Inventory Management MCQs

Inventory costs include

Practically the risks associated with a stock out are so great that the company always tries to avoid it even if it leads to extra holding cost

The objective of good inventory management is to determine

Buffer/safety inventory – the basic level of inventory kept for emergencies. A buffer is required because both demand and lead time will fluctuate and predictions can only be based on best estimates

If the supply lead time is uncertain, and demand during the lead time is also uncertain, there should be a safety level of inventory. A company may wish to ensure that they are never out of stock. The reorder level to achieve this is found as:

Safety inventory is the average amount of inventory held in excess of average requirements in order to remove the risk of a stock-out

If the supply lead time is certain and demand during the lead time is constant, a company would be able to set a reorder level such that it used the last item just as a new order arrived thus reducing holding costs to a minimum. The reorder level to do this is found as:

Reorder level is the level of inventory at which a new order for the item should be placed with the supplier

In an inventory control system, if there is uncertainty about the length of the supply lead time and demand during the lead time there might be following warning levels for inventory, to warn management that:

Supply lead time. This is the period of time between placing a new order with a supplier and receiving the delivery of the purchased items. The length of this supply lead time might be uncertain and might be several days, weeks or even months.