Supply Chain Glossary

A

ABC Analysis

An inventory categorization technique that divides items into three categories based on their value contribution. A items (typically 20% of SKUs) generate 80% of revenue and require tight control. B items (30%) contribute 15% of revenue with moderate control. C items (50%) contribute just 5% with simplified management.

Average Inventory

The mean value of inventory held over a specific period, typically calculated as (Beginning Inventory + Ending Inventory) / 2. Used to calculate inventory turnover and carrying costs.

B

Backorder

An order placed for a product that is currently out of stock. The customer agrees to wait for the item to become available rather than canceling the order. High backorder rates indicate inventory management issues.

Buffer Stock

See Safety Stock. Additional inventory held beyond expected demand to protect against uncertainty in supply or demand.

Bullwhip Effect

A phenomenon where small fluctuations in consumer demand cause progressively larger variations in orders placed upstream in the supply chain. Results in inventory distortions, inefficiencies, and increased costs.

C

Carrying Cost

The total cost of holding inventory, including storage, insurance, taxes, obsolescence, and opportunity cost of capital. Typically expressed as a percentage of inventory value, ranging from 15-30% annually.

Coefficient of Variation (CV)

A statistical measure of demand variability calculated as Standard Deviation divided by Mean Demand. Used in XYZ analysis to classify items by demand predictability. Lower CV indicates more stable, forecastable demand.

Cycle Stock

The portion of inventory that is consumed and replenished in regular cycles. Calculated based on average demand between replenishment orders. Distinguished from safety stock which buffers against uncertainty.

Cycle Time

The total time to complete one full cycle of a process, from start to finish. In manufacturing, it's the time to produce one unit. In logistics, it can refer to order-to-delivery time.

D

Days of Supply (DOS)

A metric showing how many days current inventory will last at the current rate of consumption. Calculated as (Current Inventory / Average Daily Usage). Also called Days Sales of Inventory (DSI) or Days Inventory Outstanding (DIO).

Demand Forecasting

The process of predicting future customer demand using historical data, statistical methods, and market intelligence. Accurate forecasts are essential for inventory optimization, production planning, and procurement decisions.

Demand Variability

The degree to which actual demand fluctuates around average demand over time. High variability requires more safety stock and makes forecasting more challenging. Measured using standard deviation or coefficient of variation.

E

Economic Order Quantity (EOQ)

The optimal order size that minimizes total inventory costs (ordering costs + carrying costs). The classic EOQ formula is: √(2DS/H) where D = annual demand, S = ordering cost per order, H = holding cost per unit per year.

Expediting

The process of rushing an order through the supply chain faster than normal to meet urgent demand. Usually involves additional costs and should be tracked as a KPI—high expediting rates indicate planning problems.

F

Fill Rate

The percentage of customer demand that is immediately satisfied from available inventory. Calculated as (Orders Shipped Complete / Total Orders) × 100. A key service level metric—top performers achieve 95%+ fill rates.

FIFO (First In, First Out)

An inventory management method where the oldest inventory items are used or sold first. Critical for perishable goods to prevent spoilage. Also an accounting method for valuing inventory.

Forecast Accuracy

A measure of how well demand predictions match actual demand. Commonly calculated as: 100% - (|Forecast - Actual| / Actual) × 100. Higher accuracy enables better inventory decisions and lower costs.

I

Inventory Turnover

A ratio showing how many times inventory is sold and replaced over a period. Calculated as Cost of Goods Sold / Average Inventory. Higher turnover indicates efficient inventory management but must be balanced against service levels.

Inventory Velocity

The speed at which inventory moves through the supply chain from procurement to sale. Fast-moving items require different management strategies than slow movers.

J

Just-in-Time (JIT)

An inventory strategy that aligns raw material orders with production schedules to minimize inventory holding. Materials arrive exactly when needed, reducing carrying costs but requiring reliable suppliers and accurate demand forecasting.

K

KPI (Key Performance Indicator)

A measurable value that demonstrates how effectively a company is achieving key business objectives. Supply chain KPIs include inventory turnover, fill rate, forecast accuracy, and order cycle time.

L

Lead Time

The total time from placing an order to receiving the goods. Includes processing time, production time (if made to order), and shipping time. Longer lead times require more safety stock and earlier ordering.

LIFO (Last In, First Out)

An inventory management method where the most recently received items are used or sold first. Less common than FIFO for physical inventory but used in accounting for tax purposes in some jurisdictions.

Lost Sales

Sales that cannot be completed due to stockouts. Unlike backorders, lost sales represent customers who purchase elsewhere or cancel entirely. A critical cost of poor inventory management.

M

Min-Max Inventory System

A simple replenishment method where orders are placed when inventory falls to a minimum level, ordering enough to bring stock back to the maximum level. Easy to implement but less sophisticated than demand-driven approaches.

MRP (Material Requirements Planning)

A production planning system that calculates material requirements based on demand forecasts, bills of materials, and current inventory. Ensures materials are available for production while minimizing excess inventory.

O

Order Cycle Time

The time from when a customer places an order to when they receive it. Includes order processing, picking, packing, and shipping. A key customer service metric.

Overstock

Inventory levels that exceed demand requirements, tying up capital and increasing carrying costs. Often results from poor forecasting, cancelled orders, or safety stock set too high.

P

Pareto Principle (80/20 Rule)

The observation that roughly 80% of effects come from 20% of causes. In inventory management, typically 20% of SKUs generate 80% of revenue. The foundation of ABC analysis.

Perfect Order Rate

The percentage of orders delivered complete, on time, undamaged, and with accurate documentation. A comprehensive measure of supply chain performance that combines multiple metrics.

Pipeline Inventory

Inventory that is currently in transit between locations. Must be tracked to maintain accurate available-to-promise quantities and prevent duplicate ordering.

R

Reorder Point (ROP)

The inventory level at which a new order should be placed. Calculated as: (Average Daily Demand × Lead Time) + Safety Stock. Ensures new inventory arrives before stockout.

S

Safety Stock

Extra inventory held beyond expected demand to buffer against uncertainty in supply or demand. Calculated based on service level targets, demand variability, and lead time variability. Also called buffer stock.

Service Level

The probability of not experiencing a stockout during a replenishment cycle. A 95% service level means 95% of replenishment cycles will have sufficient inventory to meet all demand.

SKU (Stock Keeping Unit)

A unique identifier for each distinct product and variant. Each color/size combination of a product would be a separate SKU. Essential for tracking inventory at the item level.

Stockout

A situation where inventory is depleted and customer demand cannot be fulfilled. Results in lost sales, backorders, and damaged customer relationships. A critical metric to minimize.

T

Total Cost of Ownership (TCO)

The complete cost of acquiring and owning inventory, including purchase price, shipping, storage, handling, obsolescence, and disposal costs. A holistic view beyond unit price.

Turnover Ratio

See Inventory Turnover. The number of times inventory is sold and replaced during a period.

V

Vendor Managed Inventory (VMI)

An arrangement where the supplier monitors customer inventory levels and makes replenishment decisions. Shifts inventory management responsibility to the vendor, often improving fill rates and reducing costs.

W

WMS (Warehouse Management System)

Software that controls warehouse operations including receiving, putaway, picking, packing, and shipping. Provides real-time inventory visibility and optimizes warehouse workflows.

X

XYZ Analysis

An inventory classification method based on demand variability. X items have stable, predictable demand (CV < 0.5). Y items have moderate variability (CV 0.5-1.0). Z items have highly erratic demand (CV > 1.0). Often combined with ABC analysis.

A