Question

For each answer, indicate ‘T’ for TRUE or ‘F’ for FALSE. (Please only specify ‘T’ or ‘F’ – the grading criteria requires only a single letter.)  ***Read these carefully***

a) T or F: The longer the lead time for replenishment of inventory, the larger the order size must be. _____

b) T or F: Automating the ordering process so as to reduce the fixed administrative costs for placing orders should result in a reduction in cycle inventory (assuming the proper application of EOQ concepts). ______

c) T or F: The Economic Order Quantity (EOQ) model is used to resolve the trade-off between annual holding costs and annual ordering costs. _______

d) T or F: Assuming that demand and lead time do not change, an increase in the ROP (reorder point) will result in an increase in the number of annual inventory turns. ______

e) T or F:   The role of safety stock is to allow a firm to take advantage of economies of scale for fixed costs (such as ordering and/or transportation costs) _______

f)  Doubling the lead time (e.g. from five to ten days) would mean that the average demand during the lead time increases by 2.000 times while the standard deviation of demand during the lead time increases by 1.414 times. _______

Answer 1

a) False. EOQ is not a function of lead time. Order size can remain same as EOQ irrespective of lead time

b)True. EOQ = Sqrt (2DS / H) , and Average inventory = EOQ / 2, If Order cost (S) reduces, EOQ reduces, If EOQ reduces the cycle inventory reduces

c) True. If order cost increases, EOQ increases, if H increases, EOQ reduces. hence it is a trade-off between both costs.

d) False. If Reorder point increases, average inventory increases and hence inventory turns decreases.

e) True. We hold safety stock to avoid stockout and minimize adhoc orders for uncertain demand. Hence taking advtanges of fixed costs.

f) True.

Standard deviation of demand = z-score * Std deviation * sqrt (LT)

so increase is by Sqrt (10/5) = Sqrt (2) = 1.414