CPIM Inventory Planning & Control Strategies 4 — Questions and Answers
Question 1: A company has annual demand of 10,000 units, ordering cost of $50 per order, and holding cost of $2 per unit per year. What is the EOQ?
- 500 units
- 707 units (Correct answer)
- 1,000 units
- 250 units
Correct answer: 707 units
EOQ = √(2DS/H) = √(2 × 10,000 × 50 / 2) = √500,000 ≈ 707 units.
Question 2: Which inventory replenishment strategy is most appropriate for items with highly lumpy or sporadic demand?
- Economic Order Quantity (EOQ)
- Lot-for-lot (LFL) (Correct answer)
- Fixed order quantity
- Period order quantity (POQ)
Correct answer: Lot-for-lot (LFL)
Lot-for-lot orders exactly the quantity needed to meet net requirements each period, avoiding excess inventory for items with irregular demand.
Question 3: In a two-bin kanban system, what triggers a replenishment order?
- When total inventory falls below the EOQ
- When the first bin is emptied and the second bin is opened (Correct answer)
- When the review period expires
- When inventory drops below safety stock
Correct answer: When the first bin is emptied and the second bin is opened
In a two-bin system, opening (emptying) the first bin signals the need to reorder; the second bin contains enough stock to cover demand during replenishment lead time.
Question 4: What is the primary advantage of vendor-managed inventory (VMI)?
- The buyer retains full control over ordering decisions
- The supplier manages replenishment, reducing buyer administrative burden and often improving fill rates (Correct answer)
- It eliminates the need for safety stock entirely
- It replaces electronic data interchange with manual processes
Correct answer: The supplier manages replenishment, reducing buyer administrative burden and often improving fill rates
VMI transfers replenishment responsibility to the supplier, who uses shared data to optimize inventory levels, reducing stockouts and administrative costs for the buyer.
Question 5: Which term describes the total cost associated with placing and receiving a single purchase order, regardless of order size?
- Holding cost
- Stockout cost
- Ordering cost (Correct answer)
- Unit cost
Correct answer: Ordering cost
Ordering cost (or procurement cost) includes all expenses associated with placing a single order, such as processing, receiving, and inspection, independent of quantity.
Question 6: A fill rate of 95% means that:
- 95% of orders are delivered on time
- 95% of demand is satisfied from stock on hand without backorders (Correct answer)
- 5% of inventory is classified as safety stock
- The warehouse operates at 95% capacity utilization
Correct answer: 95% of demand is satisfied from stock on hand without backorders
Fill rate measures the percentage of demand immediately satisfied from available inventory; a 95% fill rate means 5% of demand results in a backorder or lost sale.
Question 7: Which inventory classification approach categorizes items by their criticality to operations, regardless of value or usage frequency?
- ABC analysis
- FSN (Fast/Slow/Non-moving) analysis
- VED (Vital/Essential/Desirable) analysis (Correct answer)
- HML (High/Medium/Low) analysis
Correct answer: VED (Vital/Essential/Desirable) analysis
VED analysis classifies items by their operational importance: Vital (operations stop without them), Essential (serious impact), and Desirable (minor impact if unavailable).
CPIM Inventory Planning & Control Strategies 4
A company has annual demand of 10,000 units, ordering cost of $50 per order, and holding cost of $2 per unit per year.
What is the EOQ?