Inventory Management Flashcards

A warehouse manager is implementing an inventory control program. An analysis reveals that 15% of SKUs account for 80% of the annual dollar value, 35% of SKUs account for 15%, and the remaining 50% of SKUs account for only 5%. Based on this distribution, which inventory management technique is MOST appropriate?

Answer: ABC classification

This scenario perfectly describes the Pareto principle (80/20 rule) applied to inventory, which is the foundation of ABC classification. 'A' items (the top 15%) are the most valuable and should receive the tightest control and most frequent review. 'B' items (the next 35%) require moderate control, and 'C' items (the bottom 50%) can be managed with simpler, less frequent controls.

A manufacturing company holds extra components just before a machine's scheduled annual maintenance, during which the machine will be shut down and unable to produce. This type of inventory is BEST classified as:

Answer: Anticipation inventory

Anticipation inventory is built up to meet demand during a foreseeable future event. In this case, the event is the planned plant shutdown for maintenance. This is different from safety stock, which is held to buffer against unexpected variations in demand or supply. Decoupling inventory separates different stages in a process, and pipeline inventory is in transit.

A distribution center needs to determine the reorder point (ROP) for a product. The average daily demand is 60 units, the lead time from the supplier is 8 days, and management has set the required safety stock at 120 units. At what inventory level should a new order be placed?

Answer: 600 units

The Reorder Point (ROP) formula is: (Average daily demand × Lead time in days) + Safety stock. In this scenario, the calculation is (60 units/day × 8 days) + 120 units = 480 + 120 = 600 units. An order should be placed when the inventory on hand drops to 600 units to cover demand during the lead time plus the safety buffer.

The basic Economic Order Quantity (EOQ) model is a foundational concept for determining the optimal order size. Which of the following is a key assumption of this model?

Answer: Demand is constant and known.

The classic EOQ model is built on several simplifying assumptions to function correctly. One of the most critical is that the demand for the product is constant and known over the period. The basic model also assumes that lead time is constant, no quantity discounts are available, and no stockouts occur.

A company is experiencing frequent discrepancies between its inventory records and physical stock counts, leading to stockouts and production delays. To improve inventory record accuracy on a continual basis, which of the following is the MOST appropriate and sustainable practice to implement?

Answer: Implement a robust cycle counting program.

Cycle counting is a process of continually auditing inventory records by counting small, specific subsets of inventory on a frequent basis. It is a proactive and sustainable method for identifying and correcting the root causes of inventory errors, thereby improving overall record accuracy over time. A full annual count is disruptive and only provides a single snapshot in time, while increasing safety stock only mitigates the symptom (stockouts) without fixing the underlying problem of inaccuracy.

In the context of total inventory costs, which of the following would be considered an ordering cost?

Answer: Clerical costs for preparing a purchase order.

Ordering costs are the expenses incurred each time an order is placed, regardless of the quantity ordered. This includes fixed administrative and clerical costs associated with creating and processing a purchase order. Costs like insurance, capital, and spoilage are considered carrying or holding costs, as they are related to the quantity of inventory being stored over time.