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

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

A. remain the same.

B. increase in direct (linear) proportion.

C. increase at a decreasing rate.

D. increase at an increasing rate.

View Answer

Answer: 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.

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