5. Why it might be inappropriate to use inventory turnover ratios to compare
inventory performance of companies that are in different industries?
Ans: It may be inappropriate to compare the inventory turnover ratios of companies in
different industries because the production process, requirements and the length of
production run varies across different industries. The shorter the production time, the less
will be the need for inventory.
In addition, the material delivery lead times may vary between different industries. The
higher the variability of lead time and the longer the lead time, the greater would be the
need for inventory. As supplier reliability increases, the need for inventory decreases. The
industries with higher forecast accuracies have less of a need for inventories.
7. How would you respond to the criticism that EOQ models tend to provide misleading
results because values of D,H,S are educated guess?
Ans: The total cost curve is relatively flat in the vicinity of the EOQ, so that there is a “zone” of
values of order quantity for which the total cost is close to its minimum. The fact that the
EOQ calculation involves taking a square root lessens the impact of estimation errors.
Also, errors may cancel each other out.
8. Explain briefly how a higher carrying cost can result in a decrease in inventory?
Ans: As the carrying cost increases, holding inventory becomes more expensive. Therefore, in
order to avoid higher inventory carrying costs, the company will order more frequently in
smaller quantities because ordering smaller quantities will lead to carrying fewer
inventories.
12. Describe briefly the ABC approach to inventory control.
Ans: The A-B-C approach refers to the classification of items stocked according to some
measure of importance (e.g., cost, cost-volume, criticalness, cost of stockout) and
allocating control efforts on that basis.
This study source was downloaded by 100000850872992 from CourseHero.com on 03-31-2023 03:54:58 GMT -05:00
https://www.coursehero.com/file/12828466/Inventory-Management/
, 14. Explain how a decrease in setup time can lead to a decrease in the average amount of
inventory a firm holds, and why that would be beneficial?
Ans: Annual carrying costs are determined by average inventory. Hence, a decrease in average
inventory is desirable, if possible. Average inventory is Qo/2, and Qo decreases (run size
model) if setup cost, S, decreases.
17. What are some ways in which a company can reduce the need for inventories?
Ans: A company can reduce the need for inventories by:
a. using standardized parts
b. improved forecasting of demand
c. using preventive maintenance on equipment and machines
d. reducing supplier delivery lead times and delivery reliability
e. utilizing reliable suppliers and improving the relationships in the supply chain
f. restructuring the supply chain so that the supplier holds the inventory
g. reducing production lead time by using more efficient manufacturing methods
h. developing simpler product designs with fewer parts.
This study source was downloaded by 100000850872992 from CourseHero.com on 03-31-2023 03:54:58 GMT -05:00
https://www.coursehero.com/file/12828466/Inventory-Management/
inventory performance of companies that are in different industries?
Ans: It may be inappropriate to compare the inventory turnover ratios of companies in
different industries because the production process, requirements and the length of
production run varies across different industries. The shorter the production time, the less
will be the need for inventory.
In addition, the material delivery lead times may vary between different industries. The
higher the variability of lead time and the longer the lead time, the greater would be the
need for inventory. As supplier reliability increases, the need for inventory decreases. The
industries with higher forecast accuracies have less of a need for inventories.
7. How would you respond to the criticism that EOQ models tend to provide misleading
results because values of D,H,S are educated guess?
Ans: The total cost curve is relatively flat in the vicinity of the EOQ, so that there is a “zone” of
values of order quantity for which the total cost is close to its minimum. The fact that the
EOQ calculation involves taking a square root lessens the impact of estimation errors.
Also, errors may cancel each other out.
8. Explain briefly how a higher carrying cost can result in a decrease in inventory?
Ans: As the carrying cost increases, holding inventory becomes more expensive. Therefore, in
order to avoid higher inventory carrying costs, the company will order more frequently in
smaller quantities because ordering smaller quantities will lead to carrying fewer
inventories.
12. Describe briefly the ABC approach to inventory control.
Ans: The A-B-C approach refers to the classification of items stocked according to some
measure of importance (e.g., cost, cost-volume, criticalness, cost of stockout) and
allocating control efforts on that basis.
This study source was downloaded by 100000850872992 from CourseHero.com on 03-31-2023 03:54:58 GMT -05:00
https://www.coursehero.com/file/12828466/Inventory-Management/
, 14. Explain how a decrease in setup time can lead to a decrease in the average amount of
inventory a firm holds, and why that would be beneficial?
Ans: Annual carrying costs are determined by average inventory. Hence, a decrease in average
inventory is desirable, if possible. Average inventory is Qo/2, and Qo decreases (run size
model) if setup cost, S, decreases.
17. What are some ways in which a company can reduce the need for inventories?
Ans: A company can reduce the need for inventories by:
a. using standardized parts
b. improved forecasting of demand
c. using preventive maintenance on equipment and machines
d. reducing supplier delivery lead times and delivery reliability
e. utilizing reliable suppliers and improving the relationships in the supply chain
f. restructuring the supply chain so that the supplier holds the inventory
g. reducing production lead time by using more efficient manufacturing methods
h. developing simpler product designs with fewer parts.
This study source was downloaded by 100000850872992 from CourseHero.com on 03-31-2023 03:54:58 GMT -05:00
https://www.coursehero.com/file/12828466/Inventory-Management/
