MGSC 492 Actual Questions and Correct Answers
Q1
Inventory is
Answer: the lifeblood of the supply chain
Q2
Inventory turns=
Answer: the annual cost of goods sold/ avg annual inventory
Q3
Inventory Turns Example
Answer: would be a company who has annual Cost of Goods Sold of $200,000 and the
average annual inventory has been $50,000. The inventory turns would be 4 =
$200,000/$50,000.
Q4
Inventory Turns Example 2
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 good
sold/ 8 inventory turns = $25,000. The savings the first year would be $25,000 =
$50,000-$25,000.
Q5
Capital Cost
Answer: Capital Cost is the cost of using your money and not getting a return. If you
have money in inventory and the money rate is 6%, then the capital cost is 6% of the
amount you have in inventory.
Q6
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.
, Q7
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.
Q8
Carrying Costs
Answer: Total costs of holding inventory
Q9
Inventory Carrying Costs - Annual Saving
Answer: From our accountants we are told the inventory carrying cost in this company
is 30% and the 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 costs 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 $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: Example for part 1245x- there is 600 pieces on hand with an avg. 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. ABC analysis, 20% of the parts will contribute to 80% of the inventory
value. You have a part whose order qty is 800. The avg. 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. Avg. Inventory calculations with safety
stock. Order qty. is 800 and safety stock is 100. The avg inventory is (800/2)+100=500
Q11
Fixed Order Quantity
Answer: an order for the same amount each time. Example if demand is 59 and the
manufacturing floor wants to run orders in quantities of 20 because that is how many
subassemblies they can create at one time the ERP system would order 60 in 3 orders
of 20; eliminating excess inventory.
Q1
Inventory is
Answer: the lifeblood of the supply chain
Q2
Inventory turns=
Answer: the annual cost of goods sold/ avg annual inventory
Q3
Inventory Turns Example
Answer: would be a company who has annual Cost of Goods Sold of $200,000 and the
average annual inventory has been $50,000. The inventory turns would be 4 =
$200,000/$50,000.
Q4
Inventory Turns Example 2
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 good
sold/ 8 inventory turns = $25,000. The savings the first year would be $25,000 =
$50,000-$25,000.
Q5
Capital Cost
Answer: Capital Cost is the cost of using your money and not getting a return. If you
have money in inventory and the money rate is 6%, then the capital cost is 6% of the
amount you have in inventory.
Q6
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.
, Q7
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.
Q8
Carrying Costs
Answer: Total costs of holding inventory
Q9
Inventory Carrying Costs - Annual Saving
Answer: From our accountants we are told the inventory carrying cost in this company
is 30% and the 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 costs 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 $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: Example for part 1245x- there is 600 pieces on hand with an avg. 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. ABC analysis, 20% of the parts will contribute to 80% of the inventory
value. You have a part whose order qty is 800. The avg. 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. Avg. Inventory calculations with safety
stock. Order qty. is 800 and safety stock is 100. The avg inventory is (800/2)+100=500
Q11
Fixed Order Quantity
Answer: an order for the same amount each time. Example if demand is 59 and the
manufacturing floor wants to run orders in quantities of 20 because that is how many
subassemblies they can create at one time the ERP system would order 60 in 3 orders
of 20; eliminating excess inventory.
