Chapter 10Managing Economies of Scale in the Supply Chain: Cycle InventoryTrue/False1. Cycle inventory exists because producing or purchasing in large lots allows astage of the supply chain to exploit economies of scale and increase cost.Answer: FalseDifficulty: Moderate2. A lot or batch size is the quantity that a stage of the supply chain either producesor purchases at a given time.Answer: TrueDifficulty: Moderate3. Cycle inventory is the physical inventory in the supply chain due to eitherproduction or purchases demanded by the customer.Answer: TrueDifficulty: Moderate4. The inventory profile is a plot depicting the level of inventory over time.Answer: TrueDifficulty: Easy5. When demand is steady, cycle inventory and lot size are related as follows:Cycle Inventory = Lot Size x 2 = Q*2.Answer: FalseDifficulty: Moderate6. Lot sizes and cycle inventory do not affect the flow time of material within thesupply chain.Answer: FalseDifficulty: Easy7. Average flow time resulting from cycle inventory = Cycle Inventory/Demand =Q/2D.Answer: TrueDifficulty: Moderate8. Cycle inventory is primarily held to take advantage of economies of scale andreduce profit within the supply chain.Answer: FalseDifficulty: Easy9. Increasing the lot size or cycle inventory often decreases the cost incurred bydifferent stages of a supply chain.Answer: TrueDifficulty: Moderate10. Cycle inventory exists in a supply chain because different stages exploiteconomies of scale to lower total cost.Answer: TrueDifficulty: Easy11. The costs considered in lot sizing decisions include material cost, fixed orderingcost, and manufacturing cost.Answer: FalseDifficulty: Moderate12. The total annual cost is the sum of annual material cost, annual order cost, andannual holding cost, and is given as TC = CD + (D/Q)S + (Q/2)hC.Answer: TrueDifficulty: Moderate13. The optimal lot size is referred to as the economic order quantity (EOQ). It isdenoted by Q * and is given by the equation: Q* = 2DS/hC.Answer: TrueDifficulty: Moderate14. Total ordering and holding costs are unstable around the economic orderquantity.Answer: FalseDifficulty: Moderate15. A firm is often better served by ordering a convenient lot size close to theeconomic order quantity rather than the precise EOQ.Answer: TrueDifficulty: Moderate16. If demand increases by a factor of k, the optimal lot size decreases by a factor ofk.Answer: FalseDifficulty: Hard17. To reduce the optimal lot size by a factor of k, the fixed order cost S must bereduced by a factor of k.Answer: FalseDifficulty: Moderate18. Aggregating across products, retailers, or suppliers in a single order allows for areduction in lot size for individual products because fixed ordering andtransportation costs are now spread across multiple products, retailers, orsuppliers.Answer: TrueDifficulty: Moderate19. A key to reducing cycle inventory is the reduction of lot size.Answer: TrueDifficulty: Easy20. A key to reducing lot size without increasing costs is to reduce the holding costassociated with each lot.Answer: FalseDifficulty: Moderate21. Reduction of fixed cost may be achieved by aggregating lots across multipleproducts, customers, or suppliers.Answer: TrueDifficulty: Easy22. A discount is volume-based if the pricing schedule offers discounts based on thequantity ordered in a single lot.Answer: FalseDifficulty: Hard23. A discount is volume-based if the discount is based on the total quantitypurchased over a given period, regardless of the number of lots purchased overthat period.Answer: TrueDifficulty: Easy24. Pricing schedules with all unit quantity discounts encourage retailers to increasethe size of their lots, which reduces the average inventory and flow time in asupply chain.Answer: FalseDifficulty: Moderate25. Marginal unit quantity discounts have also been referred to as multi-block tariffs.Answer: TrueDifficulty: Moderate26. Quantity discounts lead to a minor buildup of cycle inventory in the supply chain.Answer: FalseDifficulty: Moderate27. For commodity products where price is set by the market, manufacturers can uselot size based quantity discounts to achieve coordination in the supply chain and decrease supply chain cost.Answer: TrueDifficulty: Moderate28. The supply chain profit is higher if each stage of the supply chain independentlymakes its pricing decisions with the objective of maximizing its own profit.Answer: FalseDifficulty: Moderate29. For products where the firm has market power, two-part tariffs can be used toachieve coordination in the supply chain and maximize supply chain profits.Answer: TrueDifficulty: Moderate30. Discounts related to price discrimination will be lot size based.Answer: FalseDifficulty: Hard31. Price discrimination is the practice where a firm charges differential prices tomaximize profits.Answer: TrueDifficulty: Easy32. The goal of trade promotions is to influence retailers to act in a way that helps t heretailer achieve its objectives.Answer: FalseDifficulty: Easy33. Although a forward buy is often the retailer’s appropriate response and increasestheir own profits, it usually increases demand variability with a resulting increase in inventory and flow times within the supply chain.Answer: TrueDifficulty: Moderate34. Trade promotions lead to a significant increase in lot size and cycle inventorybecause of forward buying by the retailer.Answer: TrueDifficulty: ModerateMultiple Choice1. Cycle inventory exists because producing or purchasing in large lots allows astage of the supply chain toa. exploit economies of scale and raise cost.b. exploit economies of scale and lower cost.c. exploit customers and lower cost.d. exploit customers and raise cost.e. none of the aboveAnswer: bDifficulty: Easy2. The quantity of inventory that a stage of the supply chain either produces o rpurchases at a given time isa. an order.b. a job.c. a shipment.d. a lot or batch.e. none of the aboveAnswer: dDifficulty: Easy3. The average inventory in the supply chain due to either production or purchasesin lot sizes that are larger than those demanded by the customer isa. annual inventory.b. distribution inventory.c. cycle inventory.d. physical inventory.e. b and c onlyAnswer: c Difficulty:Moderate4. A graphical plot depicting the level of inventory over time isa. an inventory graph.b. a distribution inventory.c. an inventory drawing.d. an inventory profile.e. an inventory picture.Answer: dDifficulty: Moderate5. When demand is steady, cycle inventory and lot size are related asa. Cycle Inventory = Lot Size x 2.b. Cycle Inventory = Q*2.c. Cycle Inventory = Q/2.d. Cycle Inventory = Lot Size = Q.e. none of the aboveAnswer: cDifficulty: Moderate6. Average flow time resulting from cycle inventory is equal toa. Cycle Inventory/Demand = Q/2.b. Cycle Inventory/Demand = Q/2D.c. Cycle Inventory = Q/2.d. Cycle Inventory = Lot Size = Q.e. none of the aboveAnswer: bDifficulty: Moderate7. Cycle inventory is primarily held toa. take advantage of diseconomies of scale and increase cost within thesupply chain.b. take advantage of diseconomies of scale and reduce cost within thesupply chain.c. take advantage of economies of scale and increase cost within the supplychain.d. take advantage of economies of scale and reduce cost within the supplychain.e. None of the above are true.Answer: d Difficulty:Moderate8. Which of the following is not a cost that must be considered in any lot sizingdecision?a. Average price per unit purchased, $C/unitb. Fixed ordering cost incurred per lot, $S/lotc. Holding cost incurred per unit per year, $H/unit/year = hCd. Manufacturing cost per unit, $M/unite. All of the above are costs to be considered.Answer: dDifficulty: Moderate9. The primary role of cycle inventory is to allow different stages in the supply chaintoa. purchase product in lot sizes that maximize the sum of the material,ordering, and holding cost.b. purchase product in lot sizes that minimize the sum of the material,ordering, and holding cost.c. sell product in lot sizes that maximize the sum of the material, ordering,and holding cost.d. sell product in lot sizes that minimize the sum of the material, ordering,and holding cost.e. none of the aboveAnswer: bDifficulty: Moderate10. Economies of scale in purchasing and ordering motivate a manager toa. increase the lot size and cycle inventory.b. decrease the lot size and cycle inventory.c. eliminate inventory.d. increase the lot size and reduce cycle inventory.e. none of the aboveAnswer: aDifficulty: Moderate11. Which of the following is not a situation in which any stage of the supply chainexploits economies of scale in its replenishment decisions?a. A fixed cost is incurred each time an order is placed or produced.b. A holding cost is incurred each period for each unit of inventory.c. The supplier offers price discounts based on the quantity purchased perlot.d. The supplier offers short-term discounts or holds trade promotions.e. all of the aboveAnswer: bDifficulty: Moderate12. The price paid per unit is referred to asa. the material cost and is denoted by C.b. the fixed ordering cost and is denoted by S.c. the holding cost and is denoted by H.d. the purchase price and is denoted by P.e. none of the aboveAnswer: aDifficulty: Moderate13. All costs that do not vary with the size of the order but are incurred each time anorder is placed are referred to asa. the material cost and is denoted by C.b. the fixed ordering cost and is denoted by S.c. the holding cost and is denoted by H.d. the purchase price and is denoted by P.e. none of the aboveAnswer: bDifficulty: Moderate14. The cost of carrying one unit in inventory for a specified period of time, usuallyone year, is referred to asa. the material cost and is denoted by C.b. the fixed ordering cost and is denoted by S.c. the holding cost and is denoted by H.d. the purchase price and is denoted by P.e. none of the aboveAnswer: cDifficulty: Moderate15. Which of the following would not be an example of a fixed ordering cost?a. administrative cost incurred to place an orderb. trucking cost incurred to transport an orderc. labor cost incurred to receive an orderd. labor cost incurred to manufacture a parte. none of the aboveAnswer: dDifficulty: Moderate16. Which of the following would not be included in holding cost?a. cost of capitalb. cost of physically storing the inventoryc. cost of manufacturingd. cost that results from the product becoming obsoletee. none of the aboveAnswer: cDifficulty: Moderate17. The total annual cost is the sum of annual material cost, annual order cost, andannual holding cost, and is given asa. TC = CD + (D/Q)S + (Q/2)hC.b. TC = CD + (Q/2)S + (D/Q)hC.c. TC = CDS + D/Q + (Q/2)hC.d. TC = Q/2 + (D/Q)S + (CD)hC.e. none of the aboveAnswer: aDifficulty: Hard18. The optimal lot size is referred to as the economic order quantity (EOQ). It isdenoted by Q* and is given by the equationa. Q* = 2DS/hC.b. Q* = √2hC.c. Q* = √2DS.d. Q* = √2DS/hC.e. none of the aboveAnswer: dDifficulty: Moderate19. Total ordering and holding costsa. are relatively stable.b. are relatively stable around the economic order quantity.c. are relatively unstable around the economic order quantity.d. are unstable.e. none of the aboveAnswer: bDifficulty: Easy20. If demand increases by a factor of k, the optimal lot size increases by a factor ofa. k.b. k/2.c. k + 2.d. k-squared.e. the square root of k.Answer: eDifficulty: Hard21. If demand increases by a factor of k, the number of orders placed per yearshould increase by a factor ofa. k.b. k/2.c. k + 2.d. k-squared.e. the square root of k.Answer: eDifficulty: Moderate22. To reduce the optimal lot size by a factor of k, the fixed order cost S must bea. increased by a factor of k.b. increased by a factor of k-squared.c. reduced by a factor of k-squared.d. reduced by a factor of the square root of k.e. reduced by a factor of k.Answer: cDifficulty: Moderate23. Aggregating across products, retailers, or suppliers in a single order allows fora. an increase in lot size for individual products.b. an increase in customer demand.c. a reduction in holding cost per unit.d. a reduction in lot size for individual products.e. a reduction in purchase price per unit.Answer: dDifficulty: Hard24. Aggregating across products, retailers, or suppliers in a single order allows for areduction in lot size for individual products becausea. fixed ordering and transportation costs are now charged to retailers.b. fixed ordering and transportation costs are now charged to suppliers.c. fixed ordering and transportation costs are now spread across multipleproducts, retailers, or suppliers.d. holding costs are now charged to retailers or suppliers.e. holding costs are now spread across multiple products, retailers, orsuppliers.Answer: c Difficulty:Moderate25. A key to reducing cycle inventory isa. the reduction of holding cost.b. the reduction of manufacturing cost.c. the reduction of lot size.d. the reduction of warehouse space.e. all of the aboveAnswer: cDifficulty: Moderate26. A key to reducing lot size without increasing costs is toa. reduce the holding cost associated with each lot.b. reduce the fixed cost associated with each lot.c. reduce the material cost associated with each lot.d. reduce the manufacturing cost associated with each lot.e. increase the holding cost associated with each lot.Answer: bDifficulty: Moderate27. A price discount where the pricing schedule offers discounts based on thequantity ordered in a single lot isa. customer based.b. lot size based.c. supplier based.d. volume based.e. none of the aboveAnswer: bDifficulty: Easy28. A price discount where the discount is based on the total quantity purchased overa given period, regardless of the number of lots purchased over that period isa. customer based.b. lot size based.c. supplier based.d. volume based.e. none of the aboveAnswer: dDifficulty: Moderate29. Pricing schedules with all unit quantity discounts encourage retailers toa. decrease the size of their lots.b. increase the size of their lots.c. decrease the size of their inventory.d. increase the price of their products.e. none of the aboveAnswer: aDifficulty: Easy30. Marginal unit quantity discounts have also been referred to asa. all unit quantity discounts.b. basic quantity discounts.c. elevated quantity discounts.d. multi-block tariffs.e. tariffs.Answer: d Difficulty:Moderate31. In the pricing schedule for marginal unit quantity discountsa. the average cost of a unit decreases at a breakpoint.b. the average cost of a unit increases at a breakpoint.c. the marginal cost of a unit decreases at a breakpoint.d. the marginal cost of a unit increases at a breakpoint.e. the average cost and the marginal cost of a unit decrease at a breakpoint.Answer: cDifficulty: Moderate32. Quantity discounts lead toa. a significant buildup of cycle inventory in the supply chain.b. a slight buildup of cycle inventory in the supply chain.c. a decrease in cycle inventory in the supply chain.d. minor fluctuations of cycle inventory in the supply chain.e. a major drop in cycle inventory in the supply chain.Answer: aDifficulty: Moderate33. For commodity products where price is set by the market, manufacturers can uselot size based quantity discounts toa. achieve coordination in the supply chain and decrease supply chain cost.b. relax coordination in the supply chain and increase supply chain cost.c. relax coordination in the supply chain and decrease supply chain cost.d. achieve coordination in the supply chain and decrease supply chain cost.e. None of the above are accurate.Answer: dDifficulty: Easy34. In a supply chain where each stage of the supply chain independently makes itspricing decisions with the objective of maximizing its own profit,a. supply chain profit is lower than a coordinated solution.b. supply chain profit is higher than a coordinated solution.c. supply chain profit is about the same as a coordinated solution.d. supply chain profit will be maximized.e. None of the above are accurate.Answer: aDifficulty: Easy35. For products where the firm has market power, coordination in the supply chaincan be achieved and supply chain profits maximized through the use ofa. two-part tariffs or volume based quantity discounts.b. marginal unit quantity discounts.c. all unit quantity discounts.d. basic quantity discounts.e. none of the aboveAnswer: aDifficulty: Easy36. The practice where a firm charges differential prices to maximize profits isa. lot pricing.b. marginal pricing.c. price incrimination.d. price discrimination.e. all of the aboveAnswer: dDifficulty: Moderate37. Discounts related to price discrimination will bea. volume based.b. unit based.c. marginally based.d. lot size based.e. none of the aboveAnswer: aDifficulty: Hard38. The goal of trade promotions is toa. influence retailers to act in a way that helps the retailer achieve itsobjectives.b. influence retailers to act in a way that helps the manufacturer achieve itsobjectives.c. influence retailers to act in a way that will maximize supply chain profit.d. influence retailers to act in a way minimize supply chain cost.e. none of the aboveAnswer: bDifficulty: Hard39. Which of the following is not a key goal (from the manufacturer’s perspective) ofa trade promotion?a. Induce retailers to use price discounts, displays, or advertising to spursales.b. Shift inventory from the manufacturer to the retailer and the customer.c. Shift inventory from the retailer to the customer.d. Defend a brand against competition.e. none of the aboveAnswer: cDifficulty: Moderate40. Which of the following is a possible response that a retailer could make to a tradepromotion?a. Pass through some or all of the promotion to customers to spur sales.b. Pass through very little of the promotion to customers but purchase ingreater quantity during the promotion period to exploit the temporaryreduction in price.c. Shift inventory from the retailer to the customer.d. a and b onlye. b and c onlyAnswer: d Difficulty:Hard41. When the retailer decides to pass through some or all of the promotion tocustomers to spur sales, the result isa. a lowering of the price of the product for the end customer.b. increased purchases and thus increased sales for the entire supply chain.c. an increase in the amount of inventory held at the retailer.d. all of the abovee. a and b onlyAnswer: e Difficulty:Hard42. When the retailer decides to pass through very little of the promotion tocustomers but purchase in greater quantity during the promotion period to exploit the temporary reduction in price, the result isa. a lowering of the price of the product for the end customer.b. increased purchases and thus increased sales for the entire supply chain.c. an increase in the amount of inventory held at the retailer.d. all of the abovee. a and b onlyAnswer: cDifficulty: Hard43. The manufacturer can justify offering trade promotions resulting in forward buyingby retailers whena. they have inadvertently built up a lot of excess inventory.b. the forward buy allows the manufacturer to smooth demand by shifting itfrom peak to low-demand periods.c. the retailer decreases his total cost.d. all of the abovee. a and b onlyAnswer: e Difficulty:Hard44. The retailer can justify the forward buying whena. they have inadvertently built up a lot of excess inventory.b. the forward buy allows the manufacturer to smooth demand by shifting it frompeak to low-demand periods.c. it decreases his total cost.d. all of the abovee. a and c onlyAnswer: cDifficulty: Hard45. Replenishment orders in multi-echelon supply chains should bea. synchronized to increase cycle inventory and order costs.b. synchronized to facilitate supplier evaluation and selection.c. synchronized to keep cycle inventory and order costs low.d. separated to increase cycle inventory and order costs.e. separated to keep cycle inventory and order costs low.Answer: cDifficulty: Hard46. When developing estimates for holding and ordering costs, it is important toa. estimate these costs to a high level of precision.b. get a good approximation quickly.c. develop estimates that will not be changed.d. both a and ce. none of the aboveAnswer: bDifficulty: Moderate47. Which cost takes into account the return demanded on the firm’s equity and theamount the firm must pay on its debt?a. cost of capitalb. obsolescence (spoilage) costc. handling costd. occupancy coste. none of the aboveAnswer: aDifficulty: Easy48. Which cost estimates the rate at which the value of the product being storeddrops either because the market value of that product drops or because theproduct quality deteriorates?a. cost of capitalb. obsolescence (spoilage) costc. handling costd. occupancy coste. none of the aboveAnswer: bDifficulty: Easy49. Which cost should only include receiving and storage costs that vary with thequantity of product received?a. cost of capitalb. obsolescence (spoilage) costc. handling costd. occupancy coste. none of the aboveAnswer: cDifficulty: Moderate50. Which cost should reflect the incremental change in space cost due to changingcycle inventory?a. cost of capitalb. obsolescence (spoilage) costc. handling costd. occupancy coste. none of the aboveAnswer: dDifficulty: Moderate51. Which of the following would not be a component of order cost?a. buyer timeb. transportation costc. handling costd. receiving coste. All of the above are components of order cost.Answer: cDifficulty: ModerateEssay/Problems1. Discuss the role of cycle inventory in the supply chain.Answer: The primary role of cycle inventory is to allow different stages in thesupply chain to purchase product in lot sizes that minimize the sum of thematerial, ordering, and holding cost. If a manager were considering the holdingcost alone, he or she would reduce the lot size and cycle inventory. Economiesof scale in purchasing and ordering, however, motivate a manager to increasethe lot size and cycle inventory. A manager must make the trade-off thatminimizes the total cost when making the lot sizing decision. Ideally, cycleinventory decisions should be made considering the total cost across the entiresupply chain. In practice, however, each stage often makes its cycle inventorydecisions independently. As we discuss later in the chapter, this practiceincreases the level of cycle inventory as well as the total cost in the supply chain.Any stage of the supply chain exploits economies of scale in its replenishmentdecisions in the following three typical situations:1. A fixed cost is incurred each time an order is placed or produced.2. The supplier offers price discounts based on the quantity purchasedper lot.3. The supplier offers short-term discounts or holds trade promotions.Cycle inventory exists in a supply chain because different stages exploiteconomies of scale to lower total cost. The costs considered include materialcost, fixed ordering cost, and holding cost. The supply chain operation phaseoperates on a weekly or daily time horizon and deals with decisions c oncerningindividual customer orders.Difficulty: Hard2. Describe the impact of trade promotions on cycle inventory.Answer: Manufacturers use trade promotions to offer a discounted price and atime period over which the discount is effective. The goal of trade promotions is to influence retailers to act in a way that helps the manufacturer achieve itsobjectives. A few of the key goals (from the manufacturer’s p erspective) of atrade promotion are as follows:1. Induce retailers to use price discounts, displays, or advertising to spursales.2. Shift inventory from the manufacturer to the retailer and the customer.3. Defend a brand against competition.In response to a trade promotion, the retailer has the following options:1. Pass through some or all of the promotion to customers to spur sales.2. Pass through very little of the promotion to customers but purchase ingreater quantity during the promotion period to exploit the temporaryreduction in price.The first action lowers the price of the product for the end customer, leading toincreased purchases and thus increased sales for the entire supply chain. Thesecond action does not increase purchases by the customer but increases theamount of inventory held at the retailer. As a result, the cycle inventory and flow time within the supply chain increase.Trade promotions lead to a significant increase in lot size and cycle inventorybecause of forward buying by the retailer. This generally results in reducedsupply chain profits unless the trade promotion reduces demand fluctuations.The retailer can justify the forward buying because it decreases his total cost. In contrast, the manufacturer can justify this action only if they have eitherinadvertently built up a lot of excess inventory or the forward buy allows themanufacturer to smooth demand by shifting it from peak to low-demand periods.In practice, manufacturers often build up inventory in anticipation of plannedpromotions. During the trade promotion, this inventory shifts to the retailer,primarily as a forward buy. If the forward buy during trade promotions is asignificant fraction of total sales, manufacturers end up reducing the revenuesthey earn from sales because most of the product is sold at a discount. Theincrease in inventory and the decrease in revenues often leads to a reduction in manufacturer profits as a result of trade promotions. Total supply chain profitsalso decrease because of an increase in inventory.Difficulty: Hard3. Discuss the characteristics of a successful multi-echelon supply chain.。
