CPIM Inventory Planning & Control Strategies 3 — Questions and Answers
Question 1: A company uses a continuous review system with a reorder point of 400 units. If current on-hand inventory is 350 units and there is an open purchase order for 200 units, what is the inventory position?
- 350 units
- 550 units (Correct answer)
- 150 units
- 400 units
Correct answer: 550 units
Inventory position = On-hand + On-order − Backorders = 350 + 200 − 0 = 550 units, which is above the reorder point so no order is needed.
Question 2: Which technique calculates safety stock based on the desired service level and the standard deviation of demand during lead time?
- Fixed-period safety stock calculation
- Statistical safety stock calculation (Correct answer)
- Empirical safety stock method
- Days-of-supply method
Correct answer: Statistical safety stock calculation
Statistical safety stock uses a service factor (Z-score) multiplied by the standard deviation of demand during lead time to achieve a target service level.
Question 3: In the context of CPIM, what does 'cycle stock' refer to?
- Inventory held to buffer against demand uncertainty
- Inventory that results from ordering in batches rather than one unit at a time (Correct answer)
- Inventory in transit between locations
- Inventory reserved for seasonal demand peaks
Correct answer: Inventory that results from ordering in batches rather than one unit at a time
Cycle stock is the portion of inventory that results from replenishing in lots or batches; it cycles between a maximum (just after receipt) and near-zero (just before replenishment).
Question 4: A firm wants to reduce inventory investment without harming service levels. Which action would BEST achieve this?
- Increase the reorder point for all items
- Implement ABC analysis and reduce safety stock on C items (Correct answer)
- Increase order quantities to gain volume discounts
- Extend review periods for all items
Correct answer: Implement ABC analysis and reduce safety stock on C items
Applying ABC analysis allows targeted safety stock reductions on low-value C items, reducing total investment while protecting service on high-value A items.
Question 5: What is the effect of increasing lead time variability on safety stock requirements, assuming demand variability is constant?
- Safety stock decreases
- Safety stock remains unchanged
- Safety stock increases (Correct answer)
- Safety stock becomes zero
Correct answer: Safety stock increases
Greater lead time variability increases the uncertainty of demand during lead time, requiring higher safety stock to maintain the same service level.
Question 6: Which inventory valuation method typically results in the lowest ending inventory value during periods of rising prices?
- FIFO (First In, First Out)
- Weighted average cost
- LIFO (Last In, First Out) (Correct answer)
- Standard cost method
Correct answer: LIFO (Last In, First Out)
LIFO assigns the most recent (higher) costs to cost of goods sold, leaving older (lower) costs in ending inventory, resulting in the lowest ending inventory value when prices rise.
Question 7: A just-in-time approach to inventory management primarily aims to:
- Maximize safety stock to prevent stockouts
- Eliminate waste by receiving materials only when needed for production (Correct answer)
- Increase batch sizes to reduce setup costs
- Centralize inventory in a single large warehouse
Correct answer: Eliminate waste by receiving materials only when needed for production
JIT aims to receive inventory exactly when needed for production, minimizing holding costs and waste while requiring reliable suppliers and stable demand.
CPIM Inventory Planning & Control Strategies 3
A company uses a continuous review system with a reorder point of 400 units.
If current on-hand inventory is 350 units and there is an open purchase order for 200 units, what is the inventory position?