Introduction to Inventory Management: Exam-Focused MCQs with Answers
Introduction to Inventory Management
Question: What is the primary objective of inventory management?
a) Maximizing stock levels
b) Minimizing cost while meeting demand
c) Increasing lead times
d) Reducing product variety
Answer: b) Minimizing cost while meeting demand
Question: Which of the following is NOT a type of inventory?
a) Raw materials
b) Work-in-progress
c) Finished goods
d) Opportunity cost
Answer: d) Opportunity cost
Question: What is the term for the inventory maintained to protect against stockouts due to uncertain demand?
a) Safety stock
b) Pipeline stock
c) Seasonal stock
d) Excess inventory
Answer: a) Safety stock
ABC Analysis
Question: In ABC analysis, which category typically accounts for the highest percentage of inventory value?
a) A-items
b) B-items
c) C-items
d) D-items
Answer: a) A-items
Question: Which inventory classification technique is used in ABC analysis?
a) Pareto principle
b) EOQ model
c) JIT system
d) FIFO method
Answer: a) Pareto principle
Question: In ABC analysis, 'C' items are typically characterized by:
a) High value, low frequency of usage
b) Low value, high frequency of usage
c) High value, high frequency of usage
d) Low value, low frequency of usage
Answer: b) Low value, high frequency of usage
Basic Inventory Models
Question: What does the Economic Order Quantity (EOQ) model aim to minimize?
a) Transportation cost
b) Ordering and holding costs
c) Procurement time
d) Storage space
Answer: b) Ordering and holding costs
Question: Which of the following is an assumption of the EOQ model?
a) Variable demand
b) Multiple order deliveries
c) Constant lead time
d) Seasonal stockouts
Answer: c) Constant lead time
Question: In the EOQ formula, what does 'D' represent?
a) Demand rate
b) Delivery cost
c) Depreciation rate
d) Distribution channel
Answer: a) Demand rate
Question: What type of inventory system places an order when inventory reaches a predetermined level?
a) Continuous review system
b) Periodic review system
c) Hybrid inventory system
d) Push system
Answer: a) Continuous review system
Introduction to Inventory Management
Question: What does the term "lead time" refer to in inventory management?
a) The time taken to process an order
b) The time between order placement and receipt
c) The time taken for inventory turnover
d) The time taken to produce goods
Answer: b) The time between order placement and receipt
Question: Which inventory system records transactions continuously?
a) Periodic inventory system
b) Perpetual inventory system
c) Just-In-Time system
d) ABC analysis
Answer: b) Perpetual inventory system
Question: What is the term for inventory purchased to meet future demand?
a) Anticipation stock
b) Buffer stock
c) Decoupling stock
d) Cycle stock
Answer: a) Anticipation stock
Question: Which of the following is NOT an inventory-related cost?
a) Holding cost
b) Ordering cost
c) Shortage cost
d) Fixed cost
Answer: d) Fixed cost
Question: Inventory turnover ratio is used to measure:
a) Efficiency of inventory usage
b) Profitability of sales
c) Demand forecasting accuracy
d) Lead time variability
Answer: a) Efficiency of inventory usage
ABC Analysis
Question: What is the primary benefit of using ABC analysis?
a) Reducing lead times
b) Prioritizing inventory control efforts
c) Improving production efficiency
d) Lowering operational costs
Answer: b) Prioritizing inventory control efforts
Question: ABC analysis classifies inventory based on:
a) Value and frequency of use
b) Size and weight
c) Source and cost
d) Expiry date and lead time
Answer: a) Value and frequency of use
Question: Which of the following tools is commonly used to perform ABC analysis?
a) Histogram
b) Pie chart
c) Pareto chart
d) Scatter diagram
Answer: c) Pareto chart
Question: In ABC analysis, which items require the most attention and control?
a) A-items
b) B-items
c) C-items
d) D-items
Answer: a) A-items
Question: What percentage of inventory typically falls into the 'C' category in ABC analysis?
a) 5%
b) 10%
c) 50%
d) 70%
Answer: d) 70%
Basic Inventory Models
Question: Which of the following is NOT a basic inventory model?
a) EOQ model
b) Newsvendor model
c) Just-In-Time model
d) Regression model
Answer: d) Regression model
Question: In a single-period inventory model, what is the main focus?
a) Balancing ordering and holding costs
b) Maximizing profit by managing stockouts and overstock
c) Optimizing lead time
d) Reducing supplier delays
Answer: b) Maximizing profit by managing stockouts and overstock
Question: What does the reorder point indicate in an inventory system?
a) The optimal inventory level
b) The level at which a new order should be placed
c) The maximum inventory level
d) The level at which stockouts occur
Answer: b) The level at which a new order should be placed
Question: The Economic Order Quantity (EOQ) model assumes:
a) Fluctuating demand
b) Bulk discounts are available
c) Constant demand and lead time
d) Stockouts are acceptable
Answer: c) Constant demand and lead time
Question: What is the primary assumption in a periodic review inventory system?
a) Orders can be placed at any time
b) Inventory is reviewed at regular intervals
c) Demand is constant
d) Stockouts are penalized
Answer: b) Inventory is reviewed at regular intervals
Introduction to Inventory Management
Question: What is the term for the cost incurred when inventory levels are insufficient to meet demand?
a) Holding cost
b) Ordering cost
c) Shortage cost
d) Carrying cost
Answer: c) Shortage cost
Question: The term "stockout" refers to:
a) Excess inventory
b) Obsolete inventory
c) Unavailable inventory during demand
d) Inventory damage
Answer: c) Unavailable inventory during demand
Question: Inventory holding costs typically include:
a) Purchase costs
b) Storage and insurance costs
c) Transportation costs
d) Manufacturing costs
Answer: b) Storage and insurance costs
Question: What does the term "cycle stock" mean?
a) Inventory held to meet seasonal demand
b) Inventory held due to variability in lead time
c) Inventory used to satisfy regular demand
d) Inventory returned from customers
Answer: c) Inventory used to satisfy regular demand
Question: Which of the following systems ensures that inventory levels are only replenished when required?
a) Just-In-Time (JIT)
b) Perpetual inventory system
c) Periodic inventory system
d) Material Requirements Planning (MRP)
Answer: a) Just-In-Time (JIT)
ABC Analysis
Question: In ABC analysis, A-items typically represent:
a) 80% of the items contributing to 20% of value
b) 20% of the items contributing to 80% of value
c) 50% of the items contributing to 50% of value
d) None of the above
Answer: b) 20% of the items contributing to 80% of value
Question: The 80/20 rule in ABC analysis is also known as:
a) Demand principle
b) Pareto principle
c) Inventory optimization
d) Value analysis
Answer: b) Pareto principle
Question: In an ideal ABC analysis, which inventory group requires the least monitoring?
a) A-items
b) B-items
c) C-items
d) D-items
Answer: c) C-items
Question: ABC analysis helps in:
a) Forecasting demand
b) Reducing inventory theft
c) Prioritizing inventory management efforts
d) Automating order placement
Answer: c) Prioritizing inventory management efforts
Question: Which of the following is an example of a typical 'A' item in a grocery store?
a) Rarely purchased spices
b) Essential items like milk and bread
c) Seasonal fruits
d) Cleaning supplies
Answer: b) Essential items like milk and bread
Basic Inventory Models
Question: The Newsvendor model is primarily used for:
a) Perishable or seasonal items
b) High-value inventory items
c) Durable goods
d) Bulk inventory purchases
Answer: a) Perishable or seasonal items
Question: Which inventory model focuses on determining the optimal reorder point?
a) EOQ model
b) Reorder Point (ROP) model
c) Newsvendor model
d) Perpetual inventory model
Answer: b) Reorder Point (ROP) model
Question: In the EOQ formula, 'H' represents:
a) Annual demand
b) Holding cost per unit
c) Ordering cost per unit
d) Total inventory cost
Answer: b) Holding cost per unit
Question: Which inventory control system integrates production schedules and inventory management?
a) EOQ
b) MRP (Material Requirements Planning)
c) Newsvendor model
d) ABC analysis
Answer: b) MRP (Material Requirements Planning)
Introduction to Inventory Management
Question: Which inventory type is used as a safeguard against unexpected demand?
a) Decoupling stock
b) Cycle stock
c) Safety stock
d) Work-in-progress stock
Answer: c) Safety stock
Question: The key objective of inventory management is to:
a) Minimize costs while meeting demand
b) Maximize inventory levels
c) Reduce supplier relationships
d) Increase stock turnover ratios
Answer: a) Minimize costs while meeting demand
Question: Which of the following is an example of dependent demand inventory?
a) Spare parts for machinery
b) Finished goods
c) Office supplies
d) Consumer electronics
Answer: a) Spare parts for machinery
Question: The concept of inventory turnover ratio helps to analyze:
a) Profit margin trends
b) Sales efficiency
c) Supply chain bottlenecks
d) How quickly inventory is sold and replenished
Answer: d) How quickly inventory is sold and replenished
Question: What is the main disadvantage of overstocking inventory?
a) High ordering cost
b) Increased carrying cost
c) Decreased lead time
d) Improved demand satisfaction
Answer: b) Increased carrying cost
ABC Analysis
Question: Which category in ABC analysis often includes low-cost consumables?
a) A-items
b) B-items
c) C-items
d) None of the above
Answer: c) C-items
Question: In which scenario would you most likely use ABC analysis?
a) Analyzing production schedules
b) Prioritizing inventory inspection
c) Planning a marketing strategy
d) Automating supply chain workflows
Answer: b) Prioritizing inventory inspection
Question: What type of items generally falls under 'B' category in ABC analysis?
a) Items with moderate consumption and value
b) Items with high consumption and value
c) Items with minimal consumption and value
d) Items prone to obsolescence
Answer: a) Items with moderate consumption and value
Question: How often should you monitor 'A' items in ABC analysis?
a) Quarterly
b) Annually
c) Monthly or more frequently
d) Once every two years
Answer: c) Monthly or more frequently
Question: ABC analysis assumes that:
a) All items have equal importance
b) Value distribution follows a uniform trend
c) The importance of items is proportional to their consumption value
d) Inventory levels should be equal for all items
Answer: c) The importance of items is proportional to their consumption value
Basic Inventory Models
Question: Which inventory model is used for items with uncertain demand and short life cycles?
a) EOQ model
b) Newsvendor model
c) Perpetual inventory model
d) Fixed Order Quantity model
Answer: b) Newsvendor model
Question: What does the term "service level" in inventory models refer to?
a) Percentage of inventory utilization
b) Probability of not facing a stockout
c) Ratio of costs to sales revenue
d) Efficiency of the supply chain
Answer: b) Probability of not facing a stockout
Question: What is the primary focus of Just-In-Time (JIT) inventory systems?
a) Maintaining high inventory levels
b) Reducing holding costs
c) Increasing lead times
d) Bulk purchasing discounts
Answer: b) Reducing holding costs
Question: The reorder point formula includes:
a) Lead time and average demand
b) EOQ and safety stock
c) Average demand and EOQ
d) Safety stock and annual demand
Answer: a) Lead time and average demand
Question: Which inventory system reviews stock levels at fixed intervals?
a) Continuous review system
b) Periodic review system
c) Newsvendor model
d) ABC analysis
Answer: b) Periodic review system
Advanced Inventory Topics
Question: What does a "two-bin system" in inventory management indicate?
a) Two separate warehouses for inventory storage
b) Using one bin for current use and another for reorder stock
c) Dividing inventory based on value
d) Separating perishable and non-perishable goods
Answer: b) Using one bin for current use and another for reorder stock
Question: Vendor-Managed Inventory (VMI) is:
a) A method where the supplier manages inventory levels for the customer
b) A strategy to increase supplier margins
c) An approach to automate stock replenishment
d) An analysis tool for demand forecasting
Answer: a) A method where the supplier manages inventory levels for the customer
Question: Which inventory model is designed to minimize both ordering and holding costs?
a) Newsvendor model
b) EOQ model
c) Fixed order interval system
d) ABC analysis
Answer: b) EOQ model
Question: What is the main difference between a push and pull inventory system?
a) Push systems rely on forecasted demand; pull systems rely on actual demand
b) Push systems have shorter lead times; pull systems have longer lead times
c) Push systems reduce stockouts; pull systems increase overstocking
d) Push systems focus on reorder points; pull systems focus on stockouts
Answer: a) Push systems rely on forecasted demand; pull systems rely on actual demand
Question: A drawback of using JIT inventory management is:
a) High holding costs
b) Increased dependency on suppliers
c) Difficulty in forecasting demand
d) Excess inventory buildup
Answer: b) Increased dependency on suppliers
Introduction to Inventory Management
Question: What is the main function of inventory in a supply chain?
a) To maximize profits
b) To act as a buffer against uncertainty
c) To reduce storage costs
d) To increase product prices
Answer: b) To act as a buffer against uncertainty
Question: What does the term "economic order quantity" (EOQ) aim to achieve?
a) Maximum inventory level
b) Optimal balance between ordering and holding costs
c) Highest possible service level
d) Minimum lead time
Answer: b) Optimal balance between ordering and holding costs
Question: Which of the following is NOT a cost component in inventory management?
a) Holding costs
b) Setup costs
c) Advertising costs
d) Shortage costs
Answer: c) Advertising costs
Question: Inventory that is stored as raw materials for future production is called:
a) Work-in-progress inventory
b) Buffer inventory
c) Finished goods inventory
d) Pre-production inventory
Answer: a) Work-in-progress inventory
Question: Which of the following inventory systems relies on a physical count of inventory at regular intervals?
a) Perpetual inventory system
b) Periodic inventory system
c) Continuous inventory system
d) Decoupling inventory system
Answer: b) Periodic inventory system
ABC Analysis
Question: The ABC analysis is most effective in which of the following industries?
a) Service-based industries
b) Manufacturing industries
c) Financial industries
d) Retail and wholesale industries
Answer: d) Retail and wholesale industries
Question: Which inventory group in ABC analysis may require automation due to its high volume?
a) A-items
b) B-items
c) C-items
d) All items
Answer: c) C-items
Question: Which of the following statements is TRUE about ABC analysis?
a) It classifies inventory based on demand variability.
b) It helps focus on the most critical inventory items.
c) It eliminates the need for inventory forecasting.
d) It applies only to perishable goods.
Answer: b) It helps focus on the most critical inventory items.
Question: In ABC analysis, the total value contribution of A-items typically ranges between:
a) 10% to 20%
b) 70% to 80%
c) 90% to 100%
d) 40% to 50%
Answer: b) 70% to 80%
Question: Which step is essential before performing ABC analysis?
a) Determining inventory safety levels
b) Calculating the total consumption value for each item
c) Ordering excess inventory for C-items
d) Implementing perpetual inventory systems
Answer: b) Calculating the total consumption value for each item
Basic Inventory Models
Question: The reorder point (ROP) is reached when:
a) Inventory is depleted completely
b) Demand exceeds supply
c) Inventory falls to a pre-determined level
d) Inventory levels reach EOQ
Answer: c) Inventory falls to a pre-determined level
Question: What is the primary assumption of the basic EOQ model?
a) Demand is variable and unpredictable.
b) Lead time is uncertain.
c) Inventory is replenished instantaneously.
d) Stockouts are inevitable.
Answer: c) Inventory is replenished instantaneously.
Question: In the Newsvendor model, the critical ratio helps determine:
a) Optimal stock quantity
b) Total inventory cost
c) Lead time variability
d) Reorder point
Answer: a) Optimal stock quantity
Question: Safety stock is most commonly used to address:
a) Unexpected supplier delays
b) Seasonal demand fluctuations
c) Demand uncertainty and lead time variability
d) Overstocking issues
Answer: c) Demand uncertainty and lead time variability
Question: Which inventory control technique is characterized by replenishing inventory based on real-time demand signals?
a) Push system
b) Pull system
c) EOQ model
d) Fixed Order Quantity model
Answer: b) Pull system
Advanced Inventory Topics
Question: What is a primary advantage of the perpetual inventory system?
a) Reduced record-keeping efforts
b) Real-time inventory tracking
c) Elimination of physical stock counts
d) Simplified cost allocation
Answer: b) Real-time inventory tracking
Question: Which inventory technique is particularly useful for high-value, low-volume items?
a) JIT
b) EOQ
c) ABC analysis
d) VED analysis
Answer: c) ABC analysis
Question: The bullwhip effect in supply chain management refers to:
a) Inventory shrinkage
b) Demand distortion across the supply chain
c) Improved lead times with higher stock levels
d) Reduction in safety stock
Answer: b) Demand distortion across the supply chain
Question: The Fixed Order Quantity model assumes:
a) Variable demand and fixed lead time
b) Fixed demand and fixed lead time
c) Variable demand and variable lead time
d) Fixed safety stock
Answer: b) Fixed demand and fixed lead time
Question: Which of the following is an example of a deterministic inventory model?
a) EOQ model
b) Probabilistic inventory model
c) Newsvendor model
d) JIT system
Answer: a) EOQ model
Introduction to Inventory Management
Question: Which inventory management technique focuses on eliminating waste by minimizing inventory levels?
a) Fixed Order Quantity
b) Just-In-Time (JIT)
c) Periodic Review System
d) Push System
Answer: b) Just-In-Time (JIT)
Question: Which of the following is NOT a reason for holding inventory?
a) To balance supply and demand
b) To minimize lead times
c) To hedge against inflation
d) To buffer against production disruptions
Answer: b) To minimize lead times
Question: What does the term "stockout" refer to?
a) Overstocking of inventory
b) Inventory theft or loss
c) An inventory shortage preventing order fulfillment
d) Excess inventory in the warehouse
Answer: c) An inventory shortage preventing order fulfillment
Question: Cycle stock is the:
a) Inventory held for seasonal variations
b) Excess inventory kept for emergencies
c) Inventory held to meet regular demand
d) Total inventory divided by lead time
Answer: c) Inventory held to meet regular demand
Question: Which inventory management KPI measures how long inventory stays in the warehouse?
a) Inventory turnover ratio
b) Days of inventory outstanding (DIO)
c) Fill rate
d) Order lead time
Answer: b) Days of inventory outstanding (DIO)
ABC Analysis
Question: Which metric is commonly used to rank items in ABC analysis?
a) Annual consumption value
b) Lead time variability
c) Safety stock levels
d) Reorder point
Answer: a) Annual consumption value
Question: The "Pareto Principle" in inventory management refers to:
a) Reducing inventory turnover
b) 20% of items accounting for 80% of the value
c) Equal importance of all inventory items
d) Seasonal demand variations
Answer: b) 20% of items accounting for 80% of the value
Question: In ABC analysis, items classified as "A" typically require:
a) Annual review
b) Close monitoring and frequent ordering
c) Bulk ordering to save costs
d) Minimal management attention
Answer: b) Close monitoring and frequent ordering
Question: Which of the following is a limitation of ABC analysis?
a) It considers multiple variables for classification.
b) It focuses only on monetary value.
c) It applies only to high-value items.
d) It requires no data for implementation.
Answer: b) It focuses only on monetary value.
Question: A company finds that 15% of its items generate 75% of the total revenue. These items fall under:
a) B category
b) A category
c) C category
d) None of the above
Answer: b) A category
Basic Inventory Models
Question: In the EOQ model, what happens if the order quantity is less than the EOQ?
a) Total cost decreases
b) Holding cost increases
c) Ordering cost increases
d) Both holding and ordering costs decrease
Answer: c) Ordering cost increases
Question: Which factor is NOT considered in the basic EOQ formula?
a) Ordering cost
b) Holding cost
c) Demand rate
d) Safety stock
Answer: d) Safety stock
Question: A periodic review inventory system is best suited for:
a) High-value items requiring tight control
b) Low-value items with fluctuating demand
c) Inventory with predictable demand patterns
d) Inventory with long lead times
Answer: b) Low-value items with fluctuating demand
Question: In the Newsvendor model, which costs are compared to determine the optimal inventory level?
a) Ordering cost and holding cost
b) Overstock cost and understock cost
c) Reorder cost and lead time cost
d) Transportation cost and safety stock cost
Answer: b) Overstock cost and understock cost
Question: The EOQ model assumes:
a) Fluctuating demand
b) Fixed lead times and constant demand
c) Random order replenishments
d) Limited supply chain visibility
Answer: b) Fixed lead times and constant demand
Advanced Inventory Topics
Question: Which inventory method adjusts stock levels based on market demand signals?
a) Push system
b) Pull system
c) Fixed Order Interval system
d) Newsvendor model
Answer: b) Pull system
Question: In Vendor-Managed Inventory (VMI), who is responsible for replenishing stock?
a) The supplier
b) The customer
c) The logistics provider
d) The distributor
Answer: a) The supplier
Question: Which inventory strategy minimizes storage costs by reducing excess stock?
a) Cross-docking
b) Bulk purchasing
c) Just-In-Time (JIT)
d) Vendor consolidation
Answer: c) Just-In-Time (JIT)
Question: A "buffer stock" is maintained to:
a) Eliminate stockouts during demand surges
b) Increase inventory turnover
c) Improve supplier relationships
d) Reduce carrying costs
Answer: a) Eliminate stockouts during demand surges
Question: Which is a key drawback of JIT inventory systems?
a) Excess inventory
b) Dependency on suppliers' reliability
c) High holding costs
d) Increased lead times
Answer: b) Dependency on suppliers' reliability
