Supply chain glossary

113 inventory, forecasting, purchasing and warehouse terms, explained for wholesale distributors. Each entry has a plain definition, the formula where there is one, a worked example and the mistakes to avoid.

Inventory planning

ABC Analysis: ABC analysis ranks SKUs by their share of annual consumption value so planning effort goes to the few items that drive most of the value.
Allocated Inventory: Allocated inventory is stock that is still physically on hand but already reserved for a specific customer order, transfer or job.
Anticipation Inventory (Seasonal Stock): Anticipation inventory is stock built ahead of a known future demand peak, price increase or supply disruption, beyond normal cycle and safety stock.
Available Inventory: Available inventory is on-hand stock minus units already allocated to orders or held, so it is the quantity you can actually sell or ship now.
Available to Promise (ATP): Available to promise (ATP) is the quantity you can commit to a new order by a given date, after current stock, incoming supply and existing commitments.
Average Daily Demand: Average daily demand is how many units of a SKU leave a warehouse on a typical day, measured from recent actual outbound movement rather than a guess.
Backorder: A backorder is customer demand accepted while the item is out of stock and promised for later shipment once stock arrives.
Continuous Review System: A continuous review system watches each SKU's stock all the time and places a fixed-size order the moment it falls to the reorder point.
Cycle Stock: Cycle stock is the inventory you expect to sell between deliveries: the part of stock that rises with each receipt and runs down until the next one.
Days of Supply: Days of supply (or days of stock) is how many days current inventory will last at the recent sales pace before the SKU runs out.
Dead Stock: Stock with no sales at all over a recent period, such as 90 days.
Economic Order Quantity (EOQ): Economic order quantity (EOQ) is the order size that minimizes the combined yearly cost of placing orders and holding inventory for a SKU with steady demand.
Fill Rate: Fill rate is the share of customer demand shipped from stock on the first attempt, measured by units, order lines or whole orders.
Inventory Position: Inventory position is stock on hand plus stock on order, minus backorders and committed stock: the figure reorder decisions should be based on.
Inventory Transfer (Stock Transfer): An inventory transfer moves stock from one of your warehouses to another, usually to cover a shortage at one site using surplus held at another.
Just-in-Time (JIT) Inventory: Just-in-time (JIT) is an approach that keeps inventory minimal by receiving goods only as they are needed, relying on short, reliable supply lead times.
Lead Time: Lead time is the time between deciding to replenish a SKU and having the goods available to sell, usually counted in days from purchase order to receipt.
Lead Time Demand: Lead time demand is the quantity you expect to sell while waiting for a replenishment order to arrive: average daily demand multiplied by lead time.
Lost Sales: Lost sales are demand that walks away because an item was unavailable: the customer bought elsewhere instead of waiting for a backorder.
Min/Max Inventory: Min/max inventory is a replenishment rule: when stock falls to the minimum level, order enough to bring it back up to the maximum level.
Minimum Order Quantity (MOQ): Minimum order quantity (MOQ) is the smallest quantity a supplier will accept on a single order line, set in units, cases or order value.
Multi-Echelon Inventory: Multi-echelon inventory is stock held at several linked levels of a supply network, such as a central warehouse feeding regional branches.
Obsolete Inventory: Obsolete inventory is stock with no realistic future demand, because the product was superseded, discontinued, expired or simply stopped selling.
Overstock: Stock that sells, but well beyond what current demand needs.
Periodic Review System: A periodic review system checks stock at fixed intervals, such as every Monday, and orders enough to bring each SKU up to a target level.
Pipeline Inventory (In-Transit Stock): Pipeline inventory is stock you own or have ordered that is still moving: shipped by the supplier, in transit between warehouses or awaiting receipt.
Quantity on Hand: Quantity on hand is the physical count of units of a SKU in a warehouse right now, whether or not they are already promised to customers.
Reorder Point: The stock level at which you place a new order so the shelf doesn't empty before the delivery arrives.
Safety Stock: The buffer of stock kept to absorb demand that runs hot or a supplier that runs late.
Safety Time (Safety Lead Time): Safety time is a buffer expressed in days rather than units: you plan to receive stock a set number of days before it is actually needed.
Service Level: Service level (cycle service level) is the probability of not running out of stock during a replenishment cycle, the target you set when sizing safety stock.
SKU (Stock Keeping Unit): A SKU (stock keeping unit) is your internal code for one distinct item you stock, unique down to size, color, pack size or any variant you track separately.
SKU Rationalization: SKU rationalization is the review of your product range to cut or consolidate SKUs whose sales, margin or strategic value no longer justify stocking them.
Slow-Moving Inventory: Slow-moving inventory is stock that still sells, but so slowly that what you hold will take months to clear at the current pace.
Stockout: A stockout happens when a SKU has no available inventory to fill demand, so orders are backordered, lost or substituted.
XYZ Analysis: XYZ analysis classifies SKUs by how predictable their demand is, using the coefficient of variation: X is steady, Y is variable and Z is erratic.

Demand forecasting

Bullwhip Effect: The bullwhip effect is the way small changes in end-customer demand grow into ever larger swings in orders further up a supply chain.
Coefficient of Variation (CV): The coefficient of variation (CV) is the standard deviation of demand divided by its mean, a scale-free measure of how volatile a SKU's demand is.
Croston's Method: Croston's method forecasts intermittent demand by smoothing two things separately: the size of non-zero orders and the interval between them.
Demand Planning: Demand planning is the process of forecasting future demand and refining it with market knowledge so purchasing and inventory decisions rest on one view.
Demand Spike: A demand spike is a short burst of sales far above a SKU's usual rate, either a real rise in demand or a single unusually large order.
Exponential Smoothing: Exponential smoothing forecasts demand as a weighted average of past demand in which the newest data counts most and older data fades gradually.
Forecast Accuracy: Forecast accuracy measures how close demand forecasts came to what actually sold, so you can judge which methods and SKUs can be trusted.
Forecast Backtesting: Backtesting checks a forecasting method by pretending to forecast the past: train on older history, predict a later period and compare with what really sold.
Forecast Bias: Forecast bias is a consistent tendency to forecast too high or too low, measured by whether errors lean in one direction over time.
Forecast Horizon: The forecast horizon is how far into the future a forecast looks, for example the next 14 days, the next quarter or the next year.
Intermittent Demand: Intermittent demand is sales that come in occasional bursts, with many periods of zero demand in between, common for spare parts and specialist items.
MAPE (Mean Absolute Percentage Error): MAPE (mean absolute percentage error) averages each period's forecast error as a percentage of actual demand, ignoring whether it was over or under.
MASE (Mean Absolute Scaled Error): MASE (mean absolute scaled error) compares a forecast's average error with that of a simple naive forecast. Below 1 beats naive; above 1 is worse.
Moving Average Forecast: A moving average forecast predicts next period's demand as the average of the most recent periods, such as the last 7 or 14 days.
Naive Forecast: A naive forecast assumes the next period will match the last one, or the same period last cycle, and serves as the benchmark other methods must beat.
Sales and Operations Planning (S&OP): Sales and operations planning (S&OP) is a regular, usually monthly, process that aligns sales forecasts, purchasing, inventory and finance on one plan.
Seasonality: Seasonality is a repeating, predictable pattern in demand tied to the calendar, such as higher sales every winter, every month-end or every Monday.
Tracking Signal: A tracking signal is a running check for forecast bias: cumulative forecast error divided by mean absolute deviation, flagged when it drifts too far from zero.
WAPE (Weighted Absolute Percentage Error): WAPE (weighted absolute percentage error) is total absolute forecast error divided by total actual demand, so high-volume periods and SKUs carry more weight.

Purchasing & suppliers

Advance Shipping Notice (ASN): An advance shipping notice (ASN) is a supplier's message, sent when goods ship, listing what is on the way, in what quantities and when it should arrive.
Back-to-Back Order (Special Order): A back-to-back order is a purchase order raised only when a specific customer order arrives, so the item is bought for that customer rather than for stock.
Blanket Purchase Order: A blanket purchase order is a longer-term agreement covering repeated purchases from one supplier, with deliveries released against it over time.
Consignment Inventory: Consignment inventory is stock held at the buyer's location but still owned by the supplier until it is used or sold, when the buyer is invoiced.
Drop Shipment: A drop shipment is when the supplier ships an order directly to your customer, so the goods never pass through your warehouse.
Dual Sourcing: Dual sourcing means buying the same item from two suppliers instead of one, to reduce the risk of a single supplier failing or running late.
Expediting: Expediting is speeding up an order that is already placed, by pushing the supplier, paying for faster shipping or splitting the delivery, to avoid a stockout.
Goods Receipt: A goods receipt records stock arriving from a supplier: what came in, how many units, in what condition and against which purchase order.
Incoterms: Incoterms are standard trade rules from the International Chamber of Commerce that set who pays for and carries the risk of shipping at each stage.
Lead Time Variability: Lead time variability is how much a supplier's actual delivery times swing around their average, measured as the spread of past lead times.
On-Time Delivery Rate (OTD): On-time delivery rate (OTD) is the percentage of orders that arrived on or before the promised date, without checking whether the quantity was complete.
Payment Terms: Payment terms set when a supplier invoice must be paid and any early-payment discount, for example net 30 or 2/10 net 30.
Purchase Order (PO): A purchase order (PO) is the buyer's formal document to a supplier listing the items, quantities, prices, delivery date and terms being ordered.
Purchase Order Cycle Time: Purchase order cycle time is how long purchase orders actually take from the day they are placed to the day the goods are received.
Purchase Price Variance (PPV): Purchase price variance (PPV) is the difference between the price actually paid for an item and its standard or expected cost.
Purchase Requisition: A purchase requisition is an internal request to buy something, which is reviewed and approved before it becomes a purchase order to a supplier.
Quantity Break (Volume Discount): A quantity break is a lower unit price a supplier offers when you buy at or above a set quantity, such as $4.00 each for 500+ units versus $4.40 below.
Request for Quote (RFQ): A request for quote (RFQ) asks several suppliers to price a defined list of items, quantities and terms so their offers can be compared side by side.
Spend Analysis: Spend analysis groups past purchases by supplier, category and SKU to show where money goes and where better prices or terms are possible.
Supplier OTIF (On Time In Full): The share of a supplier's orders that arrived both on time and with the full quantity.
Three-Way Match: Three-way match is the accounts-payable check that a supplier invoice agrees with both the purchase order and the goods receipt before it is paid.
Total Cost of Ownership (TCO): Total cost of ownership (TCO) is every cost of buying from a supplier, such as freight, duties, quality issues and stock held for its lead time, not just price.
Vendor-Managed Inventory (VMI): Vendor-managed inventory (VMI) is an arrangement where the supplier monitors the buyer's stock levels and decides when and how much to replenish.

Warehouse & logistics

Bin Location: A bin location is the specific, addressable place in a warehouse where stock is kept, typically coded by zone, aisle, rack, shelf and position.
Cross-Docking: Cross-docking moves inbound goods straight from receiving to outbound shipping, with little or no time in storage.
Cycle Counting: Cycle counting checks stock accuracy by counting a small set of locations or SKUs every day or week, so the whole warehouse is covered on a rolling basis.
Dock-to-Stock Time: Dock-to-stock time is how long it takes from goods arriving at the receiving dock until they are put away and available to pick.
FEFO (First Expired, First Out): FEFO (first expired, first out) is a picking rule that ships the units with the earliest expiry date first, whatever order they arrived in.
Inventory Accuracy (Record Accuracy): Inventory accuracy is how often the stock quantity in your system matches what is physically on the shelf, measured from counts.
Inventory Shrinkage: Inventory shrinkage is the loss of stock between what the records say you should have and what you actually have, from damage, theft, errors or spoilage.
Kitting: Kitting is grouping separate SKUs into one kit that is sold and shipped as a single item, such as a valve with its fittings and seals.
Less-Than-Truckload (LTL) Freight: Less-than-truckload (LTL) freight is a shipment too small to fill a truck, carried alongside other shippers' goods and priced by weight, size and distance.
Lot Tracking (Batch Tracking): Lot tracking records which production batch each unit belongs to, so every lot can be traced from supplier receipt to the customers who received it.
Order Cycle Time (Customer): Customer order cycle time is how long it takes from a customer placing an order to receiving it, the delivery speed your customers actually experience.
Order Picking: Order picking is collecting the items for customer orders from their storage locations, usually the most labor-intensive job in a distribution warehouse.
Perfect Order Rate: Perfect order rate is the share of customer orders delivered complete, on time, undamaged and with correct paperwork, all at once.
Physical Inventory Count (Stocktake): A physical inventory count, or stocktake, counts every item in a warehouse at one point in time, usually with operations paused, to verify stock records.
Putaway: Putaway is the warehouse step of moving received goods from the dock to their storage location and recording where they were put.
Serialized Inventory: Serialized inventory tracks each individual unit by a unique serial number, rather than tracking only quantities, so every item's history is known.
Slotting: Slotting is deciding which bin location each SKU should occupy, based on how often it is picked, its size and weight, and what it is usually ordered with.
Third-Party Logistics (3PL): A third-party logistics provider (3PL) is an outside company that runs warehousing, fulfilment or transport for you, under contract.
Unit of Measure (UoM): Unit of measure (UoM) is the unit an item is counted in, such as each, box, case or pallet, plus the conversions between them.
Warehouse Management System (WMS): A warehouse management system (WMS) is software that directs and records physical warehouse work: receiving, putaway, picking, packing, shipping and counts.

Inventory finance

Cash-to-Cash Cycle Time: The cash-to-cash cycle is the number of days between paying suppliers for stock and collecting cash from customers for selling it.
Days Inventory Outstanding (DIO): Days inventory outstanding (DIO) is the average number of days a business holds inventory before selling it, based on cost of goods sold.
FIFO (First In, First Out): FIFO (first in, first out) assumes the oldest stock is sold first, both as a physical picking rule and as a method of valuing inventory and cost of goods sold.
GMROI (Gross Margin Return on Inventory Investment): GMROI (gross margin return on inventory investment) is the gross margin earned per dollar of average inventory held at cost over a period, usually a year.
Inventory Carrying Cost: Inventory carrying cost is the full cost of holding stock: capital, storage, insurance, handling, shrinkage and obsolescence, usually a yearly % of value.
Inventory Turnover: Inventory turnover is how many times inventory is sold and replaced over a period, usually a year: cost of goods sold divided by average inventory value.
Inventory Write-Off: An inventory write-off removes stock from the books, or cuts its value, because it has been lost, damaged, has expired or can no longer be sold.
Landed Cost: Landed cost is the full cost of getting a product into your warehouse: purchase price plus freight, insurance, duties, taxes, brokerage and handling.
LIFO (Last In, First Out): LIFO (last in, first out) is an inventory valuation method that charges the most recent purchase costs to cost of goods sold first.
Open-to-Buy (OTB): Open-to-buy (OTB) is the budget left for new purchases in a period after planned sales, planned closing stock and orders already placed are accounted for.
Ordering Cost: Ordering cost is the cost of placing and receiving one purchase order, such as buyer time, approvals, receiving, invoice handling and fixed freight charges.
Sell-Through Rate: Sell-through rate is the percentage of stock received over a period that was actually sold in that period.
Stock-to-Sales Ratio: The stock-to-sales ratio compares inventory value at the start of a period with sales in that period, showing how much stock supports each dollar of sales.
Stockout Cost: Stockout cost is the total cost of running out of stock: lost margin, backorder handling, expediting, penalties and damage to customer relationships.
Weighted Average Cost: Weighted average cost values every unit of a SKU at the average cost of all units held, recalculated as new stock is bought at different prices.

Want the longer version? The guides walk through reorder points, safety stock and supplier OTIF step by step.