MGSC 492 Actual Questions and Correct Answers
Q1
The lifeblood of the supply chain
Answer: inventory
Q2
Inventory turns
Answer: the annual Cost of Goods Sold / the average annual inventory
Q3
How many inventory turns for a COGS of $200,000 and the average annual inventory has been
$50,000
Answer: $200,000 / $50,000 = 4 inventory turns
Q4
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 annual inventory.
Answer: $200, inventory turns - $25,000. The savings the first year would be
$25,000 = $50,000-$25,000.
Q5
Three major components of inventory carrying cost:
Answer: Capital cost, storage cost, risk cost
Q6
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
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
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 - Annual Saving
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
Answer: the number of days of inventory of an item - Example for part 1245x - there is
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.
Q11
ABC analysis
Answer: 20% of the parts will contribute to 80% of the inventory value. You have a
part whose order qty is 800. The average inventory for this part over time is 400
(800/2). A fixed lot multiple of 20 would generate an order in the ERP system for 60 if
the net requirement was 59.
Q1
The lifeblood of the supply chain
Answer: inventory
Q2
Inventory turns
Answer: the annual Cost of Goods Sold / the average annual inventory
Q3
How many inventory turns for a COGS of $200,000 and the average annual inventory has been
$50,000
Answer: $200,000 / $50,000 = 4 inventory turns
Q4
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 annual inventory.
Answer: $200, inventory turns - $25,000. The savings the first year would be
$25,000 = $50,000-$25,000.
Q5
Three major components of inventory carrying cost:
Answer: Capital cost, storage cost, risk cost
Q6
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
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
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 - Annual Saving
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
Answer: the number of days of inventory of an item - Example for part 1245x - there is
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.
Q11
ABC analysis
Answer: 20% of the parts will contribute to 80% of the inventory value. You have a
part whose order qty is 800. The average inventory for this part over time is 400
(800/2). A fixed lot multiple of 20 would generate an order in the ERP system for 60 if
the net requirement was 59.
