TEST BANK

CHAPTER 8: INVENTORY MANAGEMENT

Multiple Choice Questions (correct answers are bolded)

1. ___________ refers to stocks of goods and materials that are maintained for many purposes, the most common being to satisfy normal demand patterns.

a. Logistics

b. Supply chain management

c. Inventory

d. Production

[LO: Beginning of chapter material; Easy; Concept; AACSB Category 3: Analytical thinking]

2. Holding high levels of inventory results in ___________ inventory carrying costs and ___________ stockout costs.

a. high; high

b. high; low

c. low; high

d. low; low

[LO: Beginning of chapter material: Moderate; Application; AACSB Category 3: Analytical thinking]

3. Holding low levels of inventory results in ___________ inventory carrying costs and ___________ stockout costs.

a. high; high

b. high; low

c. low; high

d. low; low

[LO: Beginning of chapter material: Moderate; Application; AACSB Category 3: Analytical thinking]

4. ___________ stock refers to inventory that is needed to satisfy normal demand during the course of an order cycle.

a. Base

b. Speculative

c. Pipeline

d. Safety

[LO 8.1: To learn about the ways that inventory can be classified; Easy; Concept; AACSB Category 3: Analytical thinking]

5. ___________ stock refers to inventory that is held in addition to cycle stock to guard against uncertainty in demand and/or lead time.

a. Base

b. Pipeline

c. Speculative

d. Buffer

[LO 8.1: To learn about the ways that inventory can be classified; Easy; Concept; AACSB Category 3: Analytical thinking]

6. Another name for safety stock is ___________ stock.

a. base

b. buffer

c. cycle

d. speculative

[LO 8.1: To learn about the ways that inventory can be classified; Easy; Concept; AACSB Category 3: Analytical thinking]

7. ___________ stock refers to inventory that is en route between various nodes in a logistics system.

a. Pipeline

b. Safety

c. Speculative

d. Cycle

[LO 8.1: To learn about the ways that inventory can be classified; Easy; Concept; AACSB Category 3: Analytical thinking]

8. ___________ stock refers to inventory that is held for several reasons, to include seasonal demand, projected price increases, and potential shortages of product.

a. Base

b. Safety

c. Pipeline

d. Speculative

[LO 8.1: To learn about the ways that inventory can be classified; Easy; Concept; AACSB Category 3: Analytical thinking]

9. ___________ stock is carried to stimulate demand.

a. Base

b. Psychic

c. Speculative

d. Attractive

[LO 8.1: To learn about the ways that inventory can be classified; Moderate; Concept; AACSB Category 3: Analytical thinking]

10. Inventory costs in the United States in the twenty-first century represent approximately ___________ of total logistics costs.

a. one-fifth

b. one-fourth

c. one-third

d. one-half

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Moderate; Application; AACSB Category 3: Analytical thinking]

11. Which of the following statements if false?

a. The importance of individual carrying costs factors (categories) is generally consistent from product to product.

b. Inventory carrying costs consist of a number of different components or factors.

c. In general, companies prefer to carry less inventory as carrying costs increase.

d. In general, inventory carrying costs are expressed in percentage terms.

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Difficult; Synthesis; AACSB Category 3: Analytical thinking]

12. Inventory carrying costs in the United States since 2010 have ranged between ___________ and ___________ percent.

a. 4; 5

b. 9; 10

c. 14; 15

d. 19; 20

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Difficult; Application; AACSB Category 3: Analytical thinking]

13. Inventory shrinkage ___________.

a. refers to another name for inventory turnover

b. refers to the fact that more items are recorded entering than leaving warehousing facilities

c. refers to situations where the size and/or volume of inventory is decreased over time

d. refers to a technique of stabilizing unit loads by using shrink wrap packaging

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Moderate; Concept; AACSB Category 3: Analytical thinking]

14. Each of the following is a component of inventory carrying cost except:

a. accounting cost.

b. storage cost.

c. shrinkage cost.

d. interest cost.

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

15. In the United States, ___________ has traditionally provided a convenient starting point when estimating the interest charges associated with maintaining inventory.

a. Gross Domestic Product growth

b. Consumer Price Index

c. the prime rate of interest

d. the yield on U.S. Treasury bills

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

16. Which of the following costs is not a component of ordering (order) costs?

a. preparing invoices

b. receiving orders

c. verifying inventory availability

d. transporting orders

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Difficult; Synthesis; AACSB Category 3: Analytical thinking]

17. Which of the following situations is likely the most damaging (costly) with respect to a stockout?

a. The customer buys a substitute product that yields a higher profit for the seller.

b. The customer buys a substitute product that yields a lower profit for the seller.

c. The customer goes to a competitor for a purchase.

d. The customer says, “Call me when it’s in.”

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Difficult; Synthesis; AACSB Category 3: Analytical thinking]

18. Which of the following statements is false?

a. With respect to stockouts, a delayed sale is virtually costless to a company because of the customer’s brand loyalty.

b. Stockouts are generally less costly than having too many items in stock.

c. The higher the average cost for a stockout, the more inventory (safety stock) that should be held.

d. Trade-offs exist between carrying costs and stockout costs.

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Difficult; Synthesis; AACSB Category 3: Analytical thinking]

19. With respect to determining the average cost of a stockout, the higher the probability of a delayed sale, the ___________ the average stockout costs and the ___________ the inventory that needs to be held.

a. higher; higher

b. lower; lower

c. higher; lower

d. lower; higher

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Difficult; Application; AACSB Category 3: Analytical thinking]

20. Under conditions of certainty, a reorder point is equal to ___________.

a. average daily demand times the length of the replenishment cycle

b. safety stock plus an economic order quantity (EOQ)

c. two times base stock

d. base stock minus safety stock

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Moderate; Application; AACSB Category 3: Analytical thinking]

21. The economic order quantity (EOQ) deals with calculating the proper order size with respect to ___________ costs and ___________ costs.

a. ordering; stockout

b. stockout; carrying

c. accounting; carrying

d. carrying; ordering

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Moderate; Application; AACSB Category 3: Analytical thinking]

22. The economic order quantity (EOQ) determines ___________.

a. the point at which a company should reorder

b. the point at which carrying costs equal ordering costs

c. the point at which the sum of carrying costs and ordering costs is maximized

d. the relevant inventory flow for a particular time period

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Moderate; Application; AACSB Category 3: Analytical thinking]

23. Which of the following is not an assumption associated with the basic economic order quantity (EOQ) model?

a. no inventory in transit

b. an infinite planning horizon

c. stockouts are permitted

d. a constant and known replenishment or lead time

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Difficult; Synthesis; AACSB Category 3: Analytical thinking]

24. Concerning the EOQ model, if demand or annual usage increases by 10 percent, then the EOQ will ___________.

a. It depends on the particular product.

b. increase

c. decrease

d. stay unchanged

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Difficult; Application; AACSB Category 3: Analytical thinking]

25. Concerning the EOQ model, if the ordering costs increase by 10 percent and the product value increases by 10 percent, then the EOQ will ___________.

a. stay unchanged

b. increase

c. decrease

d. It depends on the particular product.

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Difficult; Application; AACSB Category 3: Analytical thinking]

26. Inventory flow diagrams illustrate that safety stock can prevent two problem areas, ___________ and ___________.

a. decreased rate of demand; longer-than-normal replenishment

b. increased rate of demand; shorter-than-normal replenishment

c. decreased rate of demand; shorter-than-normal replenishment

d. increased rate of demand; longer-than-normal replenishment

[LO 8.4: To differentiate the various inventory flow patterns; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

27. ___________ recognizes that all inventories are not of equal value to a firm and thus all inventories should not be managed in the same way.

a. Vendor-managed inventory

b. Inventory turnover

c. Inventory classification

d. ABC analysis of inventory

[LO 8.5: To discuss special concerns with inventory management; Easy; Concept; AACSB Category 3: Analytical thinking]

28. ABC analysis of inventory ___________.

a. applies activity-based costing to managing inventory

b. recognizes that inventories are not of equal value to a firm

c. is synonymous with vendor-managed inventory

d. is an alternative to the EOQ model

[LO 8.5: To discuss special concerns with inventory management; Moderate; Concept; AACSB Category 3: Analytical thinking]

29. Dead inventory (dead stock) refers to a product for which there are no sales during a ___________-month period.

a. 3

b. 6

c. 12

d. 24

[LO 8.5: To discuss special concerns with inventory management; Moderate; Application; AACSB Category 3: Analytical thinking]

30. All of the following are suggestions for dealing with dead stock (inventory) except:

a. aggressive marketing.

b. donating to charities.

c. make to stock.

d. throwing it away.

[LO 8.5: To discuss special concerns with inventory management; Difficult; Synthesis; AACSB Category 3: Analytical thinking]

31. ___________ refers to the number of times inventory is sold in a one-year period.

a. Churn

b. Inventory turnover

c. Cost of goods sold

d. Average inventory

[LO 8.5: To discuss special concerns with inventory management; Easy; Concept; AACSB Category 3: Analytical thinking]

32. Inventory turnover can be calculated by ___________.

a. dividing the cost of goods sold by average inventory

b. dividing average inventory by the cost of goods sold

c. multiplying average inventory by 1.5

d. adding beginning and ending inventory and then dividing by 2

[LO 8.5: To discuss special concerns with inventory management; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

33. ___________ items refer to those that are used or distributed together.

a. Psychic stock

b. Substitute

c. Co-branded product mix

d. Complementary

[LO 8.5: To discuss special concerns with inventory management; Easy; Concept; AACSB Category 3: Analytical thinking]

34. ___________ products refer to those that customers view as being able to fill the same need or want as another product.

a. Psychic stock

b. Complementary

c. Substitute

d. Co-branded

[LO 8.5: To discuss special concerns with inventory management; Easy; Concept; AACSB Category 3: Analytical thinking]

35. Which of the following is not an example of a lean inventory approach?

a. just-in-time (JIT)

b. collaborative planning, forecasting, and replenishment

c. efficient consumer response (ECR)

d. quick response (QR)

[LO 8.6: To identify several contemporary approaches to managing inventory; Moderate; Application; AACSB Category 3: Analytical thinking]

36. Which of the following statements about the lean approach and just-in-time (JIT) is false?

a. JIT tends to focus on product movement from manufacturer to retailer.

b. Organizations should give careful consideration before adopting a lean philosophy.

c. The lean approach views inventory as waste.

d. Trucking is an important mode of transportation in JIT systems.

[LO 8.6: To identify several contemporary approaches to managing inventory; Difficult; Synthesis; AACSB Category 3: Analytical thinking]

37. Efficient consumer response (ECR) tends to focus on ___________.

a. movement of materials and component parts from supplier to producer

b. product movement from manufacturer to retailer

c. last mile deliveries

d. filling large orders

[LO 8.6: To identify several contemporary approaches to managing inventory; Moderate; Application; AACSB Category 3: Analytical thinking]

38. Which of the following statements about service parts logistics is false?

a. Customer expectations for service parts logistics continues to increase.

b. Some organizations outsource their service parts logistics to companies that specialize in this area.

c. Service parts logistics creates a variety of potential challenges for logisticians.

d. It is relatively easy to forecast the demand for the necessary parts.

[LO 8.6: To identify several contemporary approaches to managing inventory; Difficult; Synthesis; AACSB Category 3: Analytical thinking]

39. Under ___________, the size and timing of replenishment orders are the responsibility of the manufacturer.

a. quick response (QR)

b. supply chain management

c. vendor-managed inventory

d. efficient consumer response (ECR)

[LO 8.6: To identify several contemporary approaches to managing inventory; Moderate; Concept; AACSB Category 3: Analytical thinking]

40. Which of the following statements about vendor-managed inventory (VMI) is false?

a. Vendors might be more proficient than customers at managing inventories.

b. Vendors have more control over when and how inventory is shipped to customers.

c. There may be inadequate sharing of data between the relevant parties.

d. VMI will produce immediate benefits.

[LO 8.6: To identify several contemporary approaches to managing inventory; Difficult; Synthesis; AACSB Category 3: Analytical thinking]

True-False Questions

1. Inventories are stocks of goods and materials that are maintained for many purposes.

[LO: Beginning of chapter material; Easy; Concept; AACSB Category 3: Analytical thinking]

1. Different organizational functions, such as marketing and production, tend to have similar inventory management objectives.

[LO: Beginning of chapter material; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

1. Inventory carries its greatest costs after value has been added through manufacturing and processing.

[LO: Beginning of chapter material; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

1. Buffer stock is also referred to as cycle stock.

[LO 8.1: To learn about the ways that inventory can be classified; Moderate; Concept; AACSB Category 3: Analytical thinking]

1. Safety stock refers to inventory that is held in addition to cycle stock to guard against uncertainty in demand and/or lead time.

[LO 8.1: To learn about the ways that inventory can be classified; Easy; Concept; AACSB Category 3: Analytical thinking]

1. Pipeline stock is inventory that is en route between various fixed facilities in a logistics system.

[LO 8.1: To learn about the ways that inventory can be classified; Easy; Concept; AACSB Category 3: Analytical thinking]

1. Psychic stock is associated with retail stores.

[LO 8.1: To learn about the ways that inventory can be classified; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

1. Inventory tends to be one of the largest assets (in terms of dollar value) on a company’s balance sheet.

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Easy; Synthesis; AACSB Category 3: Analytical thinking]

1. As a general rule, companies prefer to carry less inventory as the carrying cost percentage decreases.

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

1. Inventory shrinkage refers to the fact that products lose value through time.

[LO 8.2 To discuss inventory costs and the trade-offs that exist among them; Moderate; Concept; AACSB Category 3: Analytical thinking]

1. Obsolescence costs are one component of inventory carrying costs.

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Moderate; Application; AACSB Category 3: Analytical thinking]

1. The trade-off that exists between carrying costs and ordering costs is that they respond in opposite ways to the number of orders or size of orders.

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

1. Not having enough items in inventory can be as bad as, and sometimes worse than, having too many items in inventory.

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

1. The higher the average cost of a stockout, the more likely a company is going to want to hold some amount of inventory (safety stock) to protect against stockouts.

[LO 8.2: To discuss inventory costs and the trade-offs that exist among them; Moderate; Application; AACSB Category 3: Analytical thinking]

1. A reorder point is equal to average daily demand divided by the length of the replenishment cycle.

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Moderate; Application; AACSB Category 3: Analytical thinking]

1. One requirement of a fixed order quantity system is that the inventory must be constantly monitored.

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

1. A fixed order quantity system is more susceptible to stockouts than is a fixed order interval system.

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

1. The economy order quantity (EOQ) is the point at which carrying costs equal ordering costs.

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Easy; Concept; AACSB Category 3: Analytical thinking

1. One assumption of the basic economy order quantity (EOQ) model is a continuous, constant, and known rate of demand.

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

1. The economy order quantity (EOQ) can only be calculated with respect to the number of units to be ordered.

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Moderate; Application; AACSB Category 3: Analytical thinking

1. The economy order quantity (EOQ) cannot be modified to account for one or more conditions of uncertainty.

[LO 8.3: To identify when to order and how much to order, with a particular emphasis on the economic order quantity; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

1. Inventory flow diagrams graphically depict the demand for, and replenishment of, inventory.

[LO 8.4: To differentiate the various inventory flow patterns; Easy; Concept; AACSB Category 3: Analytical thinking]

1. Safety stock can prevent against two problem areas: an increased rate of demand and longer-than-normal replenishment.

[LO 8.4: To differentiate the various inventory flow patterns; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

1. ABC analysis recognizes that all inventories should not be managed in the same way.

[LO 8.5: To discuss special concerns with inventory management; Easy; Application; AACSB Category 3: Analytical thinking]

1. In terms of ABC analysis of inventory, no more than 25 percent of items should be classified as A items.”

[LO 8.5: Inventory management: special concerns; Moderate; Application; AACSB Category 3: Analytical thinking]

1. Dead stock (inventory) refers to product for which there are no sales during a six-month period.

[LO 8.5: To discuss special concerns with inventory management; Moderate; Concept; AACSB Category 3: Analytical thinking]

1. One way of dealing with dead stock (inventory) is for companies to simply throw it away.

[LO 8.5: To discuss special concerns with inventory management; Moderate; Synthesis; AACSB Category 3: Analytical thinking]

1. The number of times that inventory is sold in one year is referred to as average inventory.

[LO 8.5: To discuss special concerns with inventory management; Moderate; Concept; AACSB Category 3: Analytical thinking]

1. Inventory turnover can be calculated by dividing cost of goods sold by average inventory.

[LO 8.5: To discuss special concerns with inventory management; Moderate; Application; AACSB Category 3: Analytical thinking]

1. High inventory turnover indicates that a company is taking longer to sell its inventory.

[LO 8.5: To discuss special concerns with inventory management; Moderate; Application; AACSB Category 3: Analytical thinking]

1. Complementary products can be defined as inventories that can be used or distributed together, such as razor blades and razors.

[LO 8.5: To discuss special concerns with inventory management; Easy; Concept; AACSB Category 3: Analytical thinking]

1. Many grocery chains target in-stock rates of 90 percent for individual stores so that sufficient substitutes exist for a customer to purchase a substitute item rather than go to a competing store.

[LO 8.5: To discuss special concerns with inventory management; Moderate; Application; AACSB Category 3: Analytical thinking]

1. The lean concept focuses on the elimination of waste.

[LO 8.6: To identify several contemporary approaches to managing inventory; Easy; Application; AACSB Concept 3: Analytical thinking]

1. Because of smaller, more frequent orders and closer supplier location, trucking tends to be an important mode of transportation in the just-in-time (JIT) approach.

[LO 8.6: To identify several contemporary approaches to managing inventory; Moderate; Synthesis; AACSB Concept 3: Analytical thinking]

1. Efficient consumer response (ECR) and collaborative planning, forecasting, and replenishment (CPFR) are examples of lean inventory approaches.

[LO 8.6: To identify several contemporary approaches to managing inventory; Moderate; Application; AACSB Concept 3: Analytical thinking]

1. A confluence of events, such as increasing global sourcing, suggests that organizations should carefully consider the potential trade-offs before adopting a lean inventory philosophy.

[LO 8.6: To identify several contemporary approaches to managing inventory; Moderate; Synthesis; AACSB Concept 3: Analytical thinking]

1. Service parts logistics has decreased in importance in recent years.

[LO 8.6: To identify several contemporary approaches to managing inventory; Moderate; Synthesis; AACSB Concept 3: Analytical thinking]

1. One logistical challenge with service parts logistics is that it can be extremely difficult to forecast the demand for the necessary parts.

[LO 8.6: To identify several contemporary approaches to managing inventory; Moderate; Synthesis; AACSB Concept 3: Analytical thinking]

1. In vendor-managed inventory, the size and timing of replenishment orders are the responsibility of the manufacturer.

[LO 8.6: To identify several contemporary approaches to managing inventory; Moderate; Application; AACSB Concept 3: Analytical thinking]

1. Vendor-managed inventory can only be applied to consumer, and not industrial, products.

[LO 8.6: To identify several contemporary approaches to managing inventory; Moderate; Synthesis; AACSB Concept 3: Analytical thinking]