Effective inventory management requires understanding the terminology used in the field. Whether you are implementing inventory software, working with suppliers, or optimizing your operations, knowing these terms helps you communicate clearly and make better decisions.
A-B
ABC Analysis: A method of categorizing inventory by importance. A items are high-value and require tight control. B items are moderate. C items are low-value with simpler management. Helps prioritize inventory management effort.
Available Stock: Inventory on hand minus quantities already allocated to orders. Represents what can actually be promised to new customers.
Backorder: An order that cannot be fulfilled immediately due to insufficient stock but will be shipped when inventory becomes available.
Batch Number: An identifier linking products to a specific production run or receipt. Essential for quality control and traceability, especially for pharmacies and food businesses.
Bill of Materials (BOM): A list of components and quantities needed to manufacture a finished product. Used in manufacturing for production planning and costing.
Buffer Stock: Another term for safety stock. Extra inventory kept to protect against variability in demand or supply.
C-D
Carrying Cost: The total cost of holding inventory including storage, insurance, obsolescence, and capital tied up. Typically 20-30% of inventory value annually.
Consignment: Inventory held at your location but owned by the supplier until sold. Payment is made only when goods are consumed or sold. Reduces your capital requirement.
Cycle Count: Counting a portion of inventory regularly rather than doing complete physical counts. A items might be counted monthly, C items annually.
Dead Stock: Inventory that has not sold for an extended period and is unlikely to sell. Ties up capital and should be liquidated or written off.
Demand Forecasting: Predicting future product demand based on historical sales, seasonality, and other factors. Essential for inventory planning.
E-F
Economic Order Quantity (EOQ): The optimal order quantity that minimizes total ordering and carrying costs. A mathematical calculation balancing these competing costs.
Expiry Date: The date after which a product should not be sold or used. Critical for food, pharmaceuticals, and other perishable items requiring FIFO management.
FIFO (First In, First Out): An inventory valuation method and physical rotation practice where oldest inventory is used or sold first. Essential for perishable goods.
Fill Rate: The percentage of customer orders filled from available stock without backorders. Measures service level performance.
Finished Goods: Completed products ready for sale. For manufacturers, this is inventory that has completed all production steps.
G-L
Goods Received Note (GRN): A document confirming receipt of goods from a supplier. Records quantity and condition of items received. Basis for accounts payable processing.
Inventory Turnover: A ratio measuring how many times inventory is sold and replaced during a period. Higher turnover generally indicates efficient inventory management.
Just-In-Time (JIT): An inventory strategy minimizing stock by receiving goods only when needed. Reduces carrying costs but requires reliable supply chains.
Lead Time: The time between placing an order with a supplier and receiving the goods. Critical for setting reorder points and safety stock levels.
LIFO (Last In, First Out): An inventory valuation method where newest inventory is considered sold first. Not commonly used in Pakistan due to IFRS requirements.
M-P
Maximum Stock Level: The highest quantity of an item to keep in stock. Prevents overinvestment in inventory.
Minimum Order Quantity (MOQ): The smallest quantity a supplier will accept for an order. Affects ordering strategy and inventory levels.
Obsolete Inventory: Stock that is no longer saleable due to changes in technology, fashion, or market demand. Should be written off or liquidated.
Perpetual Inventory: A system that updates inventory records immediately with every transaction. Provides real-time stock visibility. Contrast with periodic inventory systems.
Physical Inventory: A complete count of all inventory on hand. Verifies accuracy of inventory records. Typically done at least annually.
Purchase Order (PO): A document sent to suppliers specifying items, quantities, and agreed prices. Creates a commitment to purchase.
R-S
Raw Materials: Basic materials used in manufacturing before any processing. Part of manufacturer’s inventory alongside work-in-process and finished goods.
Reorder Point: The inventory level at which a new order should be placed. Calculated based on lead time, average demand, and safety stock.
Safety Stock: Extra inventory kept to prevent stockouts caused by demand variability or supply delays. Also called buffer stock or reserve stock.
Shrinkage: The difference between recorded inventory and actual physical count. Caused by theft, damage, administrative errors, or supplier fraud.
SKU (Stock Keeping Unit): A unique identifier for each distinct product. Used for tracking inventory at the item level.
Stock Take: Another term for physical inventory count. The process of counting all items to verify records.
Stockout: When an item is not available when a customer wants to buy it. Results in lost sales and customer dissatisfaction.
T-W
Turnover Days: The average number of days inventory is held before selling. Calculated as 365 divided by inventory turnover ratio. Lower is generally better.
Unit Cost: The cost of a single unit of inventory including purchase price, freight, and any other costs to get it ready for sale.
Warehouse Management: The systems and processes for receiving, storing, and shipping inventory. Warehouse optimization improves efficiency and reduces costs.
Weighted Average Cost: An inventory valuation method calculating the average cost of all units available. Smooths out price fluctuations across purchases.
Work-In-Process (WIP): Partially completed products in manufacturing. Materials that have entered production but are not yet finished goods.
HysabOne: Complete Inventory Vocabulary
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