Inventory Management

remanufacturing

1) An industrial process in which worn-out products are restored to like-new condition. In contrast, a repaired product normally retains its identity, and only those parts that have failed or are badly worn are replaced or serviced. 2) The manufacturing environment where worn-out products are restored to like-new condition.

stock keeping unit (SKU)

1) An inventory item. For example, a shirt in six colors and five sizes represents 30 [of these]. 2) In a distribution system, an item at a particular geographic location. For example, one product stocked at the plant and at six different distribution centers would represent seven [of these].

reorder quantity

1) In a fixed [type of this] system of inventory control, the fixed quantity that should be ordered each time the available stock (on-hand plus on-order) falls to or below the reorder point. 2) In a variable [type of this] system, the amount ordered from time period to time period varies. Syn: replenishment order quantity.

value added

1) In accounting, the addition of direct labor, direct material, and allocated overhead assigned at an operation. It is the cost roll-up as a part goes through a manufacturing process to finished inventory. 2) In current manufacturing terms, the actual increase of utility from the viewpoint of the customer as a part is transformed from raw material to finished inventory; the contribution made by an operation or a plant to the final usefulness and value of a product, as seen by the customer. The objective is to eliminate all non-value-added activities in producing and providing a good or service.

days of supply

1) Inventory-on-hand metric converted from units to how long the units will last. For example, if there are 2,000 units on hand and the company is using 200 per day, then there are 10 [of these]. 2) A financial measure of the value of all inventory in the supply chain divided by the average daily cost of goods sold rate.

intermodal transport

1) Shipments moved by different types of equipment combining the best features of each mode. 2) The use of two or more different carrier modes in the through movement of a shipment.

physical inventory

1) The actual inventory itself. 2) The determination of inventory quantity by actual count. [It] can be taken on a continuous, periodic, or annual basis. Syn: annual inventory count, annual physical inventory. See: periodic inventory.

traceability

1) The attribute allowing the ongoing location of a shipment to be determined. 2) The registering and tracking of parts, processes, and materials used in production, by lot or serial number.

obsolescence

1) The condition of being out of date. A loss of value occasioned by new developments that place the older property at a competitive disadvantage. A factor in depreciation. 2) A decrease in the value of an asset brought about by the development of new and more economical methods, processes, or machinery. 3) The loss of usefulness or worth of a product or facility as a result of the appearance of better or more economical products, methods, or facilities.

variance

1) The difference between the expected (budgeted or planned) value and the actual. 2) In statistics, a measurement of dispersion of data. See: estimate of error.

profit margin

1) The difference between the sales and cost of goods sold for an organization, sometimes expressed as a percentage of sales. 2) [In traditional accounting for a product, this] is the product selling price minus the direct material, direct labor, and allocated overhead for the product, sometimes expressed as a percentage of selling price.

velocity

1) The rate of change of an item with respect to time. See: inventory turnover, lead time. 2) In supply chain management, a term used to indicate the relative speed of all transactions, collectively, within a supply chain community. [The maximum of this] is most desirable because it indicates higher asset turnover for stockholders and faster order-to-delivery response for customers.

pallet positions

A calculation that determines the space needed for the number of pallets for inventory storage or transportation based on a standard pallet size. Pallet dimensions vary around the globe, but are typically a constant in regional markets. The term is frequently used to quote storage and transportation rates.

contract carrier

A carrier that does not serve the general public, but provides transportation for hire for one or a limited number of shippers under a specific contract.

inventory adjustment

A change made to an inventory record to correct the balance in order to bring it in line with actual physical inventory balances. The adjustment either increases or decreases the item record on-hand balance.

reverse logistics

A complete supply chain dedicated to the reverse flow of products and materials for the purpose of returns, repair, remanufacture, and/or recycling.

perpetual inventory record

A computer record or manual document on which each inventory transaction is posted so that a current record of the inventory is maintained.

job costing

A cost accounting system in which costs are assigned to specific jobs. This system can be used with either actual or standard costs in the manufacturing of distinguishable units or lots of products. Syn: job order costing.

picking list

A document that lists the material to be picked for manufacturing or shipping orders. Syn: disbursement list, material list, stores issue order, stores requisition.

distribution warehouse

A facility where goods are received in large-volume uniform lots, stored briefly, and then broken down into smaller orders of different items required by the customer. Emphasis is on expeditious movement and handling.

income statement

A financial statement showing the net income for a business over a given period of time. See: balance sheet, funds flow statement.

balance sheet

A financial statement showing the resources owned, the debts owed, and the owner's share of a company at a given point in time. See: funds flow statement, income statement.

fixed reorder cycle inventory model

A form of independent demand management model in which an order is placed every n time units. The order quantity is variable and essentially replaces the items consumed during the current time period. If M is the maximum inventory desired at any time and x is the quantity on hand at the time the order is placed, then in the simplest model, the order quantity equals M minus x. The quantity M must be large enough to cover the maximum expected demand during the lead time plus a review interval. The order quantity model becomes more complicated whenever the replenishment lead time exceeds the review interval, because outstanding orders then have to be factored into the equation. Syn: fixed-interval order system, fixed order quantity system, order level system, periodic review system, time-based order system. See: fixed reorder quantity inventory model, hybrid inventory system, independent demand item management models, optional replenishment model.

hedge inventory

A form of inventory buildup to buffer against some event that may not happen. [Planning] involves speculation related to potential labor strikes, price increases, unsettled governments, and events that could severely impair a company's strategic initiatives. Risk and consequences are unusually high, and top management approval is often required.

work in process (WIP)

A good or goods in various stages of completion throughout the plant, including all material from raw material that has been released for initial processing up to completely processed material awaiting final inspection and acceptance as finished goods inventory. Many accounting systems also include the value of semifinished stock and components in this category. Syn: in-process inventory.

private carrier

A group that provides transportation exclusively within an organization. Ant: common carrier.

fixed order quantity

A lot-sizing technique in MRP or inventory management that will always cause planned or actual orders to be generated for a predetermined fixed quantity, or multiples thereof, if net requirements for the period exceed [this].

lot-for-lot (L4L)

A lot-sizing technique that generates planned orders in quantities equal to the net requirements in each period. See: discrete order quantity.

period order quantity

A lot-sizing technique under which the lot size is equal to the net requirements for a given number of periods (e.g., weeks into the future). The number of periods to order is variable, each order size equalizing the holding costs and the ordering costs for the interval. See: discrete order quantity, dynamic lot sizing.

on-time schedule performance

A measure (percentage) of meeting the customer's originally negotiated delivery request date. Performance can be expressed as a percentage based on the number of orders, line items, or dollar value shipped on time.

level of service

A measure (usually expressed as a percentage) of satisfying demand through inventory or by the current production schedule in time to satisfy the customers' requested delivery dates and quantities. In a make-to-stock environment, [this] is sometimes calculated as the percentage of orders picked complete from stock upon receipt of the customer order, the percentage of line items picked complete, or the percentage of total dollar demand picked complete. In make-to-order and design-to-order environments, [it] is the percentage of times the customer-requested or acknowledged date was met by shipping complete product quantities. Syn: measure of service, service level. See: cycle service level.

record accuracy

A measure of the conformity of recorded values in a bookkeeping system to the actual values; for example, the on-hand balance of an item maintained in a computer record relative to the actual on-hand balance of the items in the stockroom.

periodic replenishment

A method of aggregating requirements to place deliveries of varying quantities at evenly spaced time intervals rather than variably spaced deliveries of equal quantities.

batch picking

A method of picking orders in which order requirements are aggregated by product across orders to reduce movement to and from product locations. The aggregated quantities of each product are then transported to a common area where the individual orders are constructed. See: discrete order picking, order picking, zone picking.

discrete order picking

A method of picking orders in which the items on one order are picked before the next order is picked. See: batch picking, order picking, zone picking.

wave picking

A method of selecting and sequencing picking lists or items to minimize the waiting time of the delivered material. Shipping orders may be picked in waves combined by common carrier or destination, and manufacturing orders in waves related to work centers.

fixed-location storage

A method of storage in which a relatively permanent location is assigned for the storage of each item in a storeroom or warehouse. Although more space is needed to store parts than in a random-location storage system, fixed locations become familiar, and therefore a locator file may not be needed. See: random-location storage.

zone picking

A method of subdividing a picking list by areas within a storeroom for more efficient and rapid order picking. [This kind of order] must be grouped to a single location before delivery or must be delivered to different locations such as work centers. See: batch picking, discrete order picking, order picking.

periodic inventory

A physical inventory taken at some recurring interval (e.g., monthly, quarterly, or annual physical inventory). See: physical inventory.

sawtooth diagram

A quantity-versus-time graphic representation of the order point/order quantity inventory system showing inventory being received and then used up and reordered.

bar code

A series of alternating bars and spaces printed or stamped on parts, containers, labels, or other media, representing encoded information that can be read by electronic readers. [This] is used to facilitate timely and accurate input of data to a computer system.

free on board (FOB)

A shipping term which indicates at what point respective obligations, costs, and risk involved in the delivery of goods shift from the seller to the buyer.

visual review system

A simple inventory control system where the inventory reordering is based on actually looking at the amount of inventory on hand. Usually used for low-value items, such as nuts and bolts. See: two-bin inventory system.

recalls

A step in the reverse logistics process where parts or products are returned due to a product defect or potential hazard resulting from government regulations or liability concerns.

random-location storage

A storage technique in which parts are placed in any space that is empty when they arrive at the storeroom. Although this random method requires the use of a locator file to identify part locations, it often requires less storage space than a fixed-location storage method. Syn: floating inventory location system, floating storage location. See: fixed-location storage.

radio frequency identification (RFID)

A system using electronic tags to store data about items. Accessing or retrieving this data is accomplished through a specific radio frequency and does not require close proximity or line-of-sight access. See: active tag, passive tag, semi-passive tag.

cold chain

A term referring to the storage, transfer, and supply chain of temperature-controlled products. Industries in the cold chain include food and agriculture, pharmaceuticals, and chemicals.

economic order quantity (EOQ)

A type of fixed order quantity model that determines the amount of an item to be purchased or manufactured at one time. The intent is to minimize the combined costs of acquiring and carrying inventory. [To calculate this find the square root of ((2AS)/(iC)) where A = annual usage in units, S = ordering costs in dollars, i = annual inventory carrying cost rate as a decimal, and C = unit cost.] Syn: economic lot size, minimum cost order quantity. See: total cost curve.

min-max system

A type of order point replenishment system where the minimum (min) is the order point, and the maximum (max) is the "order up to" inventory level. The order quantity is variable and is the result of the max minus available and on-order inventory. An order is recommended when the sum of the available and on-order inventory is at or below the min.

generally accepted accounting principles (GAAP)

Accounting practices that conform to conventions, rules, and procedures that are generally accepted by the accounting profession.

anticipation inventories

Additional inventory above basic pipeline stock to cover projected trends of increasing sales, planned sales promotion programs, seasonal fluctuations, plant shutdowns, and vacations.

liabilities

An accounting/financial term (balance sheet classification of accounts) representing debts or obligations owed by a company to creditors. [These] may have a short-term time horizon, such as accounts payable, or a longer-term obligation, such as mortgage payable or bonds payable. See: assets, balance sheet, debt, owner's equity.

owner's equity

An accounting/financial term (balance sheet classification of accounts) representing the residual claim by the company's owners or shareholders, or both, to the company's assets less its liabilities. See: assets, balance sheet, liabilities.

safety lead time

An element of time added to normal lead time to protect against fluctuations in lead time so that an order can be completed before its real need date. When used, the MRP system, in offsetting for lead time, will plan both order release and order completion for earlier dates than it would otherwise. Syn: protection time, safety time.

cycle counting

An inventory accuracy audit technique where inventory is counted on a cyclic schedule rather than once a year. A cycle inventory count is usually taken on a regular, defined basis (often more frequently for high-value or fast-moving items and less frequently for low-value or slow-moving items). [the most effective of these] systems require the counting of a certain number of items every workday with each item counted at a prescribed frequency. The key purpose of [this] is to identify items in error, thus triggering research, identification, and elimination of the cause of the errors.

wall-to-wall inventory

An inventory management technique in which material enters a plant and is processed through the plant into finished goods without ever having entered a formal stock area. Syn: four-wall inventory.

order point system

An inventory replenishment system based on the stock on hand plus on order. Syn: statistical order point system. See: order point, reorder point, fixed reorder quantity inventory model, hybrid inventory system.

total line-haul cost

Basic costs of carrier operation to move a container of freight, including drivers' wages and usage depreciation, which vary with the distance shipped and the cost per mile.

line haul costs

Basic costs of carrier operation to move a container of freight, including drivers' wages and usage depreciation. These vary with the cost per mile, the distance shipped, and the weight moved.

pickup and delivery costs

Carrier charges for each shipment pickup and the weight of that shipment. Costs can be reduced if several smaller shipments are consolidated and picked up in one trip.

truckload (TL) carriers

Carriers that deliver/charge only for full truckload shipments.

product cost

Cost allocated by some method to the products being produced. Initially recorded in asset (inventory) accounts, [this becomes] an expense (cost of sales) when the product is sold.

terminals

In transportation, locations where carriers load and unload goods to and from vehicles. Also used to make connections between local pickup and delivery service and line-haul service. Functions performed in [these] include weighing connections with other routes and carriers, vehicle routing, dispatching, maintenance, paperwork, and administration. [They] may be owned and operated by the carrier or the public.

transit inventory

Inventory [moving] between manufacturing and stocking locations. See: transportation inventory.

seasonal inventory

Inventory built up to smooth production in anticipation of a peak seasonal demand. Syn: seasonal stock.

decentralized inventory control

Inventory decision making exercised at each stocking location for SKUs at that location.

pipeline stock

Inventory in the transportation network and the distribution system, including the flow through intermediate stocking points. The flow time through the pipeline has a major effect on the amount of inventory required in the pipeline. Time factors involve order transmission, order processing, scheduling, shipping, transportation, receiving, stocking, review time, and so forth. Syn: pipeline inventory. See: distribution system, transportation inventory.

inventory ordering system

Inventory models for the replenishment of inventory. Independent demand inventory ordering models include fixed reorder cycle, fixed reorder quantity, optional replenishment, and hybrid models, among others. Dependent demand inventory ordering models include material requirements planning, kanban, and drum-buffer-rope.

lot-size inventory

Inventory that results whenever quantity price discounts, shipping costs, setup costs, or similar considerations make it more economical to purchase or produce in larger lots than are needed for immediate purposes.

distribution inventory

Inventory, usually spare parts and finished goods, located in the distribution system (e.g., in warehouses or in transit between warehouses and the consumer).

maintenance, repair, and operating (MRO) supplies

Items used in support of general operations and maintenance such as maintenance supplies, spare parts, and consumables used in the manufacturing process and supporting operations.

direct labor

Labor that is specifically applied to the good being manufactured or used in the performance of the service. Syn: touch labor.

in-transit inventory

Material moving between two or more locations, usually separated geographically; for example, finished goods being shipped from a plant to a distribution center.

scrap

Material outside of specifications and possessing characteristics that make rework impractical.

materials handling

Movement and storage of goods inside the distribution center. This represents a capital cost and is balanced against the operating costs of the facility.

cycle stock

One of the two main conceptual components of any item inventory, [this] is the most active component. [It] depletes gradually as customer orders are received and is replenished cyclically when supplier orders are received. The other conceptual component of the item inventory is the safety stock, which is a cushion of protection against uncertainty in the demand or in the replenishment lead time. Syn: cycle inventory.

average inventory

One-half the average lot size plus the safety stock, when demand and lot sizes are expected to be relatively uniform over time. The average can be calculated as an average of several inventory observations taken over several historical time periods; for example, 12-month ending inventories may be averaged. When demand and lot sizes are not uniform, the stock level versus time can be graphed to determine the average.

rework

Reprocessing to salvage a defective item or part.

shrinkage

See: inventory shrinkage.

order picking

Selecting or "picking" the required quantity of specific products for movement to a packaging area (usually in response to one or more shipping orders) and documenting that the material was moved from one location to shipping. Syn: order selection. See: batch picking, discrete order picking, zone picking.

freight consolidation

Syn: consolidation.

inventory management

The branch of business management concerned with planning and controlling inventories.

ABC classification

The classification of a group of items in decreasing order of annual dollar volume (price multiplied by projected volume) or other criteria. This array is then split into three classes [...]. The [first] group usually represents 10 percent to 20 percent by number of items and 50 percent to 70 percent by projected dollar volume. The next grouping [...] usually represents about 20 percent of the items and about 20 percent of the dollar volume. The [third] class contains 60 percent to 70 percent of the items and represents about 10 percent to 30 percent of the dollar volume. The ABC principle states that effort and money can be saved through applying looser controls to the low-dollar-volume class items than to the high-dollar-volume class items. The ABC principle is applicable to inventories, purchasing, and sales. Syn: ABC analysis, distribution by value. See: 80-20, Pareto analysis, Pareto's law.

cross-docking

The concept of packing products on incoming shipments so they can be easily sorted at intermediate warehouses or for outgoing shipments based on final destination. The items are carried from the incoming vehicle docking point to the outgoing vehicle docking point without being stored in inventory at the warehouse. [It] reduces inventory investment and storage space requirements. Syn: direct loading.

carrying cost

The cost of holding inventory, usually defined as a percentage of the dollar value of inventory per unit of time (generally one year). [This] depends mainly on the cost of capital invested as well as costs of maintaining the inventory such as taxes and insurance, obsolescence, spoilage, and space occupied. Such costs vary from 10 percent to 35 percent annually, depending on type of industry. [It] is ultimately a policy variable reflecting the opportunity cost of alternative uses for funds invested in inventory. Syn: holding costs.

overhead

The costs incurred in the operation of a business that cannot be directly related to the individual goods or services produced. These costs, such as light, heat, supervision, and maintenance, are grouped in several pools (e.g., [department, factory, general]) and distributed to units of goods or services by some standard allocation method such as direct labor hours, direct labor dollars, or direct materials dollars. Syn: burden. See: expense.

ordering cost

The costs that increase as the number of orders placed increases. Used in calculating order quantities. Includes costs related to the clerical work of preparing, releasing, monitoring, and receiving orders; the physical handling of goods; inspections; and setup costs, as applicable. See: acquisition cost, inventory costs.

gross margin

The difference between total revenue and the cost of goods sold. Syn: gross profit margin.

receiving

The function encompassing the physical receipt of material, the inspection of the shipment for conformance with the purchase order (quantity and damage), the identification and delivery to destination, and the preparation of receiving reports.

cash flow

The net flow of dollars into or out of the proposed project. The algebraic sum, in any time period, of all cash receipts, expenses, and investments. Also called cash proceeds or cash generated.

inventory turnover

The number of times that an inventory cycles, or "turns over," during the year. A frequently used method to compute inventory turnover is to divide the annual cost of sales by the average inventory level. For example, an annual cost of sales of $21 million divided by an average inventory of $3 million means that inventory turned over seven times. Syn: inventory turns, turnover. See: inventory velocity.

backhauling

The process of a transportation vehicle returning from the original destination point to the point of origin. The 1980 Motor Carrier Act deregulated interstate commercial trucking and thereby allowed carriers to contract for the return trip. [This] can be with a full, partial, or empty load. [If empty, this] is called deadheading. See: deadhead.

point of sale (POS)

The relief of inventory and computation of sales data at the time and place of sale, generally through the use of bar coding or magnetic media and equipment.

green reverse logistics

The responsibility of the supplier to dispose of packaging materials or environmentally sensitive materials such as heavy metals.

replenishment lead time

The total period of time that elapses from the moment it is determined that a product should be reordered until the product is back on the shelf available for use. Syn: reorder cycle.

finished goods inventory

Those items on which all manufacturing operations, including final test, have been completed. These products are available for shipment to the customer as either end items or repair parts. Syn: finished products inventory. See: goods.

unit cost

Total labor, material, and overhead cost for one unit of production (e.g., one part, one gallon, one pound).

fixed overhead

Traditionally, all manufacturing costs—other than direct labor and direct materials—that continue even if products are not produced. Although [this] is necessary to produce the product, it cannot be directly traced to the final product.

common carrier

Transportation available to the public that does not provide special treatment to any one party and is regulated as to the rates charged, the liability assumed, and the service provided. [It] must obtain a certificate of public convenience and necessity from the Federal Trade Commission for interstate traffic. Ant: private carrier.

inventory accuracy

When the on-hand quantity is within an allowed tolerance of the recorded balance. This important metric usually is measured as the percent of items with inventory levels that fall within tolerance. Target values usually are 95 percent to 99 percent, depending on the value of the item. For logistical operations (location management) purposes, it is sometimes measured as the number of storage locations with errors divided by the total number of storage locations.