CPIM Inventory Planning & Control Strategies 2 — Questions and Answers
Question 1: A company notices its inventory turnover ratio has decreased from 8 to 5 over the past year. What does this most likely indicate?
- Inventory is being sold and replaced more quickly
- Excess inventory is being held relative to sales (Correct answer)
- The company has reduced its carrying costs
- Demand forecasting accuracy has improved
Correct answer: Excess inventory is being held relative to sales
A declining inventory turnover ratio indicates that inventory is sitting longer before being sold, suggesting excess stock relative to demand.
Question 2: Which inventory classification method assigns items to categories A, B, or C based on annual dollar usage?
- XYZ analysis
- FSN analysis
- ABC analysis (Correct answer)
- VED analysis
Correct answer: ABC analysis
ABC analysis categorizes inventory by annual dollar value, with A items representing the highest value (typically 70-80% of value from 10-20% of items).
Question 3: In a periodic review system, what is determined at each review interval?
- The reorder point
- The order quantity needed to bring inventory to a target level (Correct answer)
- The economic order quantity
- The safety stock level only
Correct answer: The order quantity needed to bring inventory to a target level
In a periodic review system, the order quantity is calculated at each review period to replenish inventory up to a predetermined target or order-up-to level.
Question 4: Which cost is NOT typically included in inventory carrying costs?
- Obsolescence cost
- Storage and warehousing cost
- Setup or ordering cost (Correct answer)
- Insurance cost
Correct answer: Setup or ordering cost
Setup or ordering cost is an ordering cost (or production cost), not a carrying cost; carrying costs include storage, insurance, taxes, and obsolescence.
Question 5: A product has a demand of 500 units/week with a lead time of 3 weeks and a safety stock of 200 units. What is the reorder point?
- 1,500 units
- 1,700 units (Correct answer)
- 700 units
- 500 units
Correct answer: 1,700 units
Reorder Point = (Demand × Lead Time) + Safety Stock = (500 × 3) + 200 = 1,700 units.
Question 6: Which inventory model assumes that the entire order quantity arrives at once and demand is continuous?
- Production order quantity model
- Newsvendor model
- Basic EOQ model (Correct answer)
- Wagner-Whitin model
Correct answer: Basic EOQ model
The basic EOQ model assumes instantaneous replenishment (entire order arrives at once) and a constant, continuous demand rate.
Question 7: What is the primary purpose of a min-max inventory system?
- To optimize economic order quantities across all SKUs
- To trigger replenishment when stock falls to a minimum and order up to a maximum level (Correct answer)
- To synchronize inventory with production schedules
- To eliminate safety stock requirements
Correct answer: To trigger replenishment when stock falls to a minimum and order up to a maximum level
A min-max system places an order when inventory hits the minimum level, ordering enough to bring stock up to the maximum level.
CPIM Inventory Planning & Control Strategies 2
A company notices its inventory turnover ratio has decreased from 8 to 5 over the past year.
What does this most likely indicate?