Ungraded Quiz Questions and Answers

13 Feb 2020

Note: The duration for the ungraded quiz was 20 minutes while Quiz 1 on 5 March would be 1 hour. So,
the quiz 1 on 5 March will be more challenging and it will have more questions.

1) Which of these words best describes a typical supply chain structure?

A) Static

B) Customer

C) Cyclical

D) Network (Answer)

2) Which sequence of stages is typical for product flow in a supply chain?

A) Supplier → Manufacturer → Distributor (Answer)

B) Retailer → Distributor → Customer

C) Manufacturer → Retailer → Distributor

D) Supplier → Customer → Retailer

3) A company would decide whether to outsource or perform a supply chain function in-house during
the strategy or design phase

4) Average flow time resulting from cycle inventory is equal to

A) Cycle Inventory/Demand = Q/2.

B) Cycle Inventory/Demand = Q/2D.

C) Cycle Inventory = Q/2.

D) Cycle Inventory = Lot Size = Q.

5) The fraction of replenishment cycles that end with all the customer demand being met is the Cycle
Service Level or CSL.
6) Safety inventory is inventory carried for the purpose of satisfying demand that exceeds the amount
forecasted for a given period.

TRUE/FALSE

7) The coefficient of variation measures

A) the accuracy of the demand forecast.

B) the size of the uncertainty relative to demand. (Answer)

C) the relevance of cycle inventory to demand.

D) the relative certainty of the forecast.

The rising popularity of bubble and squeak as a breakfast item on the menu has resulted in a steady
demand for peas. Over the course of the past week, 457 patrons have ordered the hearty breakfast and
each serving contains a half cup of English peas. It costs two cents to hold a half cup of peas in inventory
for a year and $3 to place an order. It takes two weeks to ship a container from England loaded with
peas.

8) What is the optimal order quantity? 2,670 servings or 1,335 cups

Working:

Input:

Demand = 457 breakfast / week

Holding cost, H = $0.02 / year

Note: in this example, the holding cost is already given in form of H, the holding cost per unit per year. In
other examples, the holding cost can be given as h (the holding cost per year as a fraction of product
cost, C) so that the holding cost is equal to H = h * C

Order cost, S = $3

Lead time, L = 2 weeks

Output:

2𝐷𝑆
Optimal lot size, 𝑄 ∗ = √ 𝐻
,

2∗52∗457∗$3
𝑄∗ = √ $0.02
= 2,670.06 (2,670 if rounded to the nearest integer).
Since each serving contains half a cup, the total number of cups to be ordered is 2,670/2 = 1,335 cups

9) What is the average inventory if they order at the optimal order quantity? 1,335 servings or 667 cups

The average inventory = Q/2 = 2,670/2 =1,335 servings

Since each serving contains half a cup, the total number of cups to be ordered is 1,335/2 = 667 cups

10) What is the cost of the inventory policy (excluding cost of goods) if the diner orders at the economic
order quantity?

A) $53.40

B) $106.80

C) $26.70 (Answer)

D) None of the above

𝑄 2,670
Inventory cost in this case is the annual holding cost = 𝐻 = $0.02 = $26.70
2 2

11) The weekly demand for product DDD at Retailer EEE is normally distributed, with a mean of 5,000
and a standard deviation of 1,000. The manufacturer takes 3 weeks to fill an order placed by the Retailer
EEE. The store manager aims for a cycle service level of 95 percent.

What is the safety inventory that the store should carry to achieve a CSL of 95 percent? 2,849

Input:

Demand per period, D = 5,000

Standard deviation of demand, 𝜎𝐷 = 1,000

Replenishment lead time, L = 3 weeks

Desired Cycle Service Level (CSL) = 95 percent

Output:

Mean demand during lead time 𝐷𝐿 = D * L = 5,000 * 3 = 15,000

Standard deviation of demand during lead time 𝜎𝐿 = √𝐿 ∗ 𝜎𝐷 = √3 ∗ 1,000 = 1,732.05

Approach 1 (using NORM.INV with additional explanations aside from the formula):

CSL is the probability of demand during lead time is <= ROP,

𝐶𝑆𝐿 = 𝑃𝑟𝑜𝑏(𝑋 ≤ 𝑅𝑂𝑃)

where X is the continuous random variable of the demand during lead time with mean of 𝐷𝐿 and
standard deviation of demand during lead time 𝜎𝐿 . CSL can be computed in Excel where 𝐶𝑆𝐿 =
𝐹(𝑅𝑂𝑃, 𝐷𝐿 , 𝜎𝐿 )

So. we can get ROP by taking the inverse of normal distribution of CSL, that is 𝑅𝑂𝑃 = 𝐹 −1 (𝐶𝑆𝐿, 𝐷𝐿 , 𝜎𝐿 ).
In excel, it would be by using NORMINV (or NORM.INV in newer Excel):

ROP = NORM.INV(0.95, 15000, 1732.05) = 17,848.97

ss = ROP - 𝐷𝐿 = 17,848.97 – 15,000 = 2,848.97 (2,849 if rounded to the nearest integer)

Approach 2 (using NORM.S.INV with additional explanations aside from the formula):

Alternatively, we can use standard normal distribution where the mean is 0 and standard deviation is 1
𝑋−𝑚𝑒𝑎𝑛 𝑜𝑓 𝑋
by defining 𝑍 = 𝑠𝑡𝑎𝑚𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑋. In this case, X is still the continuous random variable of the
demand during lead time with mean of 𝐷𝐿 and standard deviation of demand during lead time 𝜎𝐿 . So Z is
𝑋−𝐷𝐿
a new continuous random variable where 𝑍 = 𝜎𝐿
and therefore:

𝑋 − 𝐷𝐿 𝑅𝑂𝑃 − 𝐷𝐿
𝐶𝑆𝐿 = 𝑃𝑟𝑜𝑏 ( ≤ )
𝜎𝐿 𝜎𝐿
𝑅𝑂𝑃 − 𝐷𝐿
𝐶𝑆𝐿 = 𝑃𝑟𝑜𝑏 (𝑍 ≤ )
𝜎𝐿
𝑅𝑂𝑃−𝐷𝐿
𝐶𝑆𝐿 = 𝐹𝑠 ( 𝜎𝐿
) where 𝐹𝑠 is the cumulative standard normal distribution (mean is 0 and standard
deviation is 1)

We know that 𝑅𝑂𝑃 − 𝐷𝐿 = 𝑠𝑠 in the case of safety inventory. Therefore,

𝑠𝑠
𝐶𝑆𝐿 = 𝑃𝑟𝑜𝑏 (𝑍 ≤ )
𝜎𝐿
𝑠𝑠
𝐶𝑆𝐿 = 𝐹𝑠 ( )
𝜎𝐿
By taking the inverse of standard normal distribution, we can get:
𝑠𝑠
= 𝐹𝑠−1 (𝐶𝑆𝐿)
𝜎𝐿
In excel, 𝐹𝑠−1 would be by using NORMSINV or NORM.S.INV for newer excel. So:
𝑠𝑠
= 𝑁𝑂𝑅𝑀. 𝑆. 𝐼𝑁𝑉(𝐶𝑆𝐿)
𝜎𝐿
𝑠𝑠 = 𝑁𝑂𝑅𝑀. 𝑆. 𝐼𝑁𝑉(𝐶𝑆𝐿) ∗ 𝜎𝐿

Safety inventory, ss = NORM.S.INV(0.95) * 𝜎𝐿 = NORM.S.INV(0.95) * √3 ∗ 1,000 = 2,848.97 (2,849 if

rounded to the nearest integer)