CPM CPM Inventory and Materials Management 1 — Questions and Answers
Question 1: Which inventory management technique classifies items into three categories (A, B, and C) based on their annual dollar value?
- ABC analysis (Correct answer)
- FIFO method
- Safety stock analysis
- Reorder point method
Correct answer: ABC analysis
ABC analysis categorizes inventory by annual dollar usage so purchasing managers can focus control efforts on high-value 'A' items.
Question 2: What does the term 'Economic Order Quantity' (EOQ) represent in inventory management?
- The maximum amount that can be stored
- The order size that minimizes total holding and ordering costs (Correct answer)
- The safety stock level required
- The lead time demand quantity
Correct answer: The order size that minimizes total holding and ordering costs
EOQ is the optimal order size that minimizes the sum of ordering costs and inventory holding costs.
Question 3: What is 'safety stock' in inventory management?
- Stock reserved for key customers
- Buffer inventory held to protect against demand or supply uncertainty (Correct answer)
- Items kept for quality inspection
- Minimum order quantity from a supplier
Correct answer: Buffer inventory held to protect against demand or supply uncertainty
Safety stock is extra inventory held as a cushion against unexpected demand spikes or supplier delivery delays.
Question 4: Which inventory valuation method assumes the most recently received goods are sold first?
- FIFO
- LIFO (Correct answer)
- Weighted average
- Standard cost
Correct answer: LIFO
LIFO (Last-In, First-Out) assumes the newest inventory items are used or sold before older ones.
Question 5: What is the primary goal of Just-In-Time (JIT) inventory management?
- Maximize warehouse capacity
- Reduce inventory carrying costs by receiving goods only as needed (Correct answer)
- Increase safety stock levels
- Standardize all supplier lead times
Correct answer: Reduce inventory carrying costs by receiving goods only as needed
JIT aims to minimize inventory on hand by synchronizing deliveries with production or use schedules, reducing carrying costs.
Question 6: What is the 'reorder point' (ROP) in inventory management?
- The quantity at which a new order must be placed to avoid stockout (Correct answer)
- The maximum inventory level allowed
- The economic order quantity for replenishment
- The point when inventory is considered obsolete
Correct answer: The quantity at which a new order must be placed to avoid stockout
The reorder point is the inventory level that triggers a new purchase order, calculated to cover demand during the supplier lead time.
CPM CPM Inventory and Materials Management 1
Which inventory management technique classifies items into three categories (A, B, and C) based on their annual dollar value?