Management Notes

# Management Notes

Reference Notes for Management

# An inventory decision rule states

## An inventory decision rule states

Options:

 A. One hundred is the reorder point, and 14 is the order quantity. B. Fourteen is the reorder point, and 100 is the order quantity. C. The number 100 is a function of demand during lead time. D. Fourteen is the safety stock, and 100 is the reorder point. E. None of the above is true.

B. Fourteen is the reorder point, and 100 is the order quantity.

Correct Answer Explanation: B. Fourteen is the reorder point, and 100 is the order quantity.

Option B suggests that 14 is the reorder point, and 100 is the order quantity. In inventory management, the reorder point is the inventory level at which a new order should be placed to replenish stock before it runs out. Meanwhile, the order quantity refers to the number of units ordered when inventory reaches the reorder point.

The reorder point of 14 indicates that when the inventory level drops to 14 units, it triggers the need to place a new order to avoid stockouts. Consequently, the order quantity of 100 signifies that when the reorder point is reached, an order for 100 units is placed to replenish the inventory.

Option B is the correct answer as it appropriately identifies the reorder point (14 units) and the order quantity (100 units), aligning with best practices in inventory management by ensuring timely replenishment without risking stockouts.

Now, let’s address why the other options are incorrect:

A. Option A proposes a reorder point of 100 and an order quantity of 14.

This combination is counterintuitive in inventory management. The reorder point is the inventory level at which a new order should be initiated, and it is typically set at a level that ensures the arrival of new stock before running out.

In this case, a reorder point of 100 implies waiting until there are only 100 units left before placing a new order, which could lead to stockouts and disruptions in the supply chain. Additionally, the order quantity of 14 seems inadequate for replenishing inventory, as larger orders are generally placed to benefit from economies of scale and reduce ordering costs.

C. Option C states that the number 100 is a function of demand during lead time.

While it acknowledges the influence of demand during lead time, it lacks specificity in defining the reorder point or order quantity. Effective inventory management requires clear and precise values for these parameters.

Without specifying how 100 is determined or how it relates to the reorder point or order quantity, this option does not provide actionable information for inventory control.

D. Option D suggests that 14 is the safety stock, and 100 is the reorder point.

Safety stock is the buffer inventory held to account for variability in demand and lead time. However, the option mislabels the safety stock as the reorder point. The reorder point should reflect the minimum inventory level at which a new order should be initiated to avoid stockouts, whereas safety stock is additional inventory held above the reorder point.

This misinterpretation could lead to inappropriate ordering decisions, risking stockouts during unexpected demand peaks or delays in replenishment.

In summary, each of these options fails to align with established inventory management principles. Option A presents a contradictory and impractical combination of reorder point and order quantity, while option C lacks specificity and clarity.

Option D misidentifies the safety stock as the reorder point, introducing confusion into the inventory decision-making process. Therefore, based on these explanations, option B stands out as the correct choice among the given options.

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