Plan and Manage Inventory

Inventory planning principles, costs, classifications, lot sizing, safety stock, ordering systems, cycle counting, and inventory performance metrics.

5 minutes 5 Questions

Plan and Manage Inventory is a critical component of the Certified in Planning and Inventory Management (CPIM) framework, focusing on the strategic and operational aspects of maintaining optimal inventory levels to meet customer demand while minimizing costs. At its core, inventory planning involv…

Concepts covered
Inventory Planning Fundamentals and FunctionsTypes of Inventory (Raw, WIP, Finished Goods)Inventory Costs (Carrying, Ordering, Shortage)Inventory Valuation Methods (FIFO, LIFO, Average)ABC Classification and Inventory SegmentationEconomic Order Quantity (EOQ) and Lot Sizing TechniquesSafety Stock Calculations and Service LevelsReorder Point and Continuous Review SystemsPeriodic Review SystemsInventory Accuracy and Cycle CountingInventory Turns, Days of Supply, and Performance MetricsAggregate Inventory Management
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CPIM - Plan and Manage Inventory Example Questions

Test your knowledge of Plan and Manage Inventory

Question 1

A new warehouse employee asks their manager: 'We have $50,000 in inventory on the shelf and our cost of goods sold is $200,000 per year. How many inventory turns do we have?' Which answer should the manager give?

Correct Answer: 4 inventory turns per year

Inventory turns are calculated by dividing the annual cost of goods sold (COGS) by the average inventory on hand, so $200,000 divided by $50,000 equals 4 inventory turns per year.

The answer stating 4 days of supply confuses inventory turns with days of supply, which is a different metric. The answer of 25 turns incorrectly divides inventory by some other figure or miscalculates. The answer of 0.25 turns reverses the formula by placing inventory in the numerator and COGS in the denominator, which would actually yield the inverse of turns (representing a fraction of a year's worth of inventory on hand).

The key concept tested is the inventory turnover ratio formula: COGS divided by average inventory.

Question 2

A small shop owner stores products in a rented warehouse. Each month, the owner pays for warehouse rent, product insurance, and sometimes finds expired items that must be discarded. The owner asks: 'Which type of inventory cost am I mainly dealing with?' What is the best answer?

Correct Answer: Carrying cost, because it includes storage, insurance, and spoilage expenses tied to holding inventory

Carrying cost (also called holding cost) encompasses all expenses incurred from holding inventory over time, including warehouse rent (storage), product insurance, and spoilage or obsolescence of expired items, which is exactly what this shop owner is experiencing.

Ordering cost refers to expenses associated with placing and receiving orders, such as purchase order processing and transportation, not ongoing storage or spoilage. Shortage cost relates to stockout consequences like lost sales or backorder penalties, not expired inventory that was held too long. Classifying rent as an ordering expense and spoilage as a shortage cost mischaracterizes both components.

Key concept tested: understanding the components of inventory carrying costs, including storage, insurance, and spoilage.

Question 3

A warehouse clerk is preparing to count items in a storage bin. She notices the bin contains three different SKUs mixed together. What should the clerk do to ensure an accurate cycle count?

Correct Answer: Count each SKU separately and record the quantity for every individual item number

Counting each SKU separately and recording the quantity under its own item number is correct because cycle counting requires accurate verification of inventory records at the individual item level, and each SKU must reconcile independently to its system record.

Splitting the total evenly across SKUs would produce arbitrary, inaccurate quantities that do not reflect actual stock. Recording all quantities under the highest-value item would overstate one SKU and leave others with no recorded count. Counting only the scheduled SKU and ignoring the others misses the opportunity to verify all items present, and mixed-bin situations require attention to every SKU encountered.

Key concept tested: cycle count accuracy through proper SKU-level identification and recording.

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