PLAN EXAM 2

What is a reorder point (ROP)?

The inventory level that triggers placing another order.

What does EOQ tell a buyer?

How much to order while balancing ordering costs and holding costs.

What is the difference between ROP and EOQ?

ROP tells WHEN to order; EOQ tells HOW MUCH to order.

What is safety stock?

Extra inventory held to protect against demand or lead-time uncertainty.

Why do retailers hold safety stock?

To reduce stockouts and protect customer service when demand or deliveries vary.

What is service level in inventory management?

The target probability of avoiding a stockout during replenishment lead time.

What does a 95% service level mean?

About a 95% target chance of avoiding a stockout during lead time.

What happens when a retailer raises its service level?

Typically needs more safety stock, increasing holding costs but reducing stockouts.

What is the trade-off of carrying more safety stock?

Fewer stockouts but more inventory costs and cash tied up.

What is lead time?

The time between placing an order and receiving it.

What is mean demand?

The average or typical demand across observed periods.

What does standard deviation measure?

How spread out observations are around the average.

What does a high standard deviation tell you?

Demand or lead time is less predictable and varies more.

What does a low standard deviation tell you?

Values stay closer to the average; performance is more predictable.

Mean lead time is 5 days and SD is 1 day. Interpret.

Typical delivery takes 5 days; 4 to 6 days is within one standard deviation.

What is a deviation?

The difference between one observation and its mean.

What is a positive demand deviation?

Demand that is above the average.

What is a negative demand deviation?

Demand that is below the average.

What is variance?

A measure of spread based on squared deviations from the mean.

What is a z-score used for in inventory?

It expresses the safety buffer in standard deviations for a target service level.

What is a confidence interval?

A range used to estimate an unknown population value, such as the true mean.

What is a 95% confidence level?

An interval procedure that captures the true parameter about 95% of the time over repeated samples.

How is confidence level different from service level?

Confidence level concerns estimating a population value; service level concerns stockout risk.

What usually happens to a confidence interval with more data?

It becomes narrower because the estimate is more precise, all else equal.

Does a confidence interval for average demand predict next week's demand?

No. It estimates the true average; a prediction interval addresses future demand.

What is the difference between sales and demand?

Sales are units actually purchased; demand includes what customers wanted but could not buy.

Why can stockouts create misleading forecasts?

Recorded sales look low even when true demand is high.

What is forecasting?

Using available information to predict future demand or sales.

What is qualitative forecasting?

Forecasting based on experience, judgment, surveys, or expert opinions.

When is qualitative forecasting especially useful?

For new products with little or no sales history.

What is quantitative forecasting?

Forecasting with historical data and statistical methods.

What is a simple moving average (SMA)?

A forecast averaging a chosen number of recent periods equally.

Why use a simple moving average?

It is easy to use and smooths random variation in stable demand.

What is a weighted moving average (WMA)?

A moving average that gives different importance to different periods.

What is the main difference between SMA and WMA?

SMA weights selected periods equally; WMA can emphasize recent periods.

Demand over 3 weeks is 10, 20, 30. SMA forecast?

20 units, the average of the three weeks.

What happens when a moving average uses more past periods?

It becomes smoother but reacts more slowly to new changes.

What is exponential smoothing?

A forecasting method that updates the previous forecast using the latest error.

What does alpha near 0 mean in exponential smoothing?

A smoother forecast that reacts slowly to new information.

What does alpha near 1 mean in exponential smoothing?

A very responsive forecast that follows recent changes closely.

Which products may suit a lower alpha?

Products with relatively stable demand, such as bread or milk.

Which products may suit a higher alpha?

Trendy or fast-changing items when demand is genuinely shifting.

What is a trend in demand?

A sustained increase or decrease over time.

What is seasonality?

A repeating demand pattern tied to weeks, months, or seasons.

December holiday shopping peaks are what kind of pattern?

Seasonality, because the pattern repeats.

Demand rising steadily for months is what kind of pattern?

An upward trend.

Why can SMA and basic exponential smoothing struggle with trends?

They often lag behind sustained demand changes.

What is a forecast error?

The difference between actual demand and forecasted demand.

How does your lecture define signed forecast error?

Actual demand minus forecasted demand.

What does a positive forecast error mean?

Actual demand exceeded forecast; you under-forecasted.

What does a negative forecast error mean?

Actual demand was below forecast; you over-forecasted.

Forecast 80 units, actual 100. What happened?

Under-forecast by 20 units; positive error under Actual minus Forecast.

Forecast 100 units, actual 80. What happened?

Over-forecast by 20 units; negative error under Actual minus Forecast.

What is forecast bias?

A consistent tendency to forecast too high or too low.

What does positive forecast bias suggest?

Forecasts are consistently too low; the business is under-forecasting.

What does negative forecast bias suggest?

Forecasts are consistently too high; the business is over-forecasting.

Does zero forecast bias guarantee accuracy?

No. Positive and negative misses may cancel even when errors are large.

What does MAE or MAD measure?

Typical absolute forecast error, without considering its positive or negative sign.

What does RMSE measure?

Forecast error that penalizes large misses more heavily.

Is a smaller or larger forecast error preferred?

Smaller, because forecasts are closer to actual demand.

Why compare multiple forecasting methods?

To identify which predicts the data more accurately.

What is the risk of under-forecasting?

Stockouts, missed sales, and dissatisfied customers.

What is the risk of over-forecasting?

Too much inventory, higher holding costs, and markdowns.

What are the four steps of the weekly buyer workflow?

Forecast, Buy, Track, Adjust.

What happens during the Forecast step?

Estimate customer demand using historical patterns and expected changes.

What happens during the Buy step?

Decide how much inventory to order and when it needs to arrive.

What happens during the Track step?

Compare sales, availability, and sell-through against the plan.

What happens during the Adjust step?

Change orders, replenishment, pricing, or promotions based on results.

What should a buyer consider if sales are faster than plan?

Chase inventory or replenish faster if it can arrive in time to sell.

When should a buyer avoid chasing fast-selling inventory?

When it will arrive too late or create excess inventory after demand fades.

What should a buyer do if sales are slower than plan?

Reduce receipts and consider promotions or markdowns to clear excess stock.

What are the main sales performance metrics?

Units sold, sales dollars, and actual sales versus plan.

What are the main inventory health metrics?

On hand, on order, weeks of supply, and inventory aging.

What are the main profit metrics?

Sales, cost of goods sold, gross margin dollars, and gross margin percent.

What are the main availability metrics?

In-stock percentage, out-of-stock percentage, and fill rate.

What does on hand (OH) mean?

Inventory physically available right now.

What does on order (OO) mean?

Inventory ordered but not yet received.

What is weeks of supply (WOS)?

How many weeks current inventory will last at forecasted sales pace.

100 units on hand and 20 sold per week: WOS?

5 weeks of supply.

What is days of supply?

How many days current inventory will last at forecasted daily demand.

100 units on hand and 10 sold per day: days of supply?

10 days of supply.

What does low weeks of supply suggest?

A risk of running out and losing sales.

What does high weeks of supply suggest?

Possible overstock, aging, and markdown risk.

What is inventory aging?

How long products remain unsold in inventory.

What is sell-through?

The share of available inventory that has been sold.

What is weekly sell-through?

The share of the week's available units sold during that week.

What is cumulative sell-through?

Total units sold so far divided by total season receipts.

If 60 of 100 received units sell, what is cumulative sell-through?

60%.

What does sell-through ahead of plan suggest?

Strong demand; consider chasing stock if timing allows.

What does sell-through behind plan suggest?

Slow demand; consider reducing receipts or markdowns.

What is fill rate?

Units received divided by units ordered from a supplier or DC.

If you ordered 100 units and received 80, what is fill rate?

80%.

What does in-stock percentage measure?

How often a product is available for customers to buy.

What does out-of-stock percentage measure?

How often customers could not buy the product because it was unavailable.

How are in-stock and out-of-stock percentages related?

They add to 100% when measured on the same basis.

How is fill rate different from in-stock rate?

Fill rate tracks supply received; in-stock rate tracks customer availability.

Sales are low, but in-stock rate is high. What might be wrong?

Demand, product placement, pricing, or the assortment.

Sales are low and out-of-stock rate is high. What might be wrong?

Availability may be suppressing actual sales despite strong demand.

What is retail price?

The price charged to the customer.

What is unit cost or COGS per unit?

What the retailer paid for one unit of the product.