Inventory Management Glossary

A

ABC Analysis

A method for classifying inventory items based on their value and importance, often into three categories: A (most valuable, ~20% of items generating 80% of value), B (moderately valuable), and C (least valuable). Used to prioritize inventory management efforts and optimize stock control policies.

Advance Shipment Notice (ASN)

An electronic document sent by a supplier to notify the buyer that goods have been shipped, including details about the shipment contents, expected delivery time, and tracking information.

Aggregate Planning

A strategic planning process that determines production, inventory, and workforce levels needed to meet forecasted demand over a medium-term period (typically 3-18 months).

Allocation

The process of assigning available inventory to customer orders or production jobs based on priority rules, customer importance, profitability, or service level agreements.

Annual Demand

The total quantity of an item expected to be needed or sold over a one-year period, used in EOQ calculations and inventory planning.

Annual Usage

The total quantity of an item used or sold over a year, critical for calculating inventory turnover and optimal order quantities.

Average Inventory

The average amount of inventory held over a specific period, typically calculated as (Beginning Inventory + Ending Inventory) / 2, used for turnover calculations and cost analysis.

Average Lead Time

The mean time between placing an order and receiving the goods, calculated from historical data and used in reorder point calculations and safety stock planning.

B

Backorder

An order for a product that is temporarily out of stock and will be fulfilled when inventory is replenished. High backorder levels indicate stockout problems and can impact customer satisfaction.

Batch Tracking

The process of tracking inventory by production batch or lot number to enable quality control, recall management, and expiration date monitoring.

Bill of Materials (BOM)

A comprehensive, hierarchical list of raw materials, components, sub-assemblies, and quantities required to manufacture a finished product. Essential for MRP systems and production planning.

Blanket Order

A long-term purchase agreement with a supplier for multiple deliveries of material over a specified period, typically with predetermined pricing but flexible delivery schedules.

Break-even Point

The volume at which total costs equal total revenue, or the inventory level where holding costs equal ordering costs. Critical for pricing and inventory investment decisions.

Buffer Stock

Extra inventory kept to guard against uncertainty in demand or supply, similar to safety stock. Provides a cushion to maintain service levels during unexpected disruptions.

C

Carrying Cost

The total cost of holding inventory, including warehousing, insurance, depreciation, obsolescence, opportunity cost of capital, and handling. Typically expressed as a percentage (15-25%) of inventory value per year.

Consignment Inventory

Inventory owned by a supplier but stored at the buyer's location until it is used or sold. The buyer only pays when items are consumed, improving cash flow but requiring strong supplier relationships.

Cost of Goods Sold (COGS)

The direct costs attributable to producing goods sold by a company, including materials and direct labor. Used to calculate inventory turnover and gross profit margins.

Cross-Docking

A logistics practice where incoming goods are directly transferred from receiving to shipping with minimal or no storage time, reducing handling costs and inventory holding.

Cumulative Lead Time

The total time required to produce a product from raw materials, including all procurement and production stages. Critical for make-to-order operations.

Cycle Counting

A continuous inventory auditing process where a subset of items is counted on a rotating schedule (daily, weekly, or monthly), improving accuracy without requiring full physical inventories.

Cycle Stock

The portion of inventory that depletes as customer orders are fulfilled and is replenished through regular ordering cycles. Excludes safety stock.

Cycle Time

The total time from the beginning to the end of a process, such as order processing, manufacturing, or fulfillment. Key metric for measuring operational efficiency.

D

Days of Inventory

The average number of days inventory is held before being sold or used, calculated as (Average Inventory / COGS) × 365. Also known as Days Sales of Inventory (DSI) or Days Inventory Outstanding (DIO).

Dead Stock

Inventory that has not been used or sold for an extended period (typically 6-12 months) and is unlikely to be used or sold in the future. Represents tied-up capital and increased carrying costs.

Decoupling Stock

Inventory positioned between production stages to allow independent operation of each stage, buffering against variations in production rates or equipment downtime.

Demand Forecasting

The process of estimating future customer demand using historical data, market trends, statistical models, and qualitative inputs. Accuracy directly impacts inventory levels and service performance.

Demand Variability

The fluctuation in customer demand over time, measured by standard deviation or coefficient of variation. Higher variability requires more safety stock to maintain service levels.

Distribution Requirements Planning (DRP)

A time-phased planning process that determines inventory needed at various distribution locations and coordinates replenishment timing across the network.

Drop Shipping

A fulfillment method where products are shipped directly from the manufacturer or supplier to the end customer, bypassing the retailer's warehouse. Reduces inventory holding but limits control.

E

Economic Order Quantity (EOQ)

The optimal order quantity that minimizes total inventory costs by balancing ordering costs and holding costs. Formula: EOQ = √(2DS/H), where D=annual demand, S=order cost, H=holding cost per unit.

Economic Production Quantity (EPQ)

The optimal production batch size that minimizes total setup and holding costs when items are produced internally rather than ordered from suppliers.

Enterprise Resource Planning (ERP)

Integrated software systems that manage and coordinate all business processes, including inventory, procurement, production, finance, and sales in real-time.

Excess Inventory

Inventory that exceeds normal demand requirements and safety stock levels, resulting from over-ordering, demand changes, or obsolescence. Increases carrying costs and ties up working capital.

Expediting

The process of accelerating orders or shipments to meet urgent demand, correct supply delays, or prevent stockouts. Often incurs premium costs for rush processing or faster transportation.

F

Fill Rate

The percentage of customer orders or demand fulfilled immediately from available stock without backorders or stockouts. A key service level metric, typically targeted at 95-99% depending on industry.

Finished Goods

Products that have completed all manufacturing processes and are ready for sale or distribution to customers. One of three main inventory categories along with raw materials and work-in-progress.

First-In, First-Out (FIFO)

An inventory valuation and management method where the oldest inventory items are used or sold first. Essential for perishable goods and reduces obsolescence risk.

Forecast Accuracy

A measure of how closely demand forecasts match actual demand, typically expressed as percentage error or Mean Absolute Percentage Error (MAPE). Critical for inventory planning effectiveness.

Forecast Error

The difference between forecasted and actual demand, used to calculate safety stock requirements and improve forecasting models. Measured by MAD, MAPE, or standard deviation.

Freight Cost

The expense of transporting goods from one location to another, including carrier charges, fuel surcharges, and accessorial fees. A significant component of total landed cost.

G

Goods Receipt

The formal documentation and recording of materials received from suppliers, including verification of quantity, quality, and condition. Triggers payment and inventory updates.

Gross Requirements

The total demand for an item during a specific period before accounting for inventory on hand or scheduled receipts. Used in MRP calculations to determine net requirements.

H

Holding Cost

The cost associated with storing unsold goods, including warehousing, insurance, depreciation, taxes, and opportunity costs. Typically 15-35% of inventory value annually, a key component in EOQ calculations.

Holding Period

The average length of time an item remains in inventory before being sold or used, calculated as 365 / Inventory Turnover Ratio.

I

Inbound Logistics

The transportation, storage, and receiving of incoming materials and goods from suppliers. Encompasses supplier selection, transportation management, and receiving operations.

Inventory Accuracy

The degree to which inventory records match actual physical inventory, typically measured as percentage of SKUs with matching records. Target accuracy is usually 95-99% for effective operations.

Inventory Coverage

The number of days or periods that current inventory will last based on forecasted demand, calculated as (On-Hand Inventory / Average Daily Demand). Also called Days of Supply.

Inventory Optimization

The process of balancing inventory levels to minimize costs while maintaining desired service levels, using analytical models to determine optimal safety stock, reorder points, and order quantities.

Inventory Turnover

A ratio showing how many times inventory is sold and replaced over a period, calculated as COGS / Average Inventory. Higher turnover generally indicates efficient inventory management (typical range: 4-12x annually).

J

Job Lot

A specific quantity of items ordered or produced for a particular customer order or project, often with unique specifications or traceability requirements.

Just-in-Time (JIT)

An inventory strategy that aims to increase efficiency and reduce waste by receiving goods only as they are needed in production or sales. Minimizes inventory holding but requires reliable suppliers and demand.

K

Kanban

A visual scheduling system for lean manufacturing and JIT production that uses cards or signals to trigger inventory replenishment only when needed, reducing excess inventory and improving flow.

Key Performance Indicator (KPI)

A measurable value demonstrating how effectively a company achieves business objectives. Common inventory KPIs include turnover ratio, fill rate, carrying cost %, stockout rate, and forecast accuracy.

Kit

A group of components, parts, or products packaged together as a single unit for sale, assembly, or project completion. Kitting simplifies handling and improves picking efficiency.

L

Landed Cost

The total cost of a product delivered to a location, including purchase price, freight, duties, taxes, insurance, currency conversion, and handling fees. Essential for true profitability analysis.

Last-In, First-Out (LIFO)

An inventory valuation method where the most recently produced or purchased items are used or sold first. Less common than FIFO and not permitted under IFRS accounting standards.

Lead Time

The time between placing an order and receiving the goods at the destination. Includes order processing, production, transit, and receiving time. Critical input for reorder point calculations.

Lead Time Variability

The fluctuation or inconsistency in lead times from order to order, measured by standard deviation. Higher variability requires increased safety stock to maintain service levels.

Logistics

The planning, implementation, and control of the efficient flow and storage of goods, services, and information from point of origin to point of consumption.

Lot Size

The quantity of an item ordered for delivery on a specific date or manufactured in a single production run. Can be fixed or variable depending on ordering policy.

M

Make-to-Order (MTO)

A production strategy where products are manufactured after receiving customer orders, minimizing inventory but increasing lead times. Common for customized or low-volume products.

Make-to-Stock (MTS)

A production strategy where products are manufactured in advance based on demand forecasts and held as finished goods inventory. Enables fast order fulfillment but carries inventory risk.

Material Requirements Planning (MRP)

A computer-based system that calculates materials and components needed to manufacture products, considering BOMs, inventory levels, and production schedules to generate purchase and production orders.

Mean Absolute Deviation (MAD)

A measure of forecast error calculated as the average of the absolute differences between forecasted and actual values. Used to set safety stock levels.

Minimum Order Quantity (MOQ)

The smallest order quantity a supplier is willing to sell or the minimum economic production batch. Influences inventory levels and requires balancing against holding costs.

N

Net Requirements

The quantity of an item needed after subtracting on-hand inventory and scheduled receipts from gross requirements. Determines actual order quantities in MRP systems.

Network Optimization

The strategic design and configuration of supply chain networks to minimize costs while meeting service level requirements, including facility location, transportation routes, and inventory positioning decisions.

O

Obsolete Inventory

Inventory that is no longer usable or saleable due to demand changes, technological obsolescence, product discontinuation, or expiration. Requires write-offs and disposal, impacting profitability.

On-Hand Inventory

The physical quantity of inventory currently available at a location, excluding items on order or in transit. Used in availability calculations and replenishment decisions.

Order Cycle

The time between the placement of two consecutive orders for the same item, also called review period. Shorter cycles increase ordering costs but reduce inventory levels.

Order Fulfillment

The complete process of receiving, processing, picking, packing, and shipping customer orders. Order fulfillment cycle time is a key customer service metric.

Order Point (Reorder Point)

The inventory level at which a new order should be placed to replenish stock before it runs out, calculated as (Average Daily Demand × Lead Time) + Safety Stock.

Order Quantity

The amount of stock ordered each time a replenishment order is placed. Can be fixed (like EOQ) or variable based on current conditions and requirements.

Overstock

Inventory in excess of normal demand requirements and safety stock levels, resulting from over-ordering, demand decreases, or poor forecasting. Increases carrying costs and obsolescence risk.

P

Packing List

A document listing the contents of a shipment, including item descriptions, quantities, and sometimes weights. Accompanies shipments to aid in receiving verification.

Par Level

The minimum quantity of an item that should be kept in stock at all times to support normal operations. When inventory falls below par level, replenishment is triggered.

Peak Season

Periods of significantly higher demand than normal, such as holidays or seasonal events. Requires advance planning, increased safety stock, and often temporary capacity expansion.

Periodic Inventory

An inventory system where physical counts are conducted at regular intervals (monthly, quarterly, annually) and records are adjusted only at these times, unlike perpetual systems.

Perpetual Inventory

A system that continuously tracks inventory balances in real-time as transactions occur, providing up-to-date stock levels and enabling better decision-making.

Physical Inventory

The process of manually counting all inventory items to verify system records and identify discrepancies. Typically conducted annually or when cycle counting indicates accuracy issues.

Picking

The warehouse process of selecting and retrieving items from storage locations to fulfill customer orders. Picking efficiency significantly impacts order fulfillment speed and labor costs.

Pipeline Inventory

Inventory in transit between locations or production stages, not yet available for use. Pipeline inventory levels increase with longer lead times and transportation distances.

Procurement

The strategic process of sourcing and acquiring goods and services from suppliers, including supplier selection, negotiation, contracting, and relationship management.

Purchase Order (PO)

A legal commercial document issued by a buyer to a seller specifying item types, quantities, prices, delivery dates, and terms. Becomes a binding contract when accepted by the seller.

Putaway

The warehouse process of moving received goods to their designated storage locations, including location assignment, travel, and placement. Efficient putaway strategies reduce handling time.

Q

Quality Control (QC)

Systematic processes and inspections to ensure products meet specified quality standards. Defective inventory identification during QC prevents customer issues and reduces returns.

Quantity Discount

Price reductions offered by suppliers for purchasing larger quantities, creating a trade-off between lower unit costs and higher inventory carrying costs in ordering decisions.

Queue Time

The time an item waits in queue before processing or production begins. Reducing queue time improves overall lead times and responsiveness.

R

Raw Materials

Basic materials and components purchased from suppliers that will be transformed through manufacturing into finished goods. One of three main inventory categories.

Receiving

The warehouse process of accepting incoming shipments, verifying quantities and quality, documenting goods receipt, and updating inventory records.

Reorder Point (ROP)

The inventory level triggering replenishment order placement to avoid stockouts, calculated as (Average Daily Demand × Lead Time) + Safety Stock. A fundamental inventory control parameter.

Replenishment

The process of ordering or producing inventory to restore stock levels to desired targets. Can be triggered by reorder points, periodic review, or forecasted demand.

Return on Investment (ROI)

A profitability measure calculated as (Net Profit / Investment Cost) × 100%. Used to evaluate inventory reduction initiatives and supply chain improvement projects.

S

Safety Lead Time

Additional time added to expected lead times to protect against supplier delays and uncertainty, effectively increasing the reorder point. Alternative to increasing safety stock quantity.

Safety Stock

Extra inventory held to protect against uncertainty in demand or supply, calculated using service level targets, demand variability, and lead time variability. Critical for maintaining target fill rates.

Sales and Operations Planning (S&OP)

An integrated planning process that aligns demand forecasts, production capacity, inventory targets, and financial plans across the organization monthly or quarterly.

Scrap

Material discarded because it is damaged, defective, or no longer needed. Scrap rates impact production yields, costs, and inventory accuracy.

Service Level

The probability of not experiencing a stockout during a lead time period, typically expressed as a percentage (e.g., 95% or 99%). Directly determines required safety stock levels.

Shrinkage

The loss of inventory due to theft, damage, miscounting, or administrative errors. Measured as the difference between recorded and actual inventory levels.

SKU (Stock Keeping Unit)

A unique alphanumeric identifier for each distinct product variant that can be stocked and sold. SKU complexity directly impacts inventory management difficulty.

Slow-Moving Inventory

Items with low turnover rates (typically <2-3 turns per year) that remain in stock for extended periods. Requires analysis for potential obsolescence or policy changes.

Stock Availability

The percentage of time or orders when an item is in stock and available to fulfill demand. A customer-centric service metric closely related to fill rate.

Stockout

A condition where inventory is depleted and customer demand cannot be fulfilled, resulting in lost sales, backorders, or customer dissatisfaction. Avoided through proper safety stock.

Stock Rotation

The practice of moving older stock forward and newer stock back to ensure older items are used or sold first (FIFO). Essential for perishable goods and date-sensitive products.

Supplier Lead Time

The time between placing an order with a supplier and receiving the goods at your facility. Includes order processing, production, and transportation time.

Supply Chain

The network of organizations, people, activities, information, and resources involved in creating and delivering a product or service from suppliers to end customers.

Supply Chain Visibility

The ability to track inventory, orders, and shipments across all supply chain stages in real-time, enabling proactive decision-making and exception management.

T

Template

A pre-designed document or spreadsheet used to standardize and streamline inventory management processes, ensuring consistency and reducing errors.

Third-Party Logistics (3PL)

Outsourced logistics services including warehousing, transportation, and fulfillment operations. Allows companies to focus on core business while leveraging logistics expertise.

Total Cost of Ownership (TCO)

The complete cost of acquiring and operating inventory, including purchase price, ordering costs, carrying costs, and disposal costs. Provides comprehensive view for supplier and policy decisions.

Tracking Number

A unique identifier assigned to a shipment enabling real-time location and status monitoring throughout the delivery process.

Turnover Ratio

See Inventory Turnover. Measures how efficiently inventory is managed by showing how many times inventory is sold and replaced annually.

U

Unit of Measure (UOM)

The standard quantity unit used to measure and manage inventory items (e.g., pieces, cases, pallets, kilograms, liters). Consistent UOM usage is critical for accurate inventory tracking.

Unmet Demand

Customer orders or demand that cannot be fulfilled due to stockouts or capacity constraints. Tracked to measure service failures and estimate lost sales.

Usage Rate

The rate at which inventory is consumed or sold over time, typically expressed as units per day, week, or month. Key input for reorder point and safety stock calculations.

V

Velocity

The speed at which inventory moves through the supply chain or the rate of sales for a particular item. High-velocity items require different management than slow movers.

Vendor-Managed Inventory (VMI)

An inventory management approach where suppliers monitor and replenish inventory at the buyer's location, improving availability while reducing buyer's inventory management burden and costs.

Visibility

The extent to which accurate, real-time information about inventory location, status, and movement is available across the supply chain. Enhanced visibility enables better planning and faster response.

W

Warehouse Management System (WMS)

Software that manages warehouse operations including receiving, putaway, storage, picking, packing, and shipping. Optimizes warehouse efficiency and inventory accuracy.

Waste

Inventory or materials that provide no value and must be discarded, including obsolete stock, expired goods, damaged items, and production scrap. Lean principles focus on waste elimination.

Work-in-Progress (WIP)

Partially completed inventory in the production process, having consumed some materials and labor but not yet finished. One of three main inventory categories.

Working Capital

Capital available for day-to-day operations, calculated as Current Assets minus Current Liabilities. Inventory is a major component of working capital, so reduction improves cash flow.

Write-off

The accounting action of removing obsolete, damaged, or lost inventory from the books, recognizing the loss as an expense. Impacts profitability and requires investigation of root causes.

X

XYZ Analysis

A method for classifying inventory items based on demand predictability and variability: X items have stable, predictable demand; Y items have moderate variability; Z items have highly erratic demand. Often combined with ABC analysis.

Y

Yield

The percentage of usable output from a production process or material input. Low yields increase material requirements and costs. Calculated as (Good Units Output / Total Units Input) × 100%.

Z

Zero Inventory

An idealized state where no inventory is held because materials arrive exactly when needed. While practically unattainable, it represents the JIT philosophy of minimizing inventory waste.

Zone Picking

A warehouse picking strategy where the warehouse is divided into zones and pickers are assigned to specific zones, improving efficiency for high-volume operations with multiple concurrent orders.