CPIM Practice Exam

Which formula for inventory management is correct?

1. Order Point = Demand During the Lead Time + Safety Stock

2. Average Inventory = (Quantity + Safety Stock)/2

3. Economic Order Quantity = (2AS/ic)

4. Safety Stock = Order Point + Order Quantity

The correct answer is: Order Point = Demand During the Lead Time + Safety Stock

The first formula states that the Order Point is determined by the demand during the lead time plus safety stock. This is correct as it captures the two essential components needed to ensure that inventory levels are adequate to meet customer demand during the time it takes to replenish inventory. The demand during the lead time reflects how much stock is typically used while waiting for a new order to arrive, while safety stock acts as a buffer against unforeseen spikes in demand or delays in delivery. By combining these two elements, businesses can set a threshold that triggers a new order before running out of stock, helping to maintain service levels. The other formulas present misunderstandings of inventory concepts. The second formula regarding Average Inventory does not typically factor in safety stock in this simplified manner, where average inventory is usually calculated as the sum of the beginning and ending inventory divided by two. The third formula for Economic Order Quantity includes parameters that aren't correctly represented; typically, EOQ equals the square root of (2AD/C), where A is demand, D is the ordering cost, and C is the carrying cost per unit. Finally, the formula for Safety Stock subtracts the order quantity rather than adding it, and it doesn't align with standard inventory management practices.