Table of Contents

Instructor Guide

© 2014 APICS Confidential and Proprietary

Principles of Inventory Management
i.

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Instructor Guide Version 2.1 PIM-ii © 2014 APICS

 Table of Contents

Brief Table of Contents

Session 1 .....................................................................Operations Management Foundations
Session 2 ................................................................ Fundamentals of Inventory Management
Session 3 ...........................................................................Purpose and Function of Inventory
Session 4 ................................................................... Inventory Replenishment Management
Session 5 ...... Additional Inventory Replenishment Techniques and Inventory Performance
Session 6 ............................................................................................. Mid–Term Examination
Session 7 ...................................................................... Lean Inventory – Theory and Practice
Session 8 .................................................................................... Fundamentals of Purchasing
Session 9 ................................................................................................... Sourcing Strategies
Session 10 .......................... Purchase Order Management and Performance Measurement
Session 11 ............................................................................................................... Final Exam

© 2014 APICS PIM-iii Instructor Guide Version 2.1

Principles of Inventory Management

Table of Contents
Session 1: Operations Management Foundations
Principles of Operations Management – Program Overview ................................................... 1-3
Principles of Inventory Management – Course Overview......................................................... 1-5
Operations Management Foundations – Session Overview .................................................... 1-7
Session Learning Objectives ...................................................................................................... 1-9
What is Operations Management? ............................................................................................ 1-11
Why Study Operations Management? ....................................................................................... 1-13
What Business Trends are Impacting Operations Management? ........................................... 1-15
What Do Operations Managers Do? .......................................................................................... 1-23
Career Opportunities in Operations Management.................................................................... 1-25
What Value-Added Activities are Performed?............................................................................ 1-27
How does Operations Management Fit into the Organization? ............................................... 1-29
What is the Scope of Operations Management Functions?..................................................... 1-33
Operations Management – Changing Perspectives ................................................................. 1-39
Operations Management and Business Strategy ..................................................................... 1-41
Contributing Role of Operations Management to Strategy ...................................................... 1-43
Ten Strategic Operations Management Decisions ................................................................... 1-45
Inventory Management Concepts Self-Assessment ................................................................. 1-49
Inventory Management Terms Matching Exercise.................................................................... 1-51
Order Point Logic Exercise .......................................................................................................... 1-53
Cycle Count Analysis Exercise .................................................................................................... 1-55
Review, Terms, Discussion Questions, Exercises ..................................................................... 1-57
Terms Check ................................................................................................................................ 1-59
Performance Check – Answers and Test Documents .............................................................. 1-64
Discussion Questions ................................................................................................................. 1-67
Suggested Additional Readings ................................................................................................. 1-71

Instructor Guide Version 2.1 PIM-iv © 2014 APICS

 Table of Contents

Session 2: Fundamentals of Inventory Management

Fundamentals of Inventory Management Overview 2-3
Session Learning Objectives ...................................................................................................... 2-5
Defining Inventory Management ............................................................................................... 2-7
Why Does Inventory Have to be Managed? .............................................................................. 2-9
Inventory Management Objectives............................................................................................ 2-11
What Does Inventory Management Do? ................................................................................... 2-13
Classes of Inventory ................................................................................................................... 2-15
Levels of inventory Management .............................................................................................. 2-17
Characteristics of Inventory in the Supply Chain...................................................................... 2-21
Strategic Inventory Management Process................................................................................ 2-23
Strategic Inventory Management Issues .................................................................................. 2-25
Balancing Demand and Supply Objectives ............................................................................... 2-27
Inventory – Conflicting Objectives ............................................................................................. 2-29
Inventory Trade-Off Decisions.................................................................................................... 2-37
Inventory Demand Flows............................................................................................................ 2-39
Supply Chain Inventory and Demand Flows ............................................................................. 2-41
Inventory Dynamics .................................................................................................................... 2-43
How Does Inventory Provide Value?.......................................................................................... 2-45
Inventory – Asset or Liability? .................................................................................................... 2-47
Return on Assets ........................................................................................................................ 2-49
Financial Impact of Inventory .................................................................................................... 2-51
Review, Terms, Discussion Questions, Exercises..................................................................... 2-53
Terms Check ............................................................................................................................... 2-55
Performance Check .................................................................................................................... 2-60
Discussion Questions ................................................................................................................. 2-63
Case Study .................................................................................................................................. 2-67
Suggested Additional Readings ................................................................................................. 2-71

© 2014 APICS PIM-v Instructor Guide Version 2.1

Principles of Inventory Management

Session 3: Purpose and Function of Inventory

Purpose and Function of Inventory Overview............................................................................ 3-3
Session Learning Objectives ...................................................................................................... 3-5
Purpose of Inventory .................................................................................................................. 3-7
Functions of Inventory ................................................................................................................ 3-9
Purpose of Decoupling/Buffering Inventories........................................................................... 3-11
How Much Inventory Is Needed? ............................................................................................... 3-13
Components of Inventory Decisions .......................................................................................... 3-15
Defining Cycle Inventory ............................................................................................................. 3-17
Defining Safety Inventory ........................................................................................................... 3-19
Defining Seasonal Inventory ...................................................................................................... 3-21
Inventory Cost ............................................................................................................................. 3-23
Unit Costs .................................................................................................................................... 3-25
Order Costs .................................................................................................................................. 3-27
Inventory Carrying Cost Components ........................................................................................ 3-29
Stockout Cost .............................................................................................................................. 3-33
Capacity-Related Costs ............................................................................................................... 3-35
Inventory Valuation ..................................................................................................................... 3-39
Surplus/Obsolete Inventory ....................................................................................................... 3-41
Transportation Cost .................................................................................................................... 3-43
Measuring Inventory Performance ............................................................................................ 3-45
Cost-Benefit Trade-Off ................................................................................................................ 3-47
Review, Terms, Discussion Questions, Exercises ..................................................................... 3-49
Terms Check................................................................................................................................ 3-51
Performance Check .................................................................................................................... 3-56
Discussion Questions ................................................................................................................. 3-59
Case Study................................................................................................................................... 3-63
Suggested Additional Readings ................................................................................................. 3-67

Instructor Guide Version 2.1 PIM-vi © 2014 APICS

 Table of Contents

Session 4: Inventory Replenishment Management

Inventory Replenishment Management – Overview ....................... ………................................ 4-3
Session Learning Objectives ...................................................................................................... 4-5
Understanding the Demand Driver ........................................................................................... 4-7
Defining Inventory Replenishment Management..................................................................... 4-9
Components of Inventory Management.................................................................................... 4-11
Replenishment Review Interval ................................................................................................. 4-15
Continuous Versus Periodic Review .......................................................................................... 4-17
Inventory Replenishment Principles.......................................................................................... 4-19
Replenishment Ordering Techniques........................................................................................ 4-21
Visual Review Technique ........................................................................................................... 4-25
Two Bin System Technique ........................................................................................................ 4-27
Periodic Review System Technique........................................................................................... 4-29
Order Point Technique ............................................................................................................... 4-35
Calculating the Safety Stock ...................................................................................................... 4-41
Determining the Order Quantity ................................................................................................ 4-47
Order and Inventory Carrying Cost Components ...................................................................... 4-49
Determining the Economic Order Quantity ............................................................................... 4-51
Replenishment Planning Process.............................................................................................. 4-55
Review, Terms, Discussion Questions, Exercises..................................................................... 4-57
Terms Check ............................................................................................................................... 4-59
Performance Check .................................................................................................................... 4-62
Discussion Questions ................................................................................................................. 4-65
Case Study .................................................................................................................................. 4-69
Suggested Additional Readings ................................................................................................. 4-79

© 2014 APICS PIM-vii Instructor Guide Version 2.1

Principles of Inventory Management

Session 5: Additional Inventory Replenishment Techniques and Inventory

Performance
Additional Inventory Replenishment Techniques and Inventory Performance ....................... 5-3
Session Learning Objectives............................................................................. ......................... 5-5
Additional Inventory Replenishment Techniques .................................................................... 5-7
Supplier Lead Time Uncertainty ................................................................................................. 5-9
Time-Phased Order Point (TPOP) ............................................................................................... 5-13
Replenishment by Item Class..................................................................................................... 5-21
Inventory Performance Measurement ....................................................................................... 5-23
Financial Statements and Inventory .......................................................................................... 5-25
Inventory Values, Turns, and Ratios .......................................................................................... 5-27
Inventory Performance ............................................................................................................... 5-33
ABC Inventory Control ................................................................................................................. 5-35
Impact of Inventory Inaccuracy and Inventory Accuracy Tool Kit............................................. 5-41
Three P’s of Inventory Control .................................................................................................... 5-43
Transaction Management .......................................................................................................... 5-45
Periodic and Perpetual Inventory Review.................................................................................. 5-47
Year-End (Periodic) Physical Inventory ...................................................................................... 5-49
Cycle Counting – Definition and Methods................................................................................. 5-51
Electronic Data Collection .......................................................................................................... 5-61
Review, Terms, Discussion Questions, Exercises ..................................................................... 5-63
Terms Check................................................................................................................................ 5-64
Performance Check .................................................................................................................... 5-68
Discussion Questions ................................................................................................................. 5-71
Case Study................................................................................................................................... 5-75
Suggested Additional Readings ................................................................................................. 5-79

Session 6: Mid-Term Exam

Instructor Guide Version 2.1 PIM-viii © 2014 APICS

 Table of Contents

Session 7: Lean Inventory – Theory and Practice

Lean Inventory – Theory and Practice – Overview ................................................................... 7-3
Session Learning Objectives ...................................................................................................... 7-5
Defining Just-In-Time (JIT) .......................................................................................................... 7-7
Defining Lean.............................................................................................................................. 7-9
Why Implement Lean? ............................................................................................................... 7-11
The Structure of Lean................................................................................................................. 7-13
Three Major Areas of Waste ...................................................................................................... 7-15
Managing Inventory in a Lean Environment ............................................................................. 7-23
Inventory Flow Analogy ............................................................................................................... 7-25
Impact of Inventory Reduction................................................................................................... 7-27
The Pull System – Basic Concepts ............................................................................................ 7-29
Kanban Overview........................................................................................................................ 7-31
Calculating Kanban Cards – Production................................................................................... 7-33
Calculating Kanban Card – Move .............................................................................................. 7-35
One-Card Kanban Production Example..................................................................................... 7-37
Calculating Kanban Cards – Supplier ....................................................................................... 7-39
Lean Benefits.............................................................................................................................. 7-41
Review, Terms, Discussion Questions, Exercises..................................................................... 7-43
Terms Check ............................................................................................................................... 7-45
Performance Check .................................................................................................................... 7-49
Discussion Questions ................................................................................................................. 7-51
Case Study .................................................................................................................................. 7-55
Suggested Additional Readings ................................................................................................. 7-59

© 2014 APICS PIM-ix Instructor Guide Version 2.1

Principles of Inventory Management

Session 8: Fundamentals of Purchasing

Fundamentals of Purchasing – Overview.................................................................................. 8-3
Session Learning Objectives ...................................................................................................... 8-5
Defining Purchasing .................................................................................................................... 8-7
Purchasing as a Key Business Function................................................................................... . 8-9
Categories of Purchasing ........................................................................................................... 8-11
Purchasing’s Strategic Responsibilities .................................................................................... 8-13
Detailed Purchasing Responsibilities ........................................................................................ 8-15
Purchasing’s Place in the Organization ..................................................................................... 8-17
Typical Purchasing Organization ................................................................................................ 8-21
Purchasing’s Relations with Other Functions .......................................................................... 8-23
Centralized Versus Decentralized Purchasing .......................................................................... 8-25
Buyer/Planner Concept .............................................................................................................. 8-29
Strategic Versus Operational Activities...................................................................................... 8-31
Anatomy of Purchasing Strategy ................................................................................................ 8-33
Step 1- Environmental Scanning ............................................................................................... 8-35
Step 2- Organizational Structure................................................................................................ 8-37
Step 3 - Inventory Strategy ......................................................................................................... 8-39
Step 4 - Supplier Relations ......................................................................................................... 8-41
Step 5 - Technology Enablers ..................................................................................................... 8-43
Step 6 - Performance/Continuous Improvement ..................................................................... 8-47
Review, Terms, Discussion Questions, Exercises ..................................................................... 8-49
Terms Check................................................................................................................................ 8-51
Performance Check .................................................................................................................... 8-54
Discussion Questions ................................................................................................................. 8-57
Case Study................................................................................................................................... 8-61
Suggested Additional Readings ................................................................................................. 8-65

Instructor Guide Version 2.1 PIM-x © 2014 APICS

 Table of Contents

Session 9: Sourcing Strategies

Sourcing Strategies – Overview ................................................................................................. 9-3
Session Learning Objectives ...................................................................................................... 9-5
Defining Sourcing ........................................................................................................................ 9-7
Defining Strategic Sourcing ........................................................................................................ 9-9
Strategic Sourcing Activities ....................................................................................................... 9-13
Tactical Buying ............................................................................................................................ 9-15
Tactical Buying Versus Strategic Sourcing ................................................................................ 9-17
Sourcing Process Steps .............................................................................................................. 9-19
Make or Buy Decision ................................................................................................................. 9-21
Spend Analysis ............................................................................................................................ 9-23
Creating the Bid or Proposal ...................................................................................................... 9-25
Supplier Sourcing ........................................................................................................................ 9-27
Supplier Categorization .............................................................................................................. 9-33
Overview of Pricing...................................................................................................................... 9-35
Negotiation Objectives................................................................................................................ 9-39
Discounting ................................................................................................................................. 9-41
Contracting .................................................................................................................................. 9-43
Design Collaboration .................................................................................................................. 9-45
Advantages of Collaborative Supplier Involvement .................................................................. 9-47
Supplier Relationship Management (SRM)............................................................................... 9-49
Benefits of SRM .......................................................................................................................... 9-53
Implementing SRM Strategy ...................................................................................................... 9-55
Review, Terms, Discussion Questions, Exercises ..................................................................... 9-57
Terms Check ............................................................................................................................... 9-59
Performance Check .................................................................................................................... 9-64
Discussion Questions ................................................................................................................. 9-67
Case Study .................................................................................................................................. 9-71
Suggested Additional Readings ................................................................................................ 9-75

© 2014 APICS PIM-xi Instructor Guide Version 2.1

Principles of Inventory Management

Session 10: Purchase Order Management and Performance Measurement

Purchase Order Management and Performance Measurement – Overview ..................... 10-3
Session learning Objectives ................................................................................................... 10-5
Purchasing Management Process......................................................................................... 10-7
Procurement Database Files ................................................................................................. 10-9
Timing of Purchases ............................................................................................................... 10-11
Purchasing Process Methods ................................................................................................ 10-13
Purchase Order Flow .............................................................................................................. 10-17
Determining PO Release ........................................................................................................ 10-19
Material Requirements Planning .............................................................................. ............ 10-21
MRP Purchase Order Actions...........................………............................................................. 10-23
Purchasing Kanban ............................ …...………..................................................................... 10-25
Vendor Managed Inventory (VMI) ...................................…………………………………………....... 10-29
Transportation Mode Decision ..........................………........................................................... 10-31
Receiving and Order Close-out .........................….................................................................. 10-33
Status Reporting………..…................................................................................ ....................... 10-35
Purchasing Performance Measurement ............................................................................... 10-37
International Sourcing Overview............................................................................................ 10-43
Impact of the Internet on Purchasing .................................................................................. 10-47
Internet-Enabled Purchasing Components........................................................................... 10-49
Implementing e-Procurement ................................................................................................ 10-51
Review, Terms, Discussion Questions, Exercises................................................................. 10-55
Terms Check ........................................................................................................................... 10-57
Performance Check ................................................................................................................ 10-60
Discussion Questions ............................................................................................................. 10-63
Case Study .............................................................................................................................. 10-67
Suggested Additional Readings ............................................................................................. 10-71

Session 11: Final Exam

Instructor Guide Version 2.1 PIM-xii © 2014 APICS