Chilcutt OM 300 Exam 3 Questions
with Correct Detailed Answers
Work-in-process (inventory) - Answer--undergone some change but not completed
-a function of cycle time for a product
Maintenance/ repair/ operating
(MRO) (inventory) - Answer--necessary to keep machinery and processes productive
Finished goods (inventory) - Answer--completed product awaiting shipment
Objective of inventory management - Answer--to strike a balance between inventory
investment and customer service
-Important because inventory is one of a company's most expensive assets,
representing as much as 50% of total invested capital
Functions of Inventory - Answer-1. To decouple or separate various parts of the
production process
2. To isolate the firm from fluctuations in demand and provide a stock of goods that will
provide a selection for customers
3. To take advantage of quantity discounts
4. To hedge against inflation
Managing Inventory - Answer-1. How inventory items can be classified (ABC analysis)
2. How accurate inventory records can be maintained
ABC analysis - Answer--Divides inventory into three classes based on annual dollar
volume:
Class A - high annual dollar volume
Class B - medium annual dollar volume
Class C - low annual dollar volume
-Used to establish policies that focus on the few critical parts and not the many trivial
ones
,-note: other criteria than annual dollar volume may be used: anticipated engineering
changes, delivery problems, quality problems, high unit cost
purpose for ABC analysis classification - Answer--"A" items may be monitored much
more closely than the other items
-Policies employed may include:
1. more emphasis on supplier development for "A" items
2. tighter physical inventory control for "A" items
3. More care in forecasting "A" items
Record Accuracy - Answer--Accurate records are a critical ingredient in production and
inventory systems:
-Allows organization to focus on what is needed
-Necessary to make precise decisions about ordering, scheduling, and shipping
-Incoming and outgoing record keeping must be accurate
-access to Stockrooms should be secure
cycle counting - Answer--Items are counted and records updated on a periodic basis
-often used with ABC analysis
-Advantages:
1. eliminates shutdowns and interruptions
2. eliminates annual inventory adjustment
3. trained personnel can audit inventory accuracy
4. allows causes of errors to be identified and corrected
5. maintains accurate inventory records
Independant Demand - Answer-- the demand for item is independent of the demand for
any other item of inventory
Dependant Demand - Answer--the demand for item is dependent upon the demand for
some other item in the inventory
ordering costs - Answer-the costs of placing an order and receiving goods
setup cost - Answer-cost to prepare a machine or process for manufacturing an order
holding costs - Answer-the costs of holding or "carrying" inventory over time
Inventory Models for Independent Demand - Answer-Need to determine when and how
much to order
1. Basic economic order quantity (EOQ) model
, 2. Production order quantity model
3. Quantity discount model
Basic economic order quantity (EOQ) model - Answer-Important assumptions:
1. demand is known, constant, and independent
2. lead time is known and constant
3. receipt of inventory is instantaneous and complete
4. quality discounts are not permitted
5. only variable costs are order and holding
6. stockouts can be completely avoided
Annual Setup Cost - Answer-=[annual demand/ number of units in each order][setup or
order cost per order]
-(D/Q)S
Annual Holding Cost - Answer-=[order quantity/ 2] [holding cost per unit per year]
-(Q/2)*H
optimal order quantity - Answer--found when annual setup cost equals annual holding
cost
[D/Q]*S = [Q/2]*H
Solve for Q*=
2DS=Q^2H
Q^2=2DS/H
Q*=sqrt (2DS)/H
Reorder Point (ROP) - Answer--EOQ answers the "how much" question
-The reorder point tells "when" to order
ROP= (demand per day)(lead time for a new order in days)
d=Demand per day= Annual demand/ number of working days in a year
Relationship between SS, R, & L - Answer--R= enough stock to cover
1. what you expect to happen during a lead time, PLUS
2. what might happen during the lead time
R= dL + SS
R=reorder point
d=daily demand
L= lead time
with Correct Detailed Answers
Work-in-process (inventory) - Answer--undergone some change but not completed
-a function of cycle time for a product
Maintenance/ repair/ operating
(MRO) (inventory) - Answer--necessary to keep machinery and processes productive
Finished goods (inventory) - Answer--completed product awaiting shipment
Objective of inventory management - Answer--to strike a balance between inventory
investment and customer service
-Important because inventory is one of a company's most expensive assets,
representing as much as 50% of total invested capital
Functions of Inventory - Answer-1. To decouple or separate various parts of the
production process
2. To isolate the firm from fluctuations in demand and provide a stock of goods that will
provide a selection for customers
3. To take advantage of quantity discounts
4. To hedge against inflation
Managing Inventory - Answer-1. How inventory items can be classified (ABC analysis)
2. How accurate inventory records can be maintained
ABC analysis - Answer--Divides inventory into three classes based on annual dollar
volume:
Class A - high annual dollar volume
Class B - medium annual dollar volume
Class C - low annual dollar volume
-Used to establish policies that focus on the few critical parts and not the many trivial
ones
,-note: other criteria than annual dollar volume may be used: anticipated engineering
changes, delivery problems, quality problems, high unit cost
purpose for ABC analysis classification - Answer--"A" items may be monitored much
more closely than the other items
-Policies employed may include:
1. more emphasis on supplier development for "A" items
2. tighter physical inventory control for "A" items
3. More care in forecasting "A" items
Record Accuracy - Answer--Accurate records are a critical ingredient in production and
inventory systems:
-Allows organization to focus on what is needed
-Necessary to make precise decisions about ordering, scheduling, and shipping
-Incoming and outgoing record keeping must be accurate
-access to Stockrooms should be secure
cycle counting - Answer--Items are counted and records updated on a periodic basis
-often used with ABC analysis
-Advantages:
1. eliminates shutdowns and interruptions
2. eliminates annual inventory adjustment
3. trained personnel can audit inventory accuracy
4. allows causes of errors to be identified and corrected
5. maintains accurate inventory records
Independant Demand - Answer-- the demand for item is independent of the demand for
any other item of inventory
Dependant Demand - Answer--the demand for item is dependent upon the demand for
some other item in the inventory
ordering costs - Answer-the costs of placing an order and receiving goods
setup cost - Answer-cost to prepare a machine or process for manufacturing an order
holding costs - Answer-the costs of holding or "carrying" inventory over time
Inventory Models for Independent Demand - Answer-Need to determine when and how
much to order
1. Basic economic order quantity (EOQ) model
, 2. Production order quantity model
3. Quantity discount model
Basic economic order quantity (EOQ) model - Answer-Important assumptions:
1. demand is known, constant, and independent
2. lead time is known and constant
3. receipt of inventory is instantaneous and complete
4. quality discounts are not permitted
5. only variable costs are order and holding
6. stockouts can be completely avoided
Annual Setup Cost - Answer-=[annual demand/ number of units in each order][setup or
order cost per order]
-(D/Q)S
Annual Holding Cost - Answer-=[order quantity/ 2] [holding cost per unit per year]
-(Q/2)*H
optimal order quantity - Answer--found when annual setup cost equals annual holding
cost
[D/Q]*S = [Q/2]*H
Solve for Q*=
2DS=Q^2H
Q^2=2DS/H
Q*=sqrt (2DS)/H
Reorder Point (ROP) - Answer--EOQ answers the "how much" question
-The reorder point tells "when" to order
ROP= (demand per day)(lead time for a new order in days)
d=Demand per day= Annual demand/ number of working days in a year
Relationship between SS, R, & L - Answer--R= enough stock to cover
1. what you expect to happen during a lead time, PLUS
2. what might happen during the lead time
R= dL + SS
R=reorder point
d=daily demand
L= lead time
