Inventory Glossary

Inventory Glossary

ABC, Activity based costing.  Usually refers to costing method that breaks down overhead costs into specific activities (cost drivers) in order to more accurately distribute

APS,  Advanced planning and scheduling.  Software system designed to integrate with ERP and MRP systems to enhance the short term production planning and scheduling systems that are notoriously inadequate in MRP systems.  APS  systems have extensive programming logic that allows them to be more effective in dealing with rapidly changing customer demands.

 Available to promise.  Available to promise takes the simple availability calculation, adds time phasing and takes into account future scheduled receipts. Available to promise may be calculated for each day or broken down into larger time buckets. The first time period will take on-hand inventory and add any scheduled receipts for that period. It will then deduct any allocations scheduled prior to the next scheduled receipt (which may be several periods in the future). Subsequent periods without any scheduled receipts will have the same available to promise as the previous period. Subsequent periods with scheduled receipts will generally start with a fresh calculation, ignoring any remaining available to promise from previous periods. There are many variations on exactly how available to promise is calculated and it is also important to note that available to promise often works independently of allocation systems. This can sometimes create conflicts.  See also Available, Allocations.

Backflush   Method for issuing (reducing on-hand quantities) materials to a manufacturing order.  With backflushing, the material is issued automatically when production is posted against an operation. The backflushing program will use the quantity completed to calculate through the bill of material the quantities of the components used, and reduce on-hand balances by this amount.  There are usually options during the backflush process to report scrap.  In operations using backflushing it is advisable to set up specific machine locations and have materials transferred from storage locations to machine locations when they are physically picked for production. The backflush operation will then issue the material from the machine locations

BOM, Bill of material.  Lists materials (components or ingredients) required to produce an item.  Multilevel BOMs also show subassemblies and their components.  Other information such as scrap factors may also be included in the BOM for use in materials planning and costing.

Cantilever Rack.  Racking system in which the shelving supports are connected to vertical supports at the rear of the rack.  There are no vertical supports on the face of the rack allowing for storage of very long pieces of material such as piping and lumber. Also see Racking Pics Page.

Carrying cost.  Also called holding cost, carrying cost is the cost associated with having inventory on hand.  It is primarily made up of the costs associated with the inventory investment and storage cost. For the purpose of EOQ calculations, if  the cost does not change based upon the quantity of inventory on hand it should not be included in carrying cost. Carrying cost is represented as the annual cost per average on-hand inventory unit. See article on EOQ for more detailed info on carrying cost.

Consignment inventory. Inventory that is in the possession of the customer, but is still owned by the supplier. Consignment inventory is used as a marketing tool to make it easier for a customer to stock a specific supplier's inventory.

Consumer goods. Products sold to non-business end users. Clothing, food, Music CDs, are examples of consumer goods.

Contract warehouse.  A contract warehouse is a business that handles shipping, receiving, and storage of products on a contract basis.  Contract warehouses will generally require a client to commit to a specific period of time (generally in years) for the services.  Contracts may or may not require clients to purchase or subsidize storage and material-handling equipment.  Fees for contract warehouses may be transaction and storage based, fixed, cost plus, or any combination.  Also see Public Warehouse and 3PL.

Coproduct.  The term coproduct is used to describe multiple items that are produced simultaneously during a production run.  Coproducts are often used to increase yields in cutting operations, such as die cutting or sawing, when it is found that scrap can be reduced by combining multiple sized products in a single production run.  Coproducts are also used to reduce the frequency of machine setups required in these same types of operations. Coproducts, also known as byproducts, are also common in process manufacturing such as in chemical plants.  Although the concept of coproducts is fairly simple, the programming logic required to provide for planning and processing of coproducts is very complicated and most off-the-shelf manufacturing software will have problems with coproduct processing.

CRP, Capacity requirements planning. Process for determining amount of machine and labor resources required to meet production.

Demand.  The need for a specific item in a specific quantity.  See Dependent Demand and Independent Demand.

Discrete manufacturing.  Describes manufacturing of distinct items (items you can easily count, touch, see) such as a pencil, a light bulb, a telephone, a bicycle, a fuel pump, etc.  Discrete as opposed to Process manufacturing.  Also see Process Manufacturing.

Distribution. Describes the process of storing, shipping, and transporting goods. Also describes the facilities (distribution operations, distribution centers) that conduct these activities. In statistical analysis, describes the measurement of a group of events or occurrences (see Normal distribution).

DRP, Distribution requirements planning.  Process for determining inventory requirements in a multiple plant/warehouse environment. DRP may be used for both distribution and manufacturing.  In manufacturing, DRP will work directly with MRP. DRP may also be defined as Distribution Resource Planning which also includes determining labor, equipment, and warehouse space requirements.

EOQ, Economic order quantity.  Result of a calculation that determines the most cost effective quantity to order (purchased items) or produce (manufactured items).  The formula basically finds the point at which the combination of order cost and carrying cost is the least.  The standard formula is EOQ = Square Root [2 * (Annual Usage) * (Order Cost) / (Annual Carrying Cost/unit)].  The difficult part of implementing the formula is getting accurate values for order cost and carrying cost.  See my article Optimizing EOQ for more info. 

ERP, Enterprise resource planning.  Describes software systems designed to manage most or all aspects of a manufacturing or distribution enterprise (an expanded version of MRP systems).  ERP systems are usually broken down into modules such as Financials, Sales, Purchasing, Inventory Management, Manufacturing, MRP, DRP.  The modules are designed to work seamlessly with the rest of the system and should provide a consistent user interface between them. These systems usually have extensive set-up options that allow you to customize their functionality to your specific business needs.  Unfortunately, in the real world, ERP systems rarely are sufficient to meet all business needs and a myriad of other software packages such as Customer Relationship Management (CRM), Manufacturing Execution Systems (MES), Advanced Planning and Scheduling (APS), Warehouse Management Systems (WMS) and Transportation Management Systems (TMS) are being sold to make up for these deficiencies.

FIFO First-in-first-out.  In warehousing describes the method of rotating inventory to used oldest product first.  Actually an accounting term used to describe an inventory costing method.  See  LIFO

FMCG, Fast Moving Consumer Goods  Description of common high volume products such as food, hygiene product, or cleaning supplies. These would be products that the average consumer would frequently purchase such as soda, toothpaste, or dish soap.

Forecast  A Forecast is an estimation of future demand.  Most forecasts use historical demand to calculate future demand.  Adjustments for seasonality and trend are often necessary.

Inventory management.  The direction and control of activities with the purpose of getting the right inventory in the right place at the right time in the right quantity in the right form at the right cost.

Inventory Turn.  Number of times inventory turns during a one year period.  Generally calculated by dividing the average inventory level (or current inventory level) into the annual inventory usage (annual Cost of Goods Sold).

Item. See SKU

Item Profile. Data that describes the characteristics of an item. May include physical characteristics such as size and weight, transactional characteristics such as times sold/consumed and units sold/consumed, or group characteristics such as sales channel, commodity, hazardous classification, etc. Item profiles are used in warehouse design and slotting.

JIT, Just-in-time.  Term usually thought of as describing inventory arriving or being produced just in time for the shipment or next process.  Actually, JIT is a process for optimizing manufacturing processes by  eliminating all process waste including wasted steps, wasted material, excess inventory, etc.

Kanban.  Used as part of a Just-In-Time production operation where components and sub-assemblies are produced based upon notification of demand from a subsequent operation.  Historically, Kanban has been a physical notification such as a card (kanban cards) or even an empty hopper or tote sent up the line to the previous operation. Kanban is actually a simplistic means of both signaling the need for inventory as well as controlling the inventory levels (by limiting kanban cards or containers).

Lead time.  Amount of time required for an item to be available for use from the time it is ordered.  Lead time should include purchase order processing time, vendor processing time, in transit time, receiving, inspection, and any prepack times.

Lead-time demand.  Forecasted demand during the lead-time period.  For example, if your forecasted demand is 3 units per day and your lead time is 12 days, your lead-time demand would be 36 units.

Lean manufacturing. Alternate term used to describe the philosophies and techniques associated with Just-in-time  (JIT) manufacturing.

LIFO, Last-in-first-out.  In warehousing, describes the method for using the newest inventory first (I've never seen an operation that uses this).  In accounting, it's a term used to describe  an inventory costing method.  See FIFO

MES,  Manufacturing execution system.  Software systems designed to integrate with enterprise systems to enhance the shop-floor-control functionality that is usually inadequate in ERP systems.  MES provides for shop floor scheduling, production and labor reporting, integration with computerized manufacturing systems such as automatic data collection and computerized machinery.

Min-max.  A simplistic inventory system in which a minimum quantity and maximum quantity are set for an item.  When the quantity drops below Min you order up to the Max. Also see Optional replenishment.

MPS, Master production schedule.  Production schedule specifying specific items, quantities, and dates at which production is expected to take place.

MRP/MRPII,  Manufacturing resource planning.  Process for determining material, labor and machine requirements in a manufacturing environment.   MRPII is the consolidation of Material Requirements Planning (MRP), Capacity Requirements Planning (CRP), and Master Production Scheduling (MPS).  MRP was originally designed for materials planning only. When labor and machine (resources) planning were incorporated it became known as MRPII.  Today the definition of MRPII is generally associated with MRP systems.

MRP generation.  Term used to describe the running of the programs that convert demand into planned orders.  Depending on the operation, MRP Generation may be run daily, weekly, or even monthly.  Since this processing requires a lot of system resources it is generally confined to off hours or weekend processing.

Negative inventory. An inventory system (computer) condition whereby the on-hand inventory balance is listed as a quantity less than zero. Check out my article on negative inventory 

Physical inventory.  Refers to the process of counting all inventory in a warehouse or plant.  Operations are usually shut down during a physical inventory.

Process manufacturing.  Type of manufacturing where a product is produced or transformed through mixing, chemical reactions, etc.  Examples of process manufacturing would be refining crude oil into gasoline, extracting copper from ore, combining materials to make paint.  Process as opposed to discrete manufacturing.  Also see Discrete manufacturing.

Production plan.  Generally used to describe a long-term plan of what will be produced at a family level.

Purchase order. A document used to approve, track, and process purchased items. A purchase order is used to communicate a purchase to a supplier. It is also used as an authorization to purchase. A purchase order will state quantities, costs, and delivery dates. The purchase order is also used to process and track receipts and supplier invoices/payments associated with the purchase..

Reorder point.   The inventory level set to trigger reorder of a specific item.  Reorder point is generally calculated as the expected usage (demand) during the lead time plus safety stock. Fixed reorder point implies the reorder point is a static number plugged into the system. Dynamic reorder point implies there is some system logic calculating the order point. Generally this would be comparing current inventory to the forecasted demand during the lead time plus safety stock.

RFID, Radio frequency identification.  Refers to devices attached to an object that transmit data to an RFID receiver.  These devices can be large pieces of hardware the size of a small book, like those attached to ocean containers, or very small devices inserted into a label on a package.  RFID has advantages over barcodes, such as the ability to hold more data, the ability to change the stored data as processing occurs, does not require line-of-site to transfer data and is very effective in harsh environments where bar code labels won't work.

Routing.  Used in conjunction with the bill of material in manufacturing operations.  While the BOM contains the material requirements, the routing will contain the specific steps required to produce the finished items.  Each step in the routing is called an operation, each operation generally consists of machine and labor requirements.

Unit of measure. (U/M) The unit of measure describes how the quantity of an item is tracked in your inventory system. The most common unit of measure is "eaches" (EA), which simply means that each individual item is considered one unit. An item that uses "cases" (CA or CS) as the unit of measure would be tracked by the number of cases rather than by the actual piece quantity. Other examples of units of measure would include pallets (PL), pounds (LB), ounces (OZ), linear feet (LF), square feet (SF), cubic feet (CF), gallons , thousands, hundreds, pairs, dozens. Also see Unit-of-measure Conversion.

Unit-of-measure conversions. A unit-of-measure conversion is needed whenever you work with multiple units of measure. For example, if you purchased an item in cases (meaning that your purchase order stated a number of cases rather than a number of pieces) and then stocked the item in eaches, you would require a conversion to allow your system to calculate how many eaches are represented by a quantity of cases. This way, when you received the cases, your system would automatically convert the case quantity into an each quantity.

WIP,  Work-in-process.  Generally describes inventory that is currently being processed in an operation, or inventory that has been processed through one operation and are awaiting another operation. WIP is actually an inventory account that represents the value of materials, labor, and overhead that has been issued to manufacturing but has not yet produced a stockable item. Depending on how your accounting and inventory systems are set up, it may also include components picked for production usage or finished products awaiting final inspection.