Inventory & Logistics Glossary: Essential Supply Chain Terms
A
ABC Analysis
Assigns items to groups (A, B, C) based on value and importance.
Example: A = laptops, B = keyboards, C = mouse pads.
Accumulation
Receiving goods from multiple sources.
Example: A DC receives shipments from 10 factories.
Activity-Based Costing (ABC)
Assigns cost based on activities, not departments.
Example: Shipping-heavy customers show higher cost-to-serve.
Allocation
Matching inventory to customer orders.
Example: DC allocates 50 units to a customer order.
Anticipatory Stock
Inventory held due to risk of future events.
Example: Retailer orders extra inventory before a strike.
Assortment
Assembling multi-SKU orders.
Example: Amazon builds an order with shampoo, a charger, and a notebook.
B
Backorder
Delivering unavailable items later.
Example: Order 10 chairs, only 7 in stock → 3 backordered.
Bill of Lading (BOL)
Legal contract, receipt, and title document.
Example: Carrier signs the BOL when picking up cargo.
C
Carrying Cost
Cost of holding inventory (capital, storage, service, risk).
Example: Paying warehouse rent for stored goods.
Cycle Stock
Inventory from ordering or producing in batches.
Example: Buying 10,000 bottles because it’s cheaper per unit.
Customer Service
How well a company meets customer expectations.
Example: Amazon measuring on-time and damage-free deliveries.
D
Decentralized Inventory
Inventory stored at multiple locations.
Example: Having six regional warehouses instead of one national DC.
Dependent Demand
Demand driven by another product.
Example: Demand for car tires depends on car production.
Distribution Requirements Planning (DRP)
Plans replenishment between DCs and retail stores.
Example: Target scheduling shipments from a DC to stores.
Distribution (Accumulation, Sortation, Allocation, Assortment)
Core warehouse functions.
Example: Sorting SKUs and assembling orders.
E
Economic Order Quantity (EOQ)
Order size that minimizes total carrying and ordering cost.
Example: Company calculates EOQ = 500 units per order.
Expected Cost of Stockouts
Financial impact of running out of product.
Example: Lost revenue when a customer switches to a competitor.
F
Fill Rate
Percentage of demand filled without stockouts.
Example: Customer orders five items; all five ship → 100% fill rate.
Fixed Order Quantity
Order a fixed amount when inventory hits the reorder point.
Example: Always order 200 units when inventory hits 100.
FOB Destination
Seller owns goods until they reach the buyer.
Example: Seller pays freight to the buyer’s warehouse.
FOB Origin
Buyer owns goods once they ship.
Example: Buyer pays freight from the seller’s dock.
Freight Bill
Carrier’s invoice.
Example: FedEx bill for last Tuesday’s shipment.
I
Independent Demand
Demand unrelated to other items.
Example: Customer purchases of finished bicycles.
In-Transit Inventory
Inventory moving between locations.
Example: Goods traveling from a DC to a store by truck.
Intermodal Transportation
Using two or more modes for one shipment.
Example: Ocean → rail → truck container movement.
Inventory Turnover
How often inventory cycles through.
Example: Ten turns per year = strong inventory performance.
J
Just-In-Time (JIT)
Produces based on demand with minimal inventory.
Example: Toyota assembling cars only when orders are received.
L
Lost Customer
Customer permanently switches to another supplier.
Example: Retailer switches brands after repeated stockouts.
Lost Sale
Customer buys from a competitor when an item is unavailable.
Example: Store out of milk → customer buys at another store.
M
Materials Requirements Planning (MRP)
Plans dependent-demand inventory using BOM and schedules.
Example: Planning engine orders to match vehicle production.
O
Order Cycle Time
Time from placing an order to receiving it.
Example: You order Monday → delivered Friday.
Order Management
Handling customer orders from placement to delivery.
Example: Walmart tracking online orders through fulfillment.
Ordering Cost
Cost of placing or receiving an order.
Example: Labor to create a PO and inspect received goods.
Order-to-Cash (OTC) Cycle
Steps from receiving an order to shipping and collecting payment.
Example: Dell charges your card before shipping your laptop.
P
Perfect Order Index (POI)
Order delivered on time, complete, accurate, and damage-free.
Example: Amazon package arriving exactly correct = POI = 1.
Pipeline Transportation
Moves liquids and gases efficiently.
Example: Crude oil pipeline network.
Push System
Moves inventory based on forecast.
Example: Kellogg’s makes cereal in advance of demand.
Pull System
Moves inventory based on customer demand.
Example: Fast-food restaurant cooking burgers on demand.
R
Rail Transportation
Long-distance, heavy, low-value goods transport.
Example: Shipping coal by rail.
Reorder Point (ROP)
Inventory level where a new order is placed.
Example: Daily demand 20, lead time 5 → ROP = 100 units.
RFID
Automatic ID technology reading many tags quickly.
Example: Walmart tracking pallets entering a DC.
S
Safety Stock
Extra inventory to protect against uncertainty.
Example: Pharmacy keeps extra flu medicine before winter.
Seasonal Stock
Inventory built before predictable peaks.
Example: Toys built before the holiday season.
Sortation
Grouping items by characteristics.
Example: Sorting all small items before put-away.
Square-Root Rule
Estimates inventory reduction after consolidating facilities.
Example: Reducing warehouses from eight to two cuts safety stock.
Stockout
Item unavailable when a customer wants it.
Example: Store runs out of batteries.
Strategic Alliance
Long-term, high-trust relationship between firms.
Example: Apple and Foxconn manufacturing partnership.
T
Third-Party Logistics (3PL)
Outsourced logistics (transport, warehousing, IT).
Example: Company using DHL for deliveries.
Truck Transportation (Motor Carrier)
Most flexible transport mode.
Example: UPS delivery trucks.
U
Uncertainty (Inventory)
Demand or supply variability requiring safety stock.
Example: Winter storm delays inbound shipments.
V
Vendor-Managed Inventory (VMI)
Supplier monitors customer inventory and replenishes it.
Example: Pepsi restocking beverages for a grocery store.
W
Warehouse Management System (WMS)
Software controlling picking, putaway, and inventory accuracy.
Example: Scanner tells a worker which bin to pick from.
Water/Ocean Transportation
Slow, cost-effective, ideal for large volumes.
Example: Shipping containers from China to the US.
ABC Analysis
Why it matters
Helps companies focus resources on the most valuable items instead of treating all inventory equally.
What problem it solves
Prevents wasted time and money on low-value items by identifying which items drive cost, revenue, or risk.
How it’s used
A-items get tight control and frequent review; B-items get periodic review; C-items get simple or minimal management.
Activity-Based Costing (ABC Costing)
Why it matters
Shows the true cost of serving different customers, products, or channels.
What problem it solves
Reveals hidden costs ignored by traditional accounting, such as expensive customers who create many small orders.
How it’s used
Companies identify “protect,” “danger zone,” or “cost-engineer” customers and adjust service or pricing accordingly.
Economic Order Quantity (EOQ)
Why it matters
Balances inventory carrying cost and ordering cost to find the lowest-cost order size.
What problem it solves
Prevents over-ordering (high carrying cost) or under-ordering (high ordering cost).
How it’s used
Firms calculate EOQ to decide order quantity under stable demand, then use ROP to know when to reorder.
Fill Rate
Why it matters
Direct measure of customer service and product availability.
What problem it solves
Identifies how often a company fails to meet demand — critical for avoiding stockouts and lost sales.
How it’s used
Managers track item, line, and order fill rate to prioritize inventory improvements or justify safety stock.
FOB Origin / FOB Destination
Why it matters
Determines who owns the goods during transit, who pays freight, and who is responsible for damage.
What problem it solves
Removes confusion between buyer and seller regarding shipping responsibilities and risk.
How it’s used
Contracts specify FOB terms so companies know when ownership and liability transfer.
Inventory Carrying Cost
Why it matters
Holding inventory is expensive, typically 25–40% of inventory value.
What problem it solves
Helps companies decide whether to order more frequently, reduce inventory, or outsource storage.
How it’s used
Capital, storage, service, and risk costs are added to estimate the total cost of holding inventory.
Just-In-Time (JIT)
Why it matters
Minimizes inventory and exposes process problems.
What problem it solves
Reduces work in process, storage space, lead times, and carrying cost.
How it’s used
Companies receive small, frequent deliveries and must have reliable suppliers and short, stable lead times.
Materials Requirements Planning (MRP)
Why it matters
Plans dependent-demand items so production doesn’t stop due to missing parts.
What problem it solves
Prevents production delays by ensuring materials arrive when needed.
How it’s used
Uses BOM, MPS, and an inventory file to schedule component production or purchases.
Vendor-Managed Inventory (VMI)
Why it matters
Improves replenishment accuracy using real-time demand.
What problem it solves
Reduces stockouts and excess inventory at the customer’s location.
How it’s used
Supplier monitors retailer inventory and restocks automatically.
Warehouse Management System (WMS)
Why it matters
Controls inventory accuracy and improves picking efficiency.
What problem it solves
Reduces picking errors, labor costs, and stock discrepancies.
How it’s used
WMS directs putaway, picking routes, replenishment, cycle counts, and provides real-time inventory visibility.
Order Cycle Time
Why it matters
Affects customer satisfaction and the amount of inventory both buyer and seller must hold.
What problem it solves
Identifies delays in the ordering process and helps reduce variability in delivery.
How it’s used
Companies track OTC breakdown steps (order entry, processing, picking, shipping) to find inefficiencies.
Order-to-Cash (OTC) Cycle
Why it matters
Determines how fast a company can turn an order into revenue and cash flow.
What problem it solves
Fixes bottlenecks in order processing that slow down cash collection.
How it’s used
Companies digitize order entry, automate billing, reduce processing errors, and track each step.
Perfect Order Index (POI)
Why it matters
Represents the gold standard of customer service: on time, complete, accurate, and damage-free.
What problem it solves
Shows where service failures happen: accuracy, damage, or timeliness.
How it’s used
Companies multiply four service metrics to calculate POI and target weak areas.
Pull System
Why it matters
Reduces inventory and responds faster to actual demand.
What problem it solves
Eliminates overproduction and reduces waste.
How it’s used
Products are replenished only after a customer order, for example in fast food and Toyota systems.
Push System
Why it matters
Allows large-scale production and economies of scale.
What problem it solves
Ensures product availability in markets with predictable demand.
How it’s used
Companies produce based on forecasts (CPG, groceries, apparel retailers).
Reorder Point (ROP)
Why it matters
Ensures new inventory arrives before stock runs out.
What problem it solves
Prevents stockouts due to lead time delays.
How it’s used
ROP equals lead-time demand plus safety stock if uncertain. Once inventory hits ROP, a new order is triggered.
Safety Stock
Why it matters
Buffers uncertainty in demand or supply, preventing stockouts.
What problem it solves
Covers unexpected demand spikes or supplier delays.
How it’s used
Calculated based on service level, demand variability, and lead-time variability.
Seasonal Stock
Why it matters
Ensures availability during predictable high-demand periods.
What problem it solves
Avoids lost sales when demand peaks drastically.
How it’s used
Toys for Christmas, beverages for summer, and winter apparel are produced ahead of time.
Square-Root Rule
Why it matters
Shows how much inventory can be saved by consolidating warehouses.
What problem it solves
Reduces redundant safety stock across multiple facilities.
How it’s used
Companies compare current and future DC counts to calculate expected inventory reduction.
Stockout
Why it matters
Directly impacts revenue, customer satisfaction, and loyalty.
What problem it solves
Highlights weaknesses in forecasting, safety stock, or replenishment.
How it’s used
Firms track stockout frequency and cost to justify safety stock or change suppliers.
Third-Party Logistics (3PL)
Why it matters
Enables scalability, expertise, and lower cost by outsourcing logistics.
What problem it solves
Addresses lack of internal transportation, warehousing capability, or high logistics costs.
How it’s used
Companies outsource freight, warehousing, fulfillment, customs, or inventory management.
Truck Transportation (Motor Carrier)
Why it matters
Most flexible, most used, and fastest for short-to-medium distances.
What problem it solves
Provides door-to-door service and high geographic reach.
How it’s used
Full truckload (TL), less-than-truckload (LTL), and parcel deliveries across regional networks.