MGSC 492 Actual Questions and Correct Answers
Q1
What is the lifeblood of supply chain?
Answer: Inventory
Q2
What is the inventory turns formula?
Answer: the annual Cost of Goods Sold / the average annual inventory
Q3
Example of a company who has annual Cost of Goods Sold of $200,000 and the average annual
inventory has been $50,000.
Answer: Inventory turns would be 4 = $200,000 / $50,000
Q4
Example of inventory turns:
Answer: Management in the above example sets the inventory turns goal to 8.
Currently they are at 4. If cost of goods remain the same (same sales), $200,000, then
theoretically, they should get by with $25,000 annual inventory, $200,000 cost of
goods sold / 8 inventory turns =$25,000 The savings the first year would be $25,000 =
$50,000 - $25,000
Q5
What are the three major components of inventory carrying cost?
Answer: Capital Cost Storage Cost Risk Cost
, Q6
What is Capital Cost?
Answer: When you purchase inventory you not only pay the price for the inventory and
inspection cost, but transportation and if overseas customers charges. This gets
inventory on your books. Capital cost is the cost of using your money and not getting
a return. If you have money in inventory and the going money rate is 6%, then the
capital cost is 6% of the amount you have in inventory. Another way of thinking about
this is if you borrow funds and the rate is 6% interest and buy inventory with it, you
will pay the bank 6% in interest over a period of time. So, it cost you 6% interest to
own the inventory.
Q7
What is Storage Cost?
Answer: The cost of the warehouse space, the cost of the warehouse labor, cycle
counting, and any equipment. This will increase as the amount of inventory increases.
Q8
What is Risk Cost?
Answer: When inventory is stored it is at risk. It can become damaged - there can be
accidents in the distribution center that makes the inventory no longer usable (a fork
truck crushes a box of small copper parts), it can be pilfered (stolen), it can become
obsolete, etc.
Q9
Inventory Carrying Costs Example
Answer: From our accountants we are told the inventory carrying cost in this company
is 30% and this cost is annual (every year). Before the improvement the average
annual inventory was $50,000, then the cost of carrying the inventory every year was
$50,000 * 30% = $15,000. But since the inventory was reduced to $25,000, the
inventory carrying cost is $25,000 * 30% = $7,500. So, the difference is $7,500 =
$15,000 - $7,500. So, with the new reduction in inventory, the company is saving
$7,500 each year that they do not have to pay in interest, storage cost, and risk cost
that are written off.
Q10
Days of Supply Example
Answer: There are 600 pieces on hand with an average daily usage of 30. The days of
supply for this part is 600/30 = 20 days. So, in 20 days, the part should run out.
Q1
What is the lifeblood of supply chain?
Answer: Inventory
Q2
What is the inventory turns formula?
Answer: the annual Cost of Goods Sold / the average annual inventory
Q3
Example of a company who has annual Cost of Goods Sold of $200,000 and the average annual
inventory has been $50,000.
Answer: Inventory turns would be 4 = $200,000 / $50,000
Q4
Example of inventory turns:
Answer: Management in the above example sets the inventory turns goal to 8.
Currently they are at 4. If cost of goods remain the same (same sales), $200,000, then
theoretically, they should get by with $25,000 annual inventory, $200,000 cost of
goods sold / 8 inventory turns =$25,000 The savings the first year would be $25,000 =
$50,000 - $25,000
Q5
What are the three major components of inventory carrying cost?
Answer: Capital Cost Storage Cost Risk Cost
, Q6
What is Capital Cost?
Answer: When you purchase inventory you not only pay the price for the inventory and
inspection cost, but transportation and if overseas customers charges. This gets
inventory on your books. Capital cost is the cost of using your money and not getting
a return. If you have money in inventory and the going money rate is 6%, then the
capital cost is 6% of the amount you have in inventory. Another way of thinking about
this is if you borrow funds and the rate is 6% interest and buy inventory with it, you
will pay the bank 6% in interest over a period of time. So, it cost you 6% interest to
own the inventory.
Q7
What is Storage Cost?
Answer: The cost of the warehouse space, the cost of the warehouse labor, cycle
counting, and any equipment. This will increase as the amount of inventory increases.
Q8
What is Risk Cost?
Answer: When inventory is stored it is at risk. It can become damaged - there can be
accidents in the distribution center that makes the inventory no longer usable (a fork
truck crushes a box of small copper parts), it can be pilfered (stolen), it can become
obsolete, etc.
Q9
Inventory Carrying Costs Example
Answer: From our accountants we are told the inventory carrying cost in this company
is 30% and this cost is annual (every year). Before the improvement the average
annual inventory was $50,000, then the cost of carrying the inventory every year was
$50,000 * 30% = $15,000. But since the inventory was reduced to $25,000, the
inventory carrying cost is $25,000 * 30% = $7,500. So, the difference is $7,500 =
$15,000 - $7,500. So, with the new reduction in inventory, the company is saving
$7,500 each year that they do not have to pay in interest, storage cost, and risk cost
that are written off.
Q10
Days of Supply Example
Answer: There are 600 pieces on hand with an average daily usage of 30. The days of
supply for this part is 600/30 = 20 days. So, in 20 days, the part should run out.
