Inventory Management: Key Terms and Definitions
Chapter 12
Backorder: Occurs when a customer is willing to wait for the item.
Cycle Inventory: Inventory that results from purchasing or producing in larger lots than are needed for immediate consumption or sale.
Dependent Demand: Demand is directly related to the demand of other SKUs and can be calculated without needing to be forecasted.
Dynamic Demand: Demand that varies over time.
Economic Order Quantity (EOQ): A classic economic model developed in the early 1900s that minimizes the total cost, which is the sum of the inventory-holding cost and the ordering cost.
Environmentally Preferable Purchasing (EPP) or Green Purchasing: The affirmative selection and acquisition of products and services that most effectively minimize negative environmental impacts over their life cycle of manufacturing, transportation, use, and recycling or disposal.
Finished-Goods Inventory: Completed products ready for distribution or sale to customers.
Fixed-Period System (FPS): One in which the inventory position is checked only at fixed intervals of time, *T*, rather than on a continuous basis.
Fixed-Quantity System (FQS): A system where the order of quantity of lost size is fixed; that is, the same amount, *Q*, is ordered every time.
Independent Demand: Demand for an SKU that is unrelated to the demand for other SKUs and needs to be forecasted.
Inventory: Any asset held for future use or sale.
Inventory Management: Involves planning, coordinating, and controlling the acquisition, storage, handling, movement, distribution, and possible sale of raw materials, component parts and subassemblies, supplies and tools, replacement parts, and other assets that are needed to meet customer wants and needs.
Inventory Position (IP): The on-hand quantity (OH) plus any orders placed but which have not arrived (called scheduled receipts, SR), minus any backorders (BO).
Inventory-Holding or Inventory-Carrying Costs: The expenses associated with carrying inventory.
Lead-Time: The time between placement of an order and its receipt.
Lost Sale: Occurs when the customer is unwilling to wait and purchases the item elsewhere.
Ordering Costs or Setup Costs: Incurred as a result of the work involved in placing orders with suppliers or configuring tools, equipment, and machines within a factory to produce an item.
Raw Materials, Component Parts, Subassemblies, and Supplies: Inputs to manufacturing and service-delivery processes.
Reorder Point: The value of the inventory position that triggers a new order.
Safety Stock: Additional planned on-hand inventory that acts as a buffer to reduce the risk of a stockout.
Safety Stock Inventory: An additional amount that is kept over and above the average amount required to meet demand.
Service Level: The desired probability of not having a stockout during a lead-time period.
Shortage or Stockout Costs: Costs associated with inventory being unavailable when needed to meet demand.
Static Demand: Stable demand.
Stock-Keeping Unit (SKU): A single item or asset stored at a particular location.
Stockout: The inability to satisfy the demand for an item.
Unit Cost: The price paid for purchased goods or the internal cost of producing them.
Work-in-Process (WIP) Inventory: Partially finished products in various stages of completion that are awaiting further processing.