Chapter 11
Managing Uncertainty in the Supply Chain: Safety Inventory
True/False
1. Safety inven tory is inven tory carried for the purpose of satisfy ing dema nd that exceeds the
amount forecasted for a give n period.
An swer: True
Difficulty: Moderate
2. Safety inven tory is carried because dema nd forecasts are accurate and a product shortage
may result if the forecast dema nd exceeds the actual dema nd. An swer: False
Difficulty: Moderate
3. Rais ing the level of safety inven tory in creases product availability and thus the margin
captured from customer purchases.
An swer: True
Difficulty: Moderate
4. Raisi ng the level of safety inven tory in creases inven tory holdi ng costs. An swer: True
Difficulty: Easy
5. Carrying excessive inven tory can help coun ter dema nd volatility whe n new products come
on the market.
An swer: False
Difficulty: Moderate
6. The appropriate level of safety inven tory is determ ined by the un certa inty of both dema nd
and supply and the desired level of cycle inven tory.
An swer: False
Difficulty: Moderate
7. As the un certai nty of supply or dema nd grows, the required level of safety inven tories in
creases.
An swer: True
Difficulty: Moderate
8. As the desired level of product availability in creases, the required level of safety inven tory
decreases.
An swer: False
Difficulty: Easy
9. Lead time is the gap between when an order is placed and when it is received. An swer: True
Difficulty: Easy
10. The coefficient of variation measures the size of the relative certainty of cycle
inventory. Answer: False Difficulty: Easy
11. Product availab ility reflects a firm ' s ability to fill a customer order out of available
inventory. Answer: True Difficulty: Moderate
12. Order fill rate is the fraction of product demand that is satisfied from product in inventory.
Answer: False Difficulty: Moderate
13. Product fill rate is the fraction of product demand that is satisfied from product in
inventory. Answer: True Difficulty: Moderate
14. The distinction between product fill rate and order fill rate is significant in a single
product situation. Answer: False Difficulty: Hard
15. Tracking order fill rates is important when customers place a high value on the
entire order being filled simultaneously. Answer: True Difficulty: Easy
16. With continuous review, inventory is continuously tracked and an order for a lot
size Q is placed at regular intervals of time. Answer: False Difficulty: Hard
17. With periodic review, inventory status is checked at regular intervals and an order
is placed to raise the inventory level to a specified threshold. Answer: True Difficulty: Hard 18. The expected shortage per replenishment cycle (ESC) is the average units of
demand that are satisfied from inventory in stock per replenishment cycle. Answer: False Difficulty: Hard
19. A shortage occurs in a replenishment cycle only if the demand during the lead
time exceeds the ROP. Answer: True Difficulty: Moderate
20. The fill rate increases and the cycle service level decreases as the safety
inventory is increased. Answer: False Difficulty: Moderate
21. For the same safety inventory, an increase in lot size increases the fill rate but
not the cycle service level.
Answer: True Difficulty: Hard
22. The required safety inventory grows rapidly with a decrease in the desired
product availability. Answer: False Difficulty: Easy
23. The required safety inventory increases with an increase in the lead time and the standard
deviation of periodic demand.
Answer: True Difficulty: Easy
24. A goal of any supply chain manager is to reduce the level of safety inventory
required regardless of the affect product availability. Answer: False Difficulty: Easy
25. In most supply chains, the key to reducing the underlying forecast uncertainty is
to link all forecasts throughout the supply chain to customer demand data. Answer: True
Difficulty: Moderate
26. A reduction in supply can help dramatically reduce safety inventory required
without hurting product availability. Answer: False Difficulty: Moderate
27. Aggregation reduces the standard deviation of demand only if demand across
the regions being aggregated is not perfectly positively correlated. Answer: True Difficulty:
Moderate
28. In case demand in different geographical regions is about the same size and
independent, aggregation increases safety inventory by the square root of the number of areas aggregated. Answer: False Difficulty: Moderate
29. If aggregation reduces the required safety inventory for a product by a small
amount, it may be best to carry the product in multiple decentralized locations to reduce response time and transportation cost. Answer: True Difficulty: Moderate
30. The lower the coefficie nt of variati on of an item, the greater the reduct ion in
safety inven tories as a result of cen tralizatio n.
An swer: False
Difficulty: Hard
31. Manu facturer-drive n substituti on in creases overall profitability for the manu
facturer by allow ing some aggregati on of dema nd, which reduces the inven
tory requireme nts for the same level of availability.
An swer: True
Difficulty: Moderate
32. Postp on eme nt allows the supply cha in to delay product differe ntiati on,
which results in disaggregat ing most of the inven tories in the supply cha in.
An swer: False
Difficulty: Moderate
33. Periodic review policies require more safety inven tory tha n con ti nu ous
review policies for the same level of product availability.
An swer: True
Difficulty: Easy
34. Whe n using a continu ous review policy, a man ager has to acco unt for the un
certa inty of dema nd duri ng the lead time and the review in terval.
An swer: False
Difficulty: Easy
Multiple Choice
1. Inven tory carried for the purpose of satisfy ing dema nd that exceeds the
amount forecasted for a give n period is
a. cycle inven tory.
b. dema nd inven tory.
c. safety inven tory.
d. security inven tory.
e. all of the above
An swer: c
Difficulty: Easy
2.
Safety inven tory is carried because
a. dema nd forecasts are accurate.
b. dema nd forecasts are un certa in.
c. adequate supplies are available.
d. excess product was manufactured.
e. forecast dema nd exceeds the actual dema nd.
Answer: b
Difficulty: Moderate
3. The trade-off that a supply chain manager must consider when planning safety
inventory is
a. increasing product availability versus increasing inventory holding costs.
b. decreasing product availability versus decreasing inventory holding costs.
c. increasing product availability versus raising the level of safety inventory.
d. decreasing product availability versus decreasing the level of safety
inventory.
e. none of the above
Answer: a
Difficulty: Moderate
4. The issue of product availability and the level of safety inventory is particularly
significant in industries where
a. product life cycles are short and demand is stable.
b. product life cycles are short and demand is very volatile.
c. product life cycles are long and demand is stable.
d. product life cycles are long and demand is very volatil
e.
e. a and b only
Answer: b
Difficulty: Moderate
5. A key to success at which company has been its ability to provide a high level of
product availability to customers while carrying very low levels of safety inventory in its supply chain?
a. Compaq
b. Hewlett-Packard
c. Dell
d. Packard-Bell
e. all of the above
Answer: c
Difficulty: Moderate
6. What key question(s) need(s) to be considered when planning safety inventory
for any supply chain?
a. What is the appropriate lead time to establish?
b. What is the appropriate level of safety inventory to carry?
c. What actions can be taken to improve product availability while reducing
safety inventory?
d. a and b only
e. b and c only
Answer: e Difficulty: Moderate
7. The appropriate level of safety inventory is determined by
a. the uncertainty of both demand and supply.
b. the desired level of product availability.
c. the desired level of cycle inventory.
d. the processes in a supply chain are divided into 2 categories depending
all of the above
e. a and b only
Answer: e Difficulty: Moderate