste and completely change the way an organization performs its logistics activities. JIT, as practiced by many organizations, is more comprehensive than an inventory management system. It includes a comprehensive culture of quality, supplier partnerships, and employee teams. By adhering to extremely small lot sizes and very short lead times, the JIT approach can dramatically reduce lead times. (Page 359) 42. Define and discuss Materials Requirements Planning. ANSWER: An MRP system consists of a set of logically related procedures, decision rules, and records designed to translate a master production schedule into time-phased net inventory requirements and the planned coverage of such requirements for each component item needed to implement this schedule. An MRP system recalculates net requirements and coverage as a result of changes in the master production schedule, demand, inventory status, or product composition. MRP systems meet their objectives by computing net requirements for each inventory item, timephasing them, and determining their proper coverage. The goals of an MRP system are to (1) ensure the availability of materials, components, and products for planned production and for customer delivery; (2) maintain the lowest possible inventory levels that support service objectives; and (3) plan manufacturing activities, delivery schedules, and purchasing activities. In doing so, an MRP system considers current and planned quantities of parts and products in inventory as well as the timing needed for these parts and products. MRP begins by determining how much end products (independent-demand items) customers desire and when they are needed. Then MRP disaggregates the timing and need for components based on the end-product demand. In practice, MRP is exceptionally suitable for planning and controlling the ordering and receipt of large numbers of parts and products that might interact during assembly or manufacture. Organizations such as Dell and Boeing use the MRP approach to assemble computers and

9-8

Coyle Supply Chain Management: A Logistics Perspective, 9th Edition Chapter 9 Test Bank
aircraft, respectively. With the exception of very simple problems, computer technology is virtually a prerequisite to using MRP-based applications. (Pages 361-364) 43. Describe the ABC Analysis inventory technique. ANSWER: This classification technique assigns inventory items to one of three groups according to the relative impact or value of the items that make up the group. A items are considered to be the most important, with B items being of lesser importance, and C items being the least important. Remember that the criteria used to evaluate an item will determine the group to which it is assigned. Using revenue per item as the criterion might assign Item 1 to the A group, while using profit per item as the criterion might assign Item 1 to the C group. Determining which criteria to use for inventory classification will depend on the goals the organization is trying to achieve. Also remember that an organization might determine that it needs more or less than three groupings. ABC classification is relatively simple. The first step is to select some criterion, such as revenue, for developing the ranking. The next step is to rank items in descending order of importance according to this criterion and to calculate actual and cumulative total revenue percentages for each item. This calculation will allow the items to be grouped into the ABC categories (Pages 371-372)

9-9