QUESTION: 5

If all other factors remain the same, when finished goods inventory investment is increased, service levels typically will:

remain the same.
increase in direct (linear) proportion.
increase at a decreasing rate.
increase at an increasing rate.

Answer(s): C

Explanation:

Increasing finished goods inventory investment will improve service levels by reducing the probability of stockouts. However, the relationship between inventory and service level is not linear, but rather asymptotic. This means that as inventory increases, service level increases at a decreasing rate, approaching a maximum value. Therefore, option C is correct. Option A is incorrect because service level will not remain the same when inventory changes. Option B is incorrect because service level will not increase in direct proportion to inventory. Option D is incorrect because service level will not increase at an increasing rate as inventory increases.

Reference:

CPIM Part 2 Exam Content Manual, Version 8.0, Section A: Demand Management, Subsection A.3: Demand Management and Customer Service, p. 10.

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QUESTION: 6

A low-cost provider strategy works best when which of the following conditions are met?

Price competition among rivals is similar.
Buyers are more price sensitive.
There are many ways to achieve product differentiation.
There are few industry newcomers.

Answer(s): B

Explanation:

A low-cost provider strategy is a business strategy where a company aims to become the most cost- efficient player in its industry, often by producing goods or providing services at a lower cost than its competitors. The overall goal is to increase market share or achieve higher profitability. The low-cost leader in an industry often sets the price that other companies have to match or beat to stay competitive.
A low-cost provider strategy works best when buyers are more price sensitive, meaning they are more likely to switch to cheaper alternatives if the price of a product or service increases. This condition creates a strong demand for low-priced products or services, and gives the low-cost leader a competitive advantage over rivals who have higher costs and prices. Buyers are more price sensitive when.:
* The product or service is standardized or undifferentiated, and there are few switching costs.
* The product or service represents a significant portion of the buyer's budget or income.
* The product or service has low quality, performance, or image attributes that limit the buyer's satisfaction or loyalty.
* The product or service is not crucial to the buyer's well-being or enjoyment.
The other options are not correct because:
* A. Price competition among rivals is similar. This condition does not favor a low-cost provider strategy, because it implies that the industry is already highly competitive and there is little room for differentiation. A low-cost leader would have to lower its prices even further to gain an edge over rivals, which could erode its profitability and sustainability.
* C. There are many ways to achieve product differentiation. This condition does not favor a low-cost provider strategy, because it implies that the industry is diverse and dynamic, and there are many opportunities for innovation and value creation. A low-cost leader would have to invest more in research and development, marketing, and customer service to keep up with the changing customer preferences and expectations, which could increase its costs and reduce its efficiency.
* D. There are few industry newcomers. This condition does not favor a low-cost provider strategy, because it implies that the industry is mature and stable, and there are few threats from new entrants. A low-cost leader would have to rely on its existing customer base and market share, which could limit its growth potential and expose it to the risk of obsolescence.

Reference:

1 Low-cost leadership strategy: Explained with examples
2 Low-Cost Producer:
Definition, Strategies, Examples - Investopedia
3 Low Cost Strategy - Definition, Factors & Example - MBA Skool
4 Generating Advantage Strategic Management - Open Educational Resources.

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QUESTION: 7

Based on the values reported in the table below, what is the inventory turnover?

0.50
0.58
1.73
2.60

Answer(s): C

Explanation:

Inventory turnover is a ratio that measures how many times a company sells and replaces its inventory in a given period. It is calculated by dividing the cost of goods sold (COGS) by the average inventory value. A higher inventory turnover indicates a more efficient use of inventory, while a lower turnover implies excess inventory or poor sales. Based on the values reported in the table, we can calculate the inventory turnover as follows:
Inventory Turnover = COGS / Average Inventory Value = $260,000 / $150,000 = 1.73 Therefore, the correct answer is C.

Reference:

1 Inventory Turnover - How to Calculate Inventory Turns

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QUESTION: 8

Which of the following actions hinders the transition from a push system to a pull system?

Using standardized containers
Using work orders as a backup
Introducing kanban cards as authorization for material movement
Maintaining a constant number of kanban cards during minor changes in the level of production

Answer(s): B

Explanation:

A push system is a production system that relies on forecasts and schedules to plan the production and distribution of goods and services. A pull system is a production system that responds to actual customer demand and signals to trigger the production and distribution of goods and services. A transition from a push system to a pull system requires a change in the mindset and the processes of the organization, as well as the adoption of new tools and techniques to enable a demand-driven production system.
One of the tools that is commonly used in a pull system is kanban, which is a visual signal that indicates the need for replenishment of materials or products. Kanban cards are attached to standardized containers that hold a fixed amount of inventory.
When a container is empty, the kanban card is sent back to the upstream process as a signal to produce more. This way, the inventory level is controlled by the actual consumption of the downstream process, and the production is synchronized with the demand.
One of the actions that hinders the transition from a push system to a pull system is using work orders as a backup. Work orders are documents that authorize the production of a certain quantity of a product or a service, based on a forecast or a schedule. Work orders are typical of a push system, as they are not triggered by the actual customer demand, but by the planned production. Using work orders as a backup means that the organization is not fully committed to the pull system, and still relies on the push system to ensure the availability of inventory. This can create confusion, inconsistency, and inefficiency in the production system, as well as increase the inventory holding costs and the risk of obsolescence. .
Therefore, using work orders as a backup is the correct answer, as it is an action that hinders the transition from a push system to a pull system. The other options are actions that support the transition, as they are aligned with the principles and practices of a pull system.

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