Inventory Management Terms

  • ABC Stratification – Priority given to a group of products based on their velocity, quantity sold, inventory investment or sales revenue. Used to determine warehouse location, inventory planning policies and cycle count frequency.
  • Actual Cost – Used in manufacturing to cost a specific work order, the sum of material, machine and labor costs.
  • Advanced Planning and Scheduling (APS) – An enhancement to production planning and scheduling software to more flexibly respond to customer requirements.
  • Adjusted Margin – Gross margin less carrying costs, calculated for a time period as the gross margin less the average inventory value times the carrying cost percent.
  • Adjusted Mean Average – Average monthly usage is the is the usage over a number of months divided by that number of months. Adjusted mean average instead divides by the number of months there were sales, perhaps four or five months out of twelve for a seasonal item.
  • Advanced Shipment Notification (ASN) – Notification to a customer of an impending shipment. Generally an electronic document that includes bar-code information to make receiving easier.
  • Alpha Level – In the Bodenstab model, a multiplier of .2, .3 or .4 that determines the responsiveness to new data for the exponential average of sales history.
  • Approved Stock List – The list of items authorised to be stocked for a warehouse.
  • Assembly Order – An item created from the assembly or kitting of other items.
  • Average Cost – A popular inventory costing method calculated each time inventory is received by averaging the actual cost of the receipt quantity with the cost of the current inventory in stock.
  • Average Deviation – When used for calculating safety stock, the average difference between the forecast and the usage for a number of prior forecast periods. Sometimes the mean is used instead of the average.
  • Average Inventory Investment – The average value of on-hand inventory, generally calculated by averaging the last twelve months.
  • Backorder an item that can not be shipped until receiving more into stock.
  • Bad Inventory – Inventory that might be stocked for good marketing reasons but that fails to produce an adjusted margin higher than the ratio of annual non-inventory related expenses to total annual sales (NIREP).
  • Basic Coverage – One component of the reorder target, which is the sum of safety stock and basic coverage.
  • Bill of material (BOM) – The list of materials, scrap factors, labor and procedures to produce an item from a number of other items. A Multilevel Bill of Material organizes a number of BOMS to a parent BOM.
  • Bin Location (Fixed Bin) – A designated inventory storage location. A warehouse might be organized according to row, shelf and bin with the bin number reflecting all three.
  • Blanket Order – A purchase order for a specific quantity over a specific period of time, but not always with specified ship dates.
  • Blind Count – Providing inventory takers with item and location information, but no quantity information.
  • Bonded Warehouse – Where imported items are stored prior to customs duties and taxes being paid sometimes used to delay the payment of import fees until the items are sold.
  • Buying Group – A number of warehouses or companies that pool to place a single replenishment order.
  • Capacity Requirements Planning – Production planning around a known constraint, for example, labor hours or a key piece of machinery.
  • Carrying Cost (Holding Cost, K Cost) – A percent calculated by dividing the sum of all costs of carrying inventory for a year divided by the average inventory value for the year.
  • Catch Weight – The actual weight of items that as a rule vary in weight, for example, seafood, meat and vegetables.
  • Chargeback – A financial penalty to the seller when the order does not meet specified characteristics agreed to with the buyer, for example, incorrect compliance labels.
  • Collaborative Forecasting – Acquiring future usage estimates from customers directly or from salespeople.
  • Compliance Labels – Standardized label formats often not used by the seller but required by the buyer, for example, retail bar codes.
  • Commodity – An item available from more than one vendor, for example, nuts and bolts.
  • Consignment Inventory – Inventory owned by the vendor, but in the warehouse of the distributor, or inventory owned by the distributor, but in the warehouse or store of the customer. Ownership is generally transferred when the inventory is sold.
  • Contract Warehouse (Public Warehouse) – A business that handles shipping, receiving, and storage on a contract basis. Contract warehouses are commonly used to reduce freight costs for heavy items. For example, when an item is purchased and delivered in Florida, but not yet sold, the buyer might be in California or perhaps in Florida. It makes financial sense to keep the item stored in Florida until the location of the buyer is known.
  • Costing Method – A calculation used to determine inventory cost for internal or for tax purposes. Common methods include average cost, current cost, standard cost, actual cost, landed cost, First-in-first-out (FIFO) and Last-in-last-out (LIFO).
  • Cost of Goods Sold (COGS) – For inventory sold, the purchase price from the vendor before freight and duties.
  • Crisis Prevention Order – A replenishment order at higher than the average purchasing cost in order to prevent a critical stockout.
  • Cross-docking – Moving inventory across the staging area on its way from being unloaded in receiving to being loaded to fulfill an order.
  • Cube – a measure of the volume, the length times the width times the height of the object or space. Cubed Out describes a trailer or container that is physically full while still below its weight capacity.
  • Current Cost – A costing method that applies the most recent receipt to all inventory of an item.
  • Customer Satisfaction Analysis – A percent calculated by the number of times a customer has complained divided by the number of orders shipped. Sometimes calculated for each customer and sometimes for all customers at once.
  • Customer Service Level – The percent of customer order lines shipped complete by the promise date or without back order.
  • Cycle Count – Regularly-scheduled inventory counts (perhaps daily) for small portions of the inventory that eventually cycles through the entire inventory. The Geographic Method counts all items the same number of times each year. The Ranking Method counts high-volume items more often than low-volume items.
  • Days Supply – The on-hand quantity divided by the average usage per day.
  • Dead Stock – An item with no sales for some time. The amount of time will depend on whether or not the item is seasonal.
  • Demand Forecast (Forecast) – A prediction of future usage, calculated by one of many alternative formulas.
  • Dimensional Weight (Dim Weight) – Used to determine freight charges for lightweight but bulky items.
  • Direct Ship (Drop Ship) – An order shipped direct from the vendor to the customer.
  • Discrete Manufacturing – The assembly of an item that can be counted individually and taken apart to salvage the components, for example, a paint can. Process Manufacturing mixes the ingredients of a recipe and ends with a product that can not be restored to its individual components, for example, paint.
  • Distribution – Acquiring, storing, shipping, and delivering goods. Wholesale Distribution is generally invoiced from one business to another business, who may or may not be the end user. Retail Distribution is generally paid for at the time of the sale to the end user.
  • Distribution Requirements Planning (DRP) – A phrase that evolved from Manufacturing Requirements Planning (MRP) and Enterprise Resource Planning (ERP), but is really just inventory management.
  • Dynamic Slotting – A function of warehouse management systems that stores inventory in different locations as operational characteristics change.
  • Economic Order Quantity (EOQ) – The replenishment quantity that results in the lowest total cost per unit by factoring in an estimate of ordering cost and carrying cost. There are many variations on the formula but the effect is the same. Items that represent a large portion of sales are tightly managed and ordered frequently in small quantities. Items that represent a small portion sales are not given much attention and ordered infrequently in large quantities.
  • Electronic Product Code (EPC) – The RFID version of the UPC barcode generally containing additional information like the lot or the serial number. Used in systems that can optionally track inventory to its final use.
  • Enterprise Resource Planning (ERP) – Software systems designed to manage the diverse requirements of the largest organizations, which tend to have a complex mix of requirements. A tier one software solution. Tier two solutions are specific to one industry like the smaller organizations they serve, for example, only distribution. However, sophisticated distribution solutions cover often-related requirements like manufacturing and retail. Tier three solutions or general accounting packages are entry level business solutions. As the name general implies they lack feature depth.
  • Excess Inventory – Excess inventory is inventory in excess of the amount needed to cover an order period. There might be legitimate reasons for carrying excess inventory, for example, to take advantage of a special buying opportunity.
  • Exponential Average – An average of sales history weighted to give more importance to recent periods or, for seasonal items, to the same season. The Deseasonalized Exponential Average only gives more importance to recent periods.
  • External Trends – A trend percent resulting from an educated guess. Used for predicting seasonal demand.
  • FIFO (First-in-first-out) – The warehouse practice of always using the oldest inventory first, important for items with expiration dates. An accounting practice for costing inventory by the oldest first.
  • Fill Rate (Percent Fill Rate) – The percent of orders filled from stock. Line Fill Rate is the percent of line items filled from stock. Order Fill Rate is the percent of orders filled stock. Target Fill Rate is input to the inventory management system to specify a desired fill rate.
  • Filter – An automated or manual removal of exceptional data from sales history with the goal of making the history more suitable for making accurate forecasts.
  • Forecast Error – The difference between the forecast quantity and the actual demand. Error is tracked to make future forecasts more accurate.
  • Forecast Period (Time Bucket) – The length of the time used for managing inventory.
  • Fulfilment – Processing a customer shipment.
  • Goal Seeking – An inflation of the recommended order amount to reach an even pallet, specific weight or cube goal.
  • Good Inventory – Inventory profitable in the adjusted margin / NIREP comparison.
  • Gross Margin – Profit divided by sales.
  • Gross Margin Return on Investment (GMROI, or on Inventory Investment, GMROII) – Annual profit divided by the average inventory investment for the year. Calculated for individual items, the GMROI determines what items are profitable to stock and what items are not. For further explanation see, GMROI.
  • Gross Profit – Sales less the cost of goods sold.
  • Hits – The number of times a product is sold, not the quantity sold.
  • Holding Bin – A location to store inventory not available for sale or use.
  • Internal Trend – A trend percent based upon usage history.
  • Inventory Control – Safeguarding inventory while minimizing the cost of running the warehouse.
  • Inventory Management – Determining optimal replenishment time schedules and quantities to balance a desired order fill rate against the lowest inventory cost.
  • Inventory Period – The time scheduled between replenishment orders or a calendar period like a week or a month.
  • Item Number (SKU, Stock Keeping Unit) – The identification number or alphanumeric code that identifies like inventory. White paint in a gallon can will have a different SKU than white paint in a five-gallon cans. Commodities can have a single SKU but be source from multiple vendors.
  • Item Profile (Item Master) – The record that holds the item information, which might include physical dimensions and weight, hazardous classification and the purchasing and sales units of measure, for example, pallet, case or each.
  • Just-in-time (JIT, Lean Manufacturing) – Replenishing stock with the expected single-use quantity. In manufacturing, the optimization of a process to minimize waste including wasted steps, time and material.
  • Landed Cost (Landing Cost, Incoming Cost) – COGS plus transportation costs, import fees, duties and taxes.
  • Laser Scanner – An input device that uses a moving laser to read bar codes. Devices can be hand-held or fixed, wired or wireless.
  • Lead Time (Projected Lead Time) – The expected time from ordering an item until it is received. Effective Lead Time adds factors like a fixed order schedule and internal processing time. Lead-time Demand is the expected usage during the lead time.
  • Legacy System – An old or outdated computer system perhaps only old in that the software is not on the current release. Often refers to custom applications, which tend to fall behind applications licensed by multiple organizations.
  • Left-on-shelf Stock – Inventory in excess of the order point when a replenishment order is placed, often the result of an infrequent order cycle. Residual Inventory is available inventory when an replenishment order is received.
  • Less-than-truckload (LTL) – A shipment less than a trailer load in size and that will incur a higher than full-trailer freight rate.
  • License Plate – An ID tag for a pallet, tote or other container to eliminate scanning each box on the pallet.
  • LIFO, Last-in-first-out – An accounting method of costing inventory by the cost of the most recently received item.
  • Lights-out Warehouse – A fully-automated facility needing no people and therefore no lights.
  • Line Item – On a purchase or sales order each line that reflects an item and a quantity.
  • Line Point (Reorder Point, Reorder Target) – The inventory quantity that triggers a replenishment order calculated by some systems as the order point plus anticipated usage during the order cycle.
  • Locator System – A system, for example, row, bin, shelf, that allows tracking inventory in potentially random locations in order to make better overall use of available warehouse space.
  • Maintenance, repair and operating inventory (MRO) – Miscellaneous items like office cleaning or equipment maintenance supplies.
  • Maximum Stock Quantity – The desired maximum amount of inventory that should be in stock.
  • Mean Average Deviation – The variability of sales history from the forecast. Used to calculate safety stock and to establish the filter range.
  • Mean Hit Average – Usage over a period of time divided by the number of hits for the same period.
  • Minimum Stock Quantity – The least amount of an item that can be in stock without triggering a replenishment order.
  • Mode Average – The most common usage quantity over a period of time.
  • Moving Average – The average sales history for a specific number of periods back from the present.
  • MRP (or MRPII), Manufacturing Resource Planning – A plan for the needed material, labor and work station requirements, a consolidation of what were formerly individual plans, the material requirements plan, the capacity requirement plan and the master production schedule.
  • Negative Inventory – When the system shows the on-hand inventory balance as less than zero.
  • Non Inventory Related Expense Percentage (NIREP) – A percent calculated by dividing total non-inventory related expenses by total sales dollars for a common period of time.
  • Non-seasonal Products – Items whose usage does not vary by the time of year.
  • Normal Distribution – The statistical term for a set of numbers where the occurrence of the numbers when graphed follows the form of a bell-shaped curve. Sometimes used in inventory management to predict demand variability based upon sales history.
  • One-step Transfer – A transfer from one warehouse to another in a single transaction. A Two-step is when shipping and receiving are handled as separate transactions.
  • On Hand – The physical quantity in the warehouse.
  • Obsolete Inventory (Dead Inventory) – Inventory that has had no sales or usage activity for a specific period of time.
  • Open Source Software – Software with the source code freely available for modification. While the best-known open source programs, like Linux, are free, often lesser-known programs labeled as open source will use a proprietary database or other component that must be purchased.
  • Open Stock Inventory – Inventory for which accurate on-hand quantities are not maintained, usually inexpensive consumables.
  • Optional Replenishment – Ordering or producing inventory even though the Min has not been reached. The goal is usually to fill a truck or to avoid down time at a work station.
  • Order Cost (Purchase Cost, Set Up Cost) – The fixed costs associated with placing an order.
  • Order Cycle (Replenishment Cycle) – The the time between orders, calculated by dividing the order quantity by the annual demand and multiplying by the number of days in the year.
  • Order Point – The expected lead-time demand plus the safety stock quantity.
  • Outside Operation – A step in fabrication performed by an outside vendor, for example, powder coating or chrome plating.
  • Paperless – Conducting operations electronically instead of with printed documents.
  • Physical Inventory – Counting all the inventory in a warehouse or plant while operations are shut down so inventory can not move in or out.
  • Pick Face – The primary stocking location near the dock used for filling outing orders.
  • Pick-to-clear – A warehouse management system operation that directs pickers to the locations with the smallest quantity.
  • Pick-to-carton – A warehouse management system operation that selects the packing cartons first, then directs pickers to the inventory.
  • Pipeline – Inventory on order but not yet received. Inventory in the pipeline has no cost.
  • Price-break Purchasing – The opportunity for a lower price in exchange for purchasing a larger quantity.
  • Projected Annual Demand – Expected demand for the next twelve months.
  • Projected Inventory Investment – The estimated average value of inventory if the system recommendations are followed.
  • Promotion (Dated Promotion) – An activity or price break designed to increase the sale of specific items for a specific period of time.
  • Pro Forma Invoice – A fake invoice showing what actual invoice will show, often produced to allow for prepayment.
  • Proprietary – Equipment or software that only works with other products from the same vendor instead of following open standards, which can reduce costs by creating competitive products.
  • Purchase Order – A purchase order is an approved order used to track and process purchased goods. A Requisition is not approved. In some organizations many people are allowed to create requisitions, but only purchasing agents are authorized to create purchase orders.
  • Quantity – Quantity on Order is the amount on open purchase orders, which may or may not include the amount on incoming warehouse transfers. Quantity in Transit is the amount on incoming warehouse transfers. Quantity on Hand is the actual physical amount in the warehouse. Quantity Allocated or Committed is the amount committed to sales orders, to production or held for specific customers. Quantity Available is quantity on hand less the quantity allocated at a specific time. Future orders will impact the quantity available when inventory is allocated to them. Available to Promise is a view of future expected quantity and expected receiving dates of replenishment orders balanced against future orders.
  • Radio Frequency (RF) – A wireless communication system that allows for using portable scanner/terminals to scan barcodes in the warehouse. Benefits are real time transactions and more accurate inventory accounting.
  • Radio Frequency Identification (RFID) – Similar to bar code labels and bar code scanners, RFID uses transmitters on inventory and radio receivers. RFID has a number of advantages over visual barcodes. The devices still work in harsh environments, do not require line of site, can hold more information than barcodes and the stored information can be changed during processing.
  • Random Bins (Random Location) – Bin locations designated to store whatever needs to go there. Random storage has higher space utilization than fixed location storage.
  • Ranks – An inventory classification based on comparative hits, COGS or the gross profit percent.
  • Recurring Usage Item – An item sold comparatively regularly.
  • Real-time Locator System (RTLS) – An RFID tag attached to each object that transmits its current location.
  • Reorder Target – In the Bodenstab model, the amount of inventory to cover expected orders during the order frequency and the lead time with enough extra inventory to compensate for forecast inaccuracy. The Reorder Amount is the reorder target less the amount on hand.
  • Replenishment Position – On hand less allocated plus on order.
  • Reordering Cost (R Cost) – The costs of issuing, monitoring and receiving a purchase order. Sometimes calculated to the amount per purchase order line by dividing the cost by the number of lines on the order.
  • Reserved Inventory – Inventory held for a specific customer.
  • Return (Reverse Logistics) – Items returned by the customer, a common event when selling to contractors because they tend to order too much for a job to ensure they do not come up short while the crew is on the job.
  • Return on Investment (ROI, Turn/Earn Index) – The gross margin percent times the turn rate.
  • Rough-cut Capacity – An estimate of manufacturing capacity based on a key constraint, used to develop the production plan or the master production schedule.
  • Routing – The route a fabricated item takes through different work stations, used to specify the steps of fabrication and to monitor work in progress (WIP).
  • Safety Stock – Extra inventory held to cover unusual demand or a delayed replenishment shipment. In the Graham model, the amount is another fifty percent of the order quantity. In the Bodenstab and similar models, the Safety Factor or Service Factor is multiplied by the standard deviation or the mean average deviation to calculate a specific safety stock quantity to meet a desired service level. Safety Lead Time is the amount of safety stock represented in the days of typical demand.
  • Seasonal Products – Items whose demand varies in a regular pattern year to year. A Seasonality Index is a factor for each buying period relative to average demand.
  • Shelf Life – The amount of time a product can be stocked before reaching its expiration date.
  • Slap-and-ship – Meeting a customer’s request for compliance labelling, either for bar code labels or RFID tags. An implication of the term is that the labels or tags are not used in the warehouse applying them.
  • Slotting – Optimizing a warehouse with fixed picking locations near the docks and flexible storage locations further from the docks. Warehouse management modules or packages consider item velocity, cube requirements and minimum pick face dimensions to determine optimal inventory locations.
  • Sporadic Usage Item – A stocked product not used or sold on a regular basis.
  • Standard Cost – A defined and stable estimate of cost (sometimes used to calculate a stable sell price) rather than the actual cost, which will vary due to a good or poor buy, unusually high or low freight costs, etc. In manufacturing, the combined estimated cost of the items in the bill of materials, labor and machine costs.
  • Standard Deviation – A measure of variance, for example, between the forecast and the actual usage. Used to calculate safety stock
  • Stockout – When the available quantity for an item is zero or less.
  • Substitute Product – An item that can be substituted for another.
  • Superseding Item (Replacement Item) – An item that replaces another.
  • Target Order – An order that meets the vendor’s target for the best price and terms.
  • Task Interleaving – A warehouse management module feature to mix tasks in order to reduce travel time.
  • Third-party Logistics (3PL) – An business external to the distributor that provides logistics services like public warehousing, contract warehousing, transportation management, distribution management and freight consolidation. The services might be provided in the warehouse of the external business or even in the distributor’s warehouse. A 4PL is an external business that manages 3PLs on the distributor’s behalf.
  • Three-way Ranking – Ranking of items by a combination of hits, COGS and the gross or the adjusted margin.
  • Time Fence – A number of days before a scheduled production date after which changes will adversely affect the cost or have other adverse effects.
  • Total Cost of Inventory – The cost from the vendor plus the carrying and reordering costs.
  • Transfer Order – An order between two locations of the same company.
  • Transportation Management System (TMS) – Software for yard management, fleet or carrier management, routing, rate shopping and shipment manifesting.
  • Trend Factor (Trend Percent) – Can be either an actual trend or an anticipated trend in sales up or down.
  • Turnover (Inventory Turnover) – The number of times inventory is sold during a one year period, calculated by dividing the average inventory level into the annual inventory usage (annual Cost of Goods Sold). Potential Turnover is the projected annual COGS divided by the projected inventory investment.
  • Ugly Inventory – Products that are neither profitable nor lead to other profitable sales as indicated by the adjusted margin / NIREP comparison.
  • Unit of Measure (U/M) – The quantities used to track inventory. For example, the vendor might require purchases in even case or pallet quantities, but the distributor might sell only in the quantity of each. A table to show valid conversions between units is generally part of the inventory master file.
  • Usage – The history of the sales, use and transfer of an item corrected to remove unusual events. A Usage Adjustment is an adjustment made to actual usage to remove unusual events. A Typical Usage Quantity is the quantity generally sold in a single transaction.
  • Vendor Line – The complete offering of products from a vendor.
  • Vendor Managed Inventory – Inventory for which the vendor assumes responsibility for maintaining stock levels, typically a practice used for consumables — for example, nuts and bolts — in manufacturing organizations.
  • Warehouse Management System (WMS) – A module or third-party software package that manages the storage layout and movement of inventory in the warehouse. WMS software generally integrates to radio-frequency scanner terminals or to RFID scanners for improved accuracy and real-time operations..
  • Wave Picking (Batch Picking) – Picking a number of orders for a customer or a truck simultaneously in order to follow an efficient route through the warehouse and to eliminate traffic jams in the warehouse.
  • Weighted-average Forecasting – A forecast formula that places more weight on some history than other history. For example, putting more weight on recent history will produce a forecast sensitive to recent trends. For seasonal items, more weight is put on history from a year ago than from the last few months.
  • Work-in-process (WIP) – The monitoring of fabricated items through a series of workstations to be able to observe if production is on schedule.
  • Zone Picking – An order picking method where the warehouse is divided into zones and order pickers are assigned to a specific zone.