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Inventory Terms and Definitions from A to Z

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ABC inventory classification. A method for dividing inventory into classifications, either by transaction volume or cost. Typically, category A includes that 20% of inventory involving 60% of all costs or transactions, while category B includes the next 20% of inventory involving 20% of all costs or transactions, and category C includes the remaining 60% of inventory involving 20% of all costs or transactions.

Accumulation bin. A location in which components destined for the shop floor are accumulated before delivery.

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Advance material request. Very early orders for materials before the completion of a product design, given the long lead times required to supply some items.

Aggregate planning. A budgeting process using summary-level information to derive various budget models, usually at the product family level.

Automated storage/retrieval system. A racking system using automated systems to load and unload the racks.

Back flush. The subsequent subtraction from inventory records of those parts used to assemble a product, based on the number of finished goods produced.

Bar code. Information encoded into a series of bar and spaces of varying widths, which can be automatically read and converted to text by a scanning device.

Batch picking. Picking for several summarized orders at the same time, thereby reducing the total number of required picks. The combined picks must still be separated into their constituent orders, typically at some central location.

Bill of materials. A listing of all parts and subassemblies required to produce one unit of a finished product, including the required number of units of each part and subassembly.

Bin. A storage area, typically a subdivision of a single level of a storage rack.

Bin transfer. A transaction to move inventory from one storage bin to another.

Blend off. The reintroduction of a faulty product into a process production flow by adding it back in small increments.

Bottleneck. A resource whose capacity is unable to match or exceed that of the demand volume required of it.

Breeder bill of materials. A bill of material that accounts for the generation and cost implications of byproducts as a result of manufacturing the parent item.

By-product. A material created incidental to a production process, which can be sold for value.

Carrying cost. The cost of holding inventory, which can include insurance, spoilage, rent, and other expenses.

Component. Raw materials or subassemblies used to make either finished goods or higher levels of subassembly.

Configuration audit. A review of all engineering documentation used as the basis for a manufactured product to see if the documentation accurately represents the finished product.

Configuration control. Verifying that a delivered product matches authorizing engineering documentation. This also refers to engineering changes made subsequent to the initial product release.

Consigned stocks. Inventories owned by a company, but located on the premises of its agents or distributors.

Cost of goods sold. The charge to expense of the direct materials, direct labor, and allocated overhead costs associated with products sold during a defined accounting period.

Cutoff control. A procedure for ensuring that transaction processing is completed before the commencement of cycle counting.

Cycle counting. The frequent, scheduled counting of a subset of all inventories, with the intent of spotting inventory record inaccuracies, investigating root causes, and correcting those problems.

Delivery policy. A company’s stated goal for how soon a customer order will be shipped following receipt of that order.

Departmental stocks. The informal and frequently unauthorized retention of excess inventory on the shop floor, which is used as buffer safety stock.

Discrete order picking. A picking method requiring the sequential completion of each order before one begins picking the next order.

Distribution center. A branch warehouse containing finished goods and service items intended for distribution directly to customers.

Distribution inventory. Inventory intended for shipment to customers, usually comprised of finished goods and service items.

Earmarked material. Inventory that has been physically marked as being for a specific purpose.

Ending inventory. The dollar value or unit total of goods on hand at the end of an accounting period.

Engineering change. A change to a product’s specifications as issued by the engineering department.

Enterprise resource planning system (ERP system). A computer system used to manage all company resources in the receipt, completion, and delivery of customer orders.

Expedite. To artificially accelerate an order ahead of its regularly scheduled counterparts.

Explode. The multiplication of component requirements itemized on a bill of material by the number of parent items required to determine total parts usage.

Failure analysis. The examination of failure incidents to identify components with poor performance profiles.

Field warehouse. A warehouse into which service parts and finished goods are stocked, and from which deliveries are made directly to customers.

Finished goods inventory. Completed inventory items ready for shipment to customers.
First-in, first-out. An inventory valuation method under which one assumes that the first inventory item to be stored in a bin is the first one to be used, irrespective of actual usage.

Fixed-location storage. An inventory storage technique under which permanent locations are assigned to at least some inventory items.

Floor stocks. Low-cost, high-usage inventory items stored near the shop floor, which the production staff can use at will without a requisition and which are expensed at the time of receipt, rather than being accounted for through a formal inventory database.

Fluctuation inventory. Excess inventory kept on hand to provide a buffer against forecasting errors.

Forward buying. The purchase of items exceeding the quantity levels indicated by current manufacturing requirements.

Hedge inventory. Excess inventories kept on hand as a buffer against contingent events.

Inactive inventory. Parts with no recent prior or forecasted usage.

Indented bill of material. A bill of material reporting format under which successively lower levels of components are indented farther away from the left margin.

Interplant transfer. The movement of inventory from one company location to another, usually requiring a transfer transaction.

In-transit inventory. Inventory currently situated between its shipment and delivery locations.

Inventory. Those items included categorized as either raw materials, work-in process, or finished goods, and involved in either the creation of products or service supplies for customers.

Inventory adjustment. A transaction used to adjust the book balance of an inventory record to the amount actually on hand.

Inventory diversion. The redirection of parts or finished goods away from their intended goal.

Inventory issue. A transaction used to record the reduction in inventory from a location, because of its release for processing or transfer to another location.

Inventory receipt. The arrival of an inventory delivery from a supplier or other company location.

Inventory returns. Inventory returned from a customer for any reason. This receipt is handled differently from a standard inventory receipt, typically into an inspection area, from which it may be returned to stock, reworked, or scrapped.

Inventory turnover. The number of times per year that an entire inventory or a subset thereof is used.

Item master file. A file containing all item-specific information about a component, such as its weight, cubic volume, and unit of measure.

Item number. A number uniquely identifying a product or component.

Just-in-time. A cluster of manufacturing, design, and delivery practices designed to continually reduce all types of waste, thereby improving production efficiency. Kit. A group of components needed to assemble a finished product that has been clustered together for delivery to the shop floor.

Last-in, first-out (LIFO). An inventory valuation method under which one assumes that the last inventory item to be stored in a bin is the first one to be used, irrespective of actual usage.

Lean production. The technique of stripping all non-value-added activities from the production process, thereby using the minimum possible amount of resources to accomplish manufacturing goals.

Locator file. A file identifying where inventory items are situated, by bin location.

Make-to-order. A production scheduling system under which products are only manufactured once a customer order has been received.

Make-to-stock. A production scheduling system under which products are completed before the receipt of customer orders, which are filled from stock.

Manufacturing resource planning. An integrated, computerized system for planning all manufacturing resources.

Mass customization. High-volume production runs of a product, while still offering high variability in the end product offered to customers.

Material requirements planning. A computerized system used to calculate material requirements for a manufacturing operation.

Material review board. A company committee typically comprising members representing multiple departments, which determines the disposition of inventory items that will not be used in the normal manufacturing or distribution process.

Materials requisition. A document listing the quantities of specific parts to be withdrawn from inventory.

Matrix bill of material. A bill of materials chart listing the bills for similar products, which is useful for determining common components.

Maximum inventory. An inventory item’s budgeted maximum inventory level, comprising its preset safety stock level and planned lot size.

Minimum inventory. An inventory item’s budgeted minimum inventory level.

Mix ticket. A list of the ingredients required for a blending operation.

Modular bill of material. A bill of material format in which components and subassemblies are clustered by product option, so one can more easily plan for the
assembly of finished goods with different configurations.

Move. The movement of inventory among various locations within a company.

Multilevel bill of material. An itemization of all bill of material components, including a nested categorization of all components used for subassemblies.

Net inventory. The current inventory balance, less allocated or reserved items.

Nonconforming material. Any inventory item that does not match its original design specifications within approved tolerance levels.

Non-significant part number. An identifying number assigned to a part that conveys no other information.

Obsolete inventory. Parts not used in any current end product.

Offal material. The waste materials resulting from a production process.

On-hand balance. The quantity of inventory currently in stock, based on inventory records.

Order penetration point. The point in the production process when a product is reserved for a specific customer.

Order picking. The process of moving items from stock for shipment to customers.

Outbound stock point. A designated inventory location on the shop floor between operations where inventory is stockpiled until needed by the next operation.

Overrun. A manufactured or received quantity exceeding the planned amount.

Packing slip. A document attached to a customer shipment, describing the contents of the items shipped, as well as their part number and quantity.

Pallet ticket. A document attached to a pallet, showing the description, part number, and quantity of the item contained on the pallet.

Part. A specific component of a larger assembly.

Part number. A number uniquely identifying a product or component.

Parts requisition. An authorization to move a specific quantity of an item from stock.

Part standardization. The planned reduction of similar parts through the standardization of parts among multiple products.

Periodic inventory. A physical inventory count taken on a repetitive basis.

Perpetual inventory. A manual or automated inventory tracking system in which a new inventory balance is computed continuously whenever new transactions occur.

Phantom bill of material. A bill of materials for a subassembly that is not normally kept in stock, because it is used at once as part of a higher-level assembly or finished product.

Physical inventory. A manual count of the on-hand inventory.

Picking list. A document listing items to be removed from stock, either for delivery to the shop floor for production purposes or for delivery to a customer.

Picking transaction. Withdrawing parts or subassemblies from stock in order to manufacture subassemblies or finished products.

Point-of-use delivery. A delivery of stock to a location in or near the shop floor adjacent to its area of use.

Point-of-use storage. The storage of stock in a location in or near the shop floor adjacent to its area of use.

Primary location. A storage location labeled as the primary location for a specific inventory item.

Process flow production. A production configuration in which products are continually manufactured with minimal pauses or queuing.

Product. Any item intended for sale.

Projected available balance. The future planned balance of an inventory item, based on the current balance and adjusted for planned receipts and usage.

Pull system. A materials flow concept in which parts are only withdrawn after a request is made by the using operation for more parts.

Push system. A materials flow concept in which parts are issued based on planned material requirements.

Put away. The process of moving received items to storage and recording the related transaction.

Rack. A vertical storage device in which pallets can be deposited, one over the other.

Random-location storage. The technique of storing incoming inventory in any available location, which is then tracked in a locator file.

Raw material. Base-level items used by the manufacturing process to create either subassemblies or finished goods.

Reconciling inventory. The process of comparing book to actual inventory balances, and adjusting for the difference in the book records.

Record accuracy. The variance between book and on-hand quantities, expressed as a percentage.

Remanufactured parts. Parts that have been reconstructed to render them capable of fulfilling their original function.

Repair bill of material. A special bill itemizing changes needed to refurbish an existing product.

Replacement parts. Parts requiring some modification before being substituted for another part.

Reprocessed material. Material that has been reworked and returned to stock.

Requirements explosion. The component-level requirements for a production run, derived by multiplying the number of parent-level requirements by the component requirements for each parent, as specified in the bill of materials.

Reserved material. Material that has been reserved for a specific purpose.

Rework. The refurbishment of a faulty part.

RFID. Acronym for Radio Frequency Identification. It is the basis for small radio transmitters that emit an RFID to receiver devices. The transmitter is a tiny tag, storing a unique product identification code that is transmitted and used for inventory tracking.

Safety stock. Extra inventory kept on hand to guard against requirements fluctuations.

Scrap. Faulty material that cannot be reworked.

Scrap factor. An anticipated loss percentage included in the bill of material and used to order extra materials for a production run, in anticipation of scrap losses.

Seasonal inventory. Very high inventory levels built up in anticipation of large seasonal sales.

Shelf life. The time period during which inventory can be retained in stock and beyond which it becomes unusable.

Shelf life control. Deliberate usage of the oldest items first, in order to avoid exceeding a component or product’s shelf life.

Shrinkage. Any uncontrolled loss of inventory, such as through evaporation or theft.

Shrinkage factor. The expected loss of some proportion of an item during the production process, expressed as a percentage.

Significant part number. An identifying number assigned to an item that conveys additional embedded information.

Single-level bill of material. A list of all components used in a parent item.

Single sourcing. Using a single supplier as the only source of a part.

SKU. Acronym for Stock Keeping Unit, which is an item used at a single location.

Slow-moving item. An inventory item having a slower rate of turnover than the average turnover for the entire inventory.

Split delivery. The practice of ordering large quantities on a single purchase order, but separating the order into multiple smaller deliveries.

Stack-ability. The ability to safely stack multiple layers of the same SKU on top of each other.

Staging. Picking parts from stock for an order before they are needed, in order to determine parts shortages in advance.

Standard containers. Common-sized containers that are used to efficiently move, store, and count inventory.

Stock. Any item held in inventory.

Stockless purchasing. The purchase of material for direct delivery to the production area, bypassing any warehouse storage.

Stock out. The absence of any form of inventory when needed.

Stock point. An inventory storage area used for short-term inventory staging.

Subassembly. A group of assembled components used in the assembly of a higherlevel assembly.

Summarized bill of materials. A bill of materials format showing the grand total usage requirement for each component of a finished product.

Supplies. General supplies used throughout a company and expensed at the time of acquisition.

Surplus inventory. Parts for which the on-hand quantity exceeds forecasted requirements.

Traceability. The ability to track the components used in production through their inclusion in a finished product and from there to specific customers.

Two-bin system. A system in which parts are reordered when their supply in one storage bin is exhausted, requiring usage from a backup bin until the replenishment arrives.

Unit of measure. The summarization unit by which an item is tracked, such as a box of 100 or an each of 1.

Unplanned receipt. A stock receipt for which no order was placed or for which an excess quantity was received.

Vendor-managed inventory. The direct management and ownership of selected on-site inventory by suppliers.

Visual control. The visual inspection of inventory levels, enabled by the use of designated locations and standard containers.

Visual review system. Inventory reordering based on a visual inspection of on-hand quantities.

Warehouse demand. The demand for a part by an outlying warehouse.

Wave picking. The practice of grouping the priority of pick lists so that groups of picked orders can be delivered at the same time, such as a set of orders being delivered to a single customer on a single truck departing at a specific time.

Where-used report. A report listing every product whose bill of material calls for the use of a specific component.

Withdrawal. The release of items from storage.

Work-in-process. Any items being converted into finished goods or released from the warehouse in anticipation of beginning the conversion process.

Zone picking. The practice of picking by area of the warehouse, rather than by order, requiring an additional consolidation step from which picking by order is completed.

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