CPIM Inventory Management 3 — Questions and Answers
Question 1: What is the effect of demand variability on safety stock requirements when lead time is constant?
- Safety stock decreases as demand variability increases
- Safety stock increases as demand variability increases (Correct answer)
- Safety stock is unaffected by demand variability
- Safety stock and demand variability are inversely proportional
Correct answer: Safety stock increases as demand variability increases
Higher demand variability creates greater uncertainty, requiring more safety stock to maintain a given service level.
Question 2: Which method assigns the most recent purchase cost to cost of goods sold?
- FIFO
- LIFO (Correct answer)
- Weighted average
- Standard cost
Correct answer: LIFO
LIFO (Last In, First Out) assumes the most recently purchased items are sold first, assigning their costs to COGS.
Question 3: In a two-bin system, what event triggers reordering?
- When total inventory falls below the EOQ quantity
- When the first bin is emptied (Correct answer)
- When the second bin is emptied
- At fixed time intervals regardless of usage
Correct answer: When the first bin is emptied
In a two-bin system, emptying the first bin triggers an order; the second bin provides stock during the replenishment lead time.
Question 4: What is 'shrinkage' in the context of inventory management?
- Planned reduction in inventory to reduce holding costs
- Unplanned loss of inventory due to theft, damage, or error (Correct answer)
- Seasonal decrease in product demand
- Reduction in order quantities over time
Correct answer: Unplanned loss of inventory due to theft, damage, or error
Shrinkage refers to the unexplained reduction in inventory resulting from theft, damage, spoilage, or administrative error.
Question 5: Which of the following best describes 'postponement' as an inventory strategy?
- Delaying payment to suppliers to preserve cash
- Deferring final product differentiation until closer to customer demand (Correct answer)
- Postponing cycle counts to reduce labor costs
- Delaying replenishment orders to reduce ordering frequency
Correct answer: Deferring final product differentiation until closer to customer demand
Postponement delays final product customization or configuration until actual customer demand is known, reducing finished goods inventory risk.
Question 6: When calculating the reorder point with safety stock, which formula is correct?
- ROP = Average demand during lead time only
- ROP = Average demand during lead time + Safety stock (Correct answer)
- ROP = EOQ + Safety stock
- ROP = Safety stock - Average demand during lead time
Correct answer: ROP = Average demand during lead time + Safety stock
The reorder point equals average demand during lead time plus safety stock to account for both normal demand and variability.
Question 7: What is the purpose of an inventory record accuracy (IRA) audit?
- To determine the optimal reorder quantity for each SKU
- To verify that physical counts match recorded inventory balances (Correct answer)
- To classify items by ABC category
- To calculate carrying costs for the financial statements
Correct answer: To verify that physical counts match recorded inventory balances
IRA audits compare physical inventory counts to system records, identifying and correcting discrepancies to maintain data integrity.
CPIM Inventory Management 3
What is the effect of demand variability on safety stock requirements when lead time is constant?