Glossary of Demand Forecasting and Inventory Management Terms
Dive into our Demand Forecasting and Inventory Management glossary with over 150 key terms. Perfect for finance professionals or anyone wanting to understand demand forecasting terms better. Use this page as your go-to guide for quick insights.
A document that provides detailed information about a forthcoming delivery, typically sent electronically from a supplier to a customer. It includes details like order numbers, product descriptions, quantities, and transportation information. For example, a furniture manufacturer might send an ASN to a retailer detailing a shipment of desks and chairs, including the expected delivery time and packing details.
Advance Shipping Notice (ASN)
A statistical analysis model used for time-series data forecasting. It uses past data points to predict future values by accounting for trends, seasonality, and noise in the data. For instance, a retailer might use ARIMA to forecast next month's sales based on historical sales data, considering seasonal patterns like holiday peaks.
ARIMA (Autoregressive Integrated Moving Average)
A method of classifying inventory items based on their importance to the business. 'A' items are typically high-value with a low frequency of sales, 'B' items are of moderate value and frequency, and 'C' items are low-value with a high frequency of sales. For example, in a mobile phone store, flagship smartphones might be 'A' items, mid-range phones 'B', and accessories 'C'.
This occurs when an ordered item is not in stock and must be supplied later. Backordering allows customers to order items rather than facing stockouts, potentially leading to lost sales. For example, if a customer orders a size of shoe that's currently out of stock, the retailer may backorder it for future delivery.
Extra inventory kept on hand to reduce the risk of stockouts caused by delays in delivery or unexpected increases in demand. For instance, a pharmaceutical distributor might keep additional buffer stock of essential medications to ensure a consistent supply in the face of fluctuating demand.
A phenomenon in supply chains where small fluctuations in demand at the retail level cause increasingly larger fluctuations up the supply chain. For example, a minor surge in consumer demand for a new toy can lead to progressively larger ordering by retailers, wholesalers, and manufacturers, amplifying the original demand signal.
Transporting large quantities of a product without individual packaging, typically to save costs. For example, a manufacturer might transport grains to a packaging facility in bulk shipments using large containers, rather than in smaller, individually packaged units.
The process of determining the production capacity needed by an organization to meet changing demands. For instance, before the holiday season, a toy manufacturer might increase its capacity by adding shifts or leasing additional manufacturing equipment to meet the expected rise in demand.
The total cost of holding inventory, including storage, insurance, taxes, depreciation, and opportunity costs, usually expressed as a percentage of the total inventory value. For example, a company with $1 million in average inventory and carrying costs of $200,000 annually has a carrying cost rate of 20%.
Carrying Cost Rate
Forecasting techniques that assume the demand for products or services is related to other factors or variables, like economic indicators, market trends, or promotional activities. For example, an ice cream shop might use a causal model to forecast summer sales based on factors like temperature forecasts and local event schedules.
Identifying and managing factors that limit an organization's ability to achieve its objectives, such as bottlenecks in production or supply chain inefficiencies. For instance, a car manufacturer may find that limited availability of a key component is a constraint, affecting overall production and strategize to manage this limitation, such as by sourcing from multiple suppliers.
An approach to inventory management where products are continuously restocked based on real-time demand data rather than according to a fixed schedule. For example, a grocery store using continuous replenishment might automatically reorder milk whenever stock levels fall below a predefined threshold, ensuring constant availability.
A business practice where supply chain partners collaborate on planning and forecasting to optimize the supply chain. For example, a retailer and manufacturer might share data and jointly plan production and inventory levels to meet consumer demand more accurately.
Collaborative Planning, Forecasting, and Replenishment (CPFR)
Changes or developments in the behaviors, attitudes, and needs of consumers. Understanding these trends can be crucial for accurate demand forecasting. For instance, a surge in popularity of eco-friendly products may lead a manufacturer to adjust production in favor of such items.
Goods that are sent by a supplier to a retailer, but the supplier retains ownership until the items are sold. For example, a book publisher may provide books to a bookstore on consignment, with the bookstore paying for each book only after it is sold.
A logistics process where incoming goods are directly transferred from inbound to outbound transportation vehicles, with minimal or no storage in between. For example, a distribution center might receive a truckload of electronics and immediately transfer the products to regional delivery trucks, reducing storage time.
An inventory auditing procedure where a small subset of inventory is counted on a specific day. Unlike traditional physical inventory counts, cycle counting does not disrupt operations. For instance, a warehouse might cycle count 10% of its inventory each week to ensure ongoing accuracy without the need for a full inventory count.
A financial measure indicating the average time in days that a company takes to turn its inventory into sales. It's calculated by dividing the total inventory by the cost of goods sold, then multiplying by the number of days in the period. For example, a company with $1 million in inventory and cost of goods sold of $10 million annually has a DSI of 36.5 days (1,000,000 / 10,000,000 * 365).
Days Sales of Inventory (DSI)
Inventory that has not been sold and is not likely to be sold in the future, often due to being outdated, obsolete, or no longer in demand. An example might be a retailer left with a stock of fidget spinners long after their popularity has waned.
A forecasting technique where a panel of experts provides input and feedback in multiple rounds, and after each round, the responses are summarized and shared with the group to refine the forecasts. This method might be used for technology trend forecasting, where experts iteratively refine their predictions about the adoption rates of new technologies.
A measure of how sensitive the quantity demanded of a good or service is to changes in its price or other factors, such as consumer income or the price of related goods. For example, luxury goods often have high price elasticity, meaning their demand significantly decreases as prices increase.
The process of predicting future customer demand using historical data, market trends, and other relevant information. For example, a clothing retailer uses demand forecasting to predict how many units of a new shirt style will be sold in the upcoming season.
A strategy for managing and optimizing customer demand, often through marketing and pricing strategies, product mix decisions, and understanding consumer behavior. An example is a company running promotional campaigns during off-peak seasons to balance demand throughout the year.
The process of forecasting demand to ensure that products can be delivered to satisfy customers without overstocking inventory. For instance, a manufacturer of seasonal products, like beach gear, would use demand planning to estimate the right quantity to produce for the summer season.
The use of real-time data to detect and respond to immediate demand signals, enabling more accurate and responsive supply chain planning. For example, a retailer could use point-of-sale data and current market trends to adjust inventory levels rapidly.
An indication from the market of a need or desire for a particular product or service. This can come from various sources, like sales data, social media trends, or changes in consumer behavior. An example is a spike in online searches for home exercise equipment, signaling increased demand.
The extent to which demand can change over time, impacting the ability to accurately forecast and meet demand. For instance, demand for new technology products can be highly variable, surging after a product launch and then tapering off.
The process of overseeing the movement of goods from supplier or manufacturer to point of sale. It includes warehousing, inventory control, transportation, and order processing. For example, a company distributing electronic goods must manage logistics to ensure timely, efficient delivery to retailers.
A management process to meet customer demand through the effective planning and distribution of inventory across the supply chain. A retailer, for example, uses DRP to plan inventory distribution to various stores based on predicted sales volume.
Distribution Requirements Planning (DRP)
A formula used to determine the optimal order quantity that minimizes the total costs of ordering and holding inventory. For instance, a retailer can use the EOQ model to calculate the most cost-effective quantity of a product to order from a supplier.
Economic Order Quantity (EOQ)
A model used in production planning to determine the optimal quantity of product to produce, balancing the costs of setup and holding inventory. Unlike the Economic Order Quantity model, which is used for ordering inventory, EPQ specifically addresses the production process. For example, a toy manufacturer might use EPQ to decide the most cost-effective quantity of a particular toy to produce in each batch, taking into account the setup costs of machinery and the cost of holding inventory.
Economic Production Quantity (EPQ)
Metrics used to assess the effectiveness of a company's operations, often in terms of inventory management, asset management, and overall operational efficiency. Common efficiency ratios include inventory turnover ratio and days sales in inventory. For instance, a high inventory turnover ratio might indicate efficient inventory management, showing that a company quickly sells the inventory it purchases.
Integrated management software that allows an organization to use a system of integrated applications to manage and automate many back office functions related to technology, services, and human resources. ERP systems can integrate all facets of an operation, including product planning, development, manufacturing processes, sales, and marketing. For example, a manufacturing company may use an ERP system to manage procurement, production schedules, inventory levels, and logistics in a cohesive and integrated manner.
Enterprise Resource Planning (ERP)
A time series forecasting technique that applies decreasing weights to past observations as they recede into the past. The most recent observations have the most weight, and the importance of observations decreases exponentially for older data. This method is commonly used for short-term forecasting in inventory management and sales. A retailer, for example, might use exponential smoothing to forecast next month's demand for a fast-moving consumer good, where recent sales trends are a strong predictor of near-term sales.
An inventory management and valuation method in which goods produced or acquired first are sold, used, or disposed of first. This is particularly important for perishable goods or products with an expiration date, ensuring that old stock is used before it spoils or becomes obsolete. For instance, a supermarket will use FIFO to ensure that the milk that arrives first in the store is placed at the front of the shelf and sold first.
FIFO (First-In, First-Out)
A measure of inventory effectiveness, usually expressed as a percentage, indicating the ability of a company to meet customer demand from available stock. It is the ratio of customer demand satisfied from stock on hand versus the amount that would have required backordering or lost sales. For instance, if a company receives orders for 100 units of a product and can immediately supply 95 units from existing inventory, the fill rate is 95%.
An inventory control method where a predetermined amount of stock is ordered each time the inventory level falls below a specified threshold. This method is often used in combination with an inventory monitoring system that triggers the reorder once the stock level reaches the reorder point. For example, a retailer may set a fixed order quantity of 50 units for a particular item, reordering automatically whenever the on-hand inventory drops to 10 units.
Fixed Order Quantity
A system and approach in manufacturing that allows for a range of products to be efficiently produced on the same line, facilitating customization and quick changes in production based on customer demands. For instance, an automobile factory might implement flexible manufacturing systems to switch quickly between different car models as per market demand.
A measure of how closely the forecasted demand matches the actual demand. High forecast accuracy means the predictions were close to the actual results, indicating effective forecasting processes. A company analyzing its sales forecast for the previous quarter might find that it forecasted 10,000 units in sales but actually sold 9,800 units, resulting in a high level of forecast accuracy.
Modifications made to forecasted figures based on new information, insights, or changes in the market or environment. These adjustments are necessary to align forecasts with recent trends, new product launches, or unexpected shifts in the market. For instance, if a smartphone manufacturer releases a new model, a retailer might adjust its sales forecasts to account for an anticipated increase in demand.
The tendency of a forecasting method to consistently over or under predict demand. Forecast bias can lead to either excess inventory (from overestimation) or stockouts and missed sales opportunities (from underestimation). A company analyzing its forecasting methods might discover a tendency to underestimate seasonal demand for its products, indicating a bias in its forecasting approach.
The future period for which a forecast is made. The length of the forecast horizon depends on the nature of the product, market dynamics, and the purpose of the forecast. For instance, a fashion retailer might have a short forecast horizon for seasonal clothing lines due to rapidly changing trends, whereas a manufacturer of heavy machinery might use a longer forecast horizon.
Mathematical or statistical models used to predict future demand or sales based on historical data and other relevant factors. Common forecasting models include moving averages, exponential smoothing, and regression analysis. For example, a retailer may use a time series forecasting model to predict next month's demand for various products based on historical sales data.
Software tools used to predict future demand, trends, and behaviors in the marketplace. These tools often use historical data, statistical algorithms, and machine learning techniques to generate forecasts. A company might use forecasting software to automate and improve the accuracy of its demand planning process.
The network of suppliers, manufacturers, logistics providers, distributors, and retailers that participate in the production, delivery, and sale of goods and services worldwide. Challenges in a global supply chain can include cultural differences, varying regulatory environments, and complexities in logistics and communication. For example, an automotive company may source parts from multiple countries, assemble vehicles in another, and sell globally, relying on a well-coordinated global supply chain.
Global Supply Chain
A profitability ratio that measures how efficiently a company turns its inventory into cash above the cost of the inventory. It is calculated by dividing the gross margin by the average inventory cost. For example, if a store's gross margin for the year is $100,000 and the average inventory cost is $25,000, then the GMROI is 4. This means that for every dollar invested in inventory, the store returns four dollars in gross profit.
GMROI (Gross Margin Return on Investment)
A lean manufacturing technique used to reduce operational inefficiencies by evenly distributing production over time and volume. By smoothing out the type and quantity of production, it minimizes waste and responds flexibly to customer demands. For example, a car manufacturer might use heijunka to evenly distribute the production of different models and colors of cars throughout the month, avoiding overburdening the workforce or the factory with fluctuating demands.
Heijunka (Production Leveling)
Past sales information that is used to analyze trends, forecast future demand, and make decisions regarding inventory, marketing, and sales strategies. This data includes quantities sold, sales revenues, dates, and locations of sales. For instance, a retailer might analyze historical sales data from the past five years to identify trends and prepare inventory for the upcoming holiday season.
Historical Sales Data
A statistical forecasting technique that extends exponential smoothing to capture seasonality in addition to level and trend in historical data. This method is useful in predicting future sales for seasonal products or services. For example, a gardening supply store might use the Holt-Winters method to forecast the spring surge in demand for gardening tools and supplies.
A supply chain where all the components, including suppliers, manufacturers, and distributors, work seamlessly together, often enabled by shared data systems and common objectives. Integration seeks to improve efficiency and responsiveness to market needs. An example is a consumer electronics company working closely with raw material suppliers, assembly plants, and distribution centers to ensure that products are efficiently produced and distributed to retailers and customers.
Integrated Supply Chain
The measure of how closely inventory records (such as quantities and locations) match the actual physical inventory. High inventory accuracy is crucial for effective inventory management, as inaccuracies can lead to issues like stockouts or overstock. For instance, a warehouse conducting a cycle count might find that its records show 100 units of an item, but there are only 98 units physically in stock, indicating a need for improved accuracy.
The process of analyzing inventory data to make better decisions regarding stock levels, reorder points, and inventory optimization. This can involve techniques like predictive analytics, data mining, and statistical analysis. For instance, a business might use inventory analytics to determine the optimal stock levels for each product, minimizing carrying costs while avoiding stockouts.
The total cost of holding inventory over a certain period, including costs such as warehousing, insurance, depreciation, spoilage, and opportunity costs. Businesses aim to minimize these costs without compromising the ability to meet customer demand. For example, if it costs a retailer $10,000 annually to store, insure, and finance its inventory, this is its inventory carrying cost.
Inventory Carrying Cost
A method of funding whereby a business uses its inventory as collateral to secure a loan. This financing is typically used by companies that need to purchase inventory before they can sell it. For example, a small retailer might use inventory financing to buy a large quantity of goods before a major sales season when its cash flow is low.
The practice of overseeing and controlling the ordering, storage, and use of a company's inventory. This includes the management of raw materials, components, and finished products, as well as warehousing and processing of such items. A basic example is a bookstore managing its stock of books, ensuring that popular titles are always available and that overstock of slow-moving books is minimized.
The process of finding the ideal balance between the investment in inventory and service levels to meet demand. This involves determining the optimal quantities and reorder points to minimize costs while ensuring availability. For example, an auto parts store might use inventory optimization techniques to decide how many units of each auto part to keep in stock, balancing the need to quickly supply customers with the need to keep storage and costs down.
The set of guidelines or strategies a company follows to manage its inventory. This policy includes decisions on order quantities, reorder points, safety stock levels, and how to respond to changes in demand. A simple inventory policy might state that a product should be reordered when its level falls below two weeks' worth of sales.
The loss of inventory that occurs due to theft, damage, miscounting, or other errors. Reducing shrinkage is crucial for accurate inventory management and profitability. For example, a retail clothing store might experience inventory shrinkage due to shoplifting or items being damaged in the store.
A ratio indicating how often a company's inventory is sold and replaced over a period. High inventory turnover can indicate efficient selling, while low turnover might suggest overstocking or obsolescence. For example, a grocery store with high inventory turnover is likely selling most of its goods quickly, implying fresh stock and efficient buying practices.
The process of assigning a monetary value to inventory, which is crucial for accounting
A management strategy that aligns raw-material orders from suppliers directly with production schedules. Companies use this strategy to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, reducing inventory costs. For example, a car manufacturer might use JIT inventory methods to order parts only when they are about to start assembling cars that use those parts.
Just-in-Time (JIT) Inventory
A Japanese business philosophy of continuous improvement of working practices, personal efficiency, etc. It's a concept referring to business activities that continuously improve all functions and involve all employees from the CEO to the assembly line workers. For instance, an electronics manufacturing company might implement kaizen by constantly seeking ways to reduce waste and improve productivity on the assembly line.
Kaizen (Continuous Improvement)
A set of quantifiable measures that a company uses to gauge or compare performance in terms of meeting their strategic and operational goals. KPIs might include measures related to inventory management, such as inventory turnover rate, order accuracy, or customer satisfaction rates. For example, a logistics company may have KPIs focused on delivery times, percentage of on-time deliveries, and customer satisfaction ratings.
Key Performance Indicators (KPIs)
The amount of time that passes from the beginning of a process until its conclusion. In supply chain and inventory management, lead time often refers to the time taken from placing an order with a supplier to the delivery of the items. For example, if a retailer orders a batch of goods from a manufacturer, and it takes 30 days from placing the order to receiving the goods, the lead time is 30 days.
Strategies and actions taken to shorten the lead time. It can enhance customer satisfaction and reduce inventory costs by enabling quicker responses to market demand. A manufacturer might reduce lead time by sourcing raw materials from closer suppliers, thereby cutting down on shipping time.
Lead Time Reduction
An inventory management philosophy focused on minimizing inventory to reduce carrying costs. The idea is to have just enough inventory to meet demand, reducing waste associated with overproduction, excess inventory, and storage costs. A company practicing lean inventory might keep minimal stock and rely on frequent, small deliveries.
A systematic method for waste minimization within a manufacturing system without sacrificing productivity. It involves methods such as JIT, kaizen, and continuous improvement to produce more efficiently and respond more quickly to customer demand. An automobile manufacturer using lean manufacturing would aim to reduce unnecessary inventory and optimize production processes to minimize waste and maximize efficiency.
Core guidelines and principles of lean manufacturing and lean inventory management that focus on reducing waste, optimizing processes, improving efficiency, and maximizing value to the customer. These principles include identifying value, mapping the value stream, creating flow, establishing pull, and seeking perfection. A company applying lean principles would continuously look for areas to streamline operations, remove inefficiencies, and enhance customer value.
An inventory valuation method in which the most recently produced items are recorded as sold first. This method is used in accounting to value inventory and calculate the cost of goods sold. For example, a company storing perishable goods might avoid using LIFO since it would result in older inventory being left unsold.
LIFO (Last In, First Out)
The process of efficiently organizing goods in order to maximize the load capacity of transport vehicles, ensuring safety and optimizing transportation costs. A logistics company might use software to help in load planning, determining the best way to stow different items in a truck or container to use all available space effectively.
The management of the flow of things between the point of origin and the point of consumption to meet the requirements of customers or corporations. It involves the integration of information, transportation, inventory, warehousing, material handling, and packaging. For example, the logistics team of a manufacturing company manages the shipment of parts from suppliers, storage in warehouses, and delivery to the production facility.
The process of determining the optimal order quantity for production or purchasing, balancing various costs such as ordering, holding, and shortage costs. Different lot sizing techniques can be used depending on demand patterns, production capacity, and storage constraints. A manufacturer might use a lot sizing technique to decide how many units of a product should be produced in each batch.
A branch of artificial intelligence that involves training algorithms to recognize patterns, make decisions, and predict outcomes from data. In demand forecasting and inventory management, machine learning can be used to analyze large sets of historical data to predict future demand trends. A retailer could use machine learning algorithms to forecast future product demand based on past sales data, seasonality, and market trends.
The study of the attractiveness and dynamics of a particular market within an industry. Market analysis can include reviewing trends in market size, growth rate, profitability, and demand forecasting. A company looking to launch a new product might conduct a market analysis to determine the potential sales, competitive landscape, and customer segments.
A plan for individual commodities to be produced in each time period, such as production, staffing, inventory, etc. It translates the business plan, including forecasted demand, into a production plan. For example, a furniture manufacturer's MPS might outline how many tables, chairs, and sofas are to be produced each week, taking into account labor availability and material requirements.
Master Production Schedule (MPS)
A production planning, scheduling, and inventory control system used to manage manufacturing processes. MRP ensures that materials and products are available for production and delivery to customers. It calculates how much material is required and when it is needed. For instance, an electronics manufacturer uses MRP to calculate the quantities of components needed to assemble computers and the schedule for ordering these components.
Material Requirements Planning (MRP)
A measure of errors between paired observations expressing the same phenomenon. In forecasting, MAE is used to measure the accuracy of forecast models by calculating the average absolute error between the forecasted and the actual values. A low MAE indicates a more accurate forecast model. For example, a forecast that predicts monthly sales and the actual sales can be compared using MAE to gauge the accuracy of the forecast model.
Mean Absolute Error (MAE)
A risk function, corresponding to the expected value of the squared error loss or quadratic loss. It measures the average of the squares of the errors—that is, the average squared difference between the estimated values and the actual value. In demand forecasting, a lower MSE indicates a more accurate model. For instance, if a demand forecast model predicts a certain level of sales and the actual sales figures are different, MSE can be used to quantify the precision of the forecast.
Mean Squared Error (MSE)
The smallest set quantity that a supplier is willing to sell. MOQ is often set by suppliers to increase order sizes, ensuring that the production and selling costs are covered. For instance, a fabric supplier may set an MOQ of 100 meters, meaning buyers must purchase at least this amount.
Minimum Order Quantity (MOQ)
A statistical technique used to analyze a set of data points by creating a series of averages of different subsets of the full data set. In inventory management and demand forecasting, moving averages are used to smooth out short-term fluctuations and highlight longer-term trends in data. For example, a retailer might use a 3-month moving average to forecast demand, thereby smoothing out seasonal variations and other irregularities.
The process of fulfilling orders from multiple sales channels (e.g., online, retail, wholesale) from a single inventory source. This approach enables businesses to efficiently manage inventory and fulfill orders across various platforms. For example, a business might sell products on its own website, through an online marketplace like Amazon, and in physical retail stores, all fulfilled from the same warehouse.
In supply chain management, network design refers to the strategic layout and optimization of a supply chain network's activities, such as production, storage, and distribution facilities, along with transportation routes. The goal is to deliver the right products in the right quantities at the right time while minimizing costs and maximizing service levels. For example, a global company might design its network to include manufacturing facilities in Asia, distribution centers in Europe, and retail stores worldwide.
Refers to the ability to deliver products or services in a cost-effective manner without sacrificing quality. It involves optimizing processes, maximizing throughput, and minimizing waste. A company might improve operational efficiency by automating certain production processes or by restructuring its logistics operations to reduce transport costs.
The administration of business practices aimed at ensuring maximum efficiency within an organization, focusing on converting materials and labor into goods and services as efficiently as possible. Operations management in a factory, for instance, would involve overseeing production processes, managing inventory, and ensuring quality control.
The process of taking, tracking, and fulfilling customer orders. In the context of inventory management, it involves managing the balance between fulfilling customer orders promptly and efficiently while maintaining optimal inventory levels. A retail company's order management system might track everything from customer orders and inventory levels to the delivery of products to customers.
The number of units ordered from the supplier or produced in a single order. Deciding on the right order quantity is a critical task in inventory management, as it impacts inventory holding costs and order costs. For example, a higher order quantity might result in volume discounts but also higher holding costs.
The business practice of hiring a party outside a company to perform services or create goods that traditionally were performed in-house by the company's own employees and staff. For example, a company might outsource its customer service operations to a specialized firm or its manufacturing to a contract manufacturer.
Excess inventory beyond what is required to meet demand. Overstock can occur due to poor demand forecasting, overordering, or changes in market trends. For example, a clothing retailer might end up with overstock if it orders too many winter coats and there's an unusually warm winter.
Also known as the 80/20 rule, the principle suggests that roughly 80% of the effects come from 20% of the causes. In inventory management, this might mean that 80% of sales come from 20% of the products. Companies often use this principle to optimize inventory by focusing on the most profitable or fastest-moving items.
A forecasting method using a group (panel) of experts or consumers to predict future demand or market trends. Each member of the panel provides their forecasts independently, and these are then combined to form a consensus forecast. For example, a panel of fashion experts might be used to forecast the next season's popular colors and styles.
The highest level of demand experienced for a product or service. Understanding and planning for peak demand is crucial in inventory management to avoid stockouts and capitalize on sales opportunities. A toy store, for instance, might experience peak demand during the holiday season.
An inventory management system where inventory levels are updated on a continuous basis as transactions occur. This is in contrast to periodic inventory systems, where inventory counts are updated at specific intervals. Modern retail operations often use perpetual inventory systems, with sales and stock levels constantly updated through point of sale and inventory management systems.
Perpetual Inventory System
A process in warehousing where items are picked from inventory and then packed into shipping containers to fulfill orders. Efficiency in pick and pack processes is vital for timely order fulfillment and customer satisfaction. An e-commerce warehouse, for example, might use barcode scanners to streamline the pick and pack process.
Pick and Pack
A measure of the effectiveness and speed of the picking process in a warehouse or distribution center. Improving picking efficiency can reduce labor costs and increase throughput. Techniques to improve picking efficiency include optimizing warehouse layout, using technology like voice picking or automated retrieval systems, and implementing batch or zone picking strategies.
The use of data, statistical algorithms, and machine learning techniques to identify the likelihood of future outcomes based on historical data. In inventory management and demand forecasting, predictive analytics can help predict future demand patterns, leading to more informed stocking decisions. A retailer, for example, might use predictive analytics to anticipate future product trends based on past sales data, social media trends, and other external market indicators.
The process of finding, agreeing to terms, and acquiring goods, services, or works from an external source, often via a tendering or competitive bidding process. In terms of inventory management, procurement is crucial in ensuring that necessary goods and materials are available for production or sale at the best possible cost. For example, the procurement department of a manufacturing company would be responsible for sourcing raw materials and negotiating with suppliers.
A process in the management of the entire lifecycle of a product from inception, through engineering design and manufacture, to service and disposal. PLM involves managing the data and processes associated with these stages. For instance, PLM software can help a company keep track of design changes, manage bill of materials, and maintain compliance with industry regulations throughout a product's lifecycle.
Product Lifecycle Management (PLM)
The planning of production and manufacturing modules in a company or industry. It involves deciding on the allocation of resources, scheduling of production, and organizing the production process to meet demand in an efficient and timely manner. A factory might use production planning software to optimize its production schedule, resource allocation, and inventory levels to meet forecasted customer demand.
A document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services. Purchase orders serve as a legal offer binding the two parties. In inventory management, issuing a purchase order is a primary way to replenish stock. For example, a retailer's purchase order might specify the number of units, per item, needed to restock inventory.
A forecasting method based primarily on subjective inputs such as expert opinions, estimates, and sales force feedback, rather than on purely quantitative, or historical, data. Qualitative forecasting is often used when there is a lack of historical data or when forecasting new products or technologies. For instance, if a company is developing a completely new product, it might rely on expert predictions and market research rather than past sales data to forecast demand.
A forecasting method that uses numerical data and statistical techniques to predict future events. This approach typically involves historical data analysis and can include techniques like time series analysis, regression models, and other mathematical calculations. For example, a retailer might use quantitative forecasting to predict future sales based on past sales data, considering variables like seasonality and market trends.
In statistics and forecasting, random variation refers to the unpredictable fluctuation in data that does not follow any identifiable pattern or trend. In the context of demand forecasting, accounting for random variation is important, as it affects the accuracy of predictions. For example, sudden, unexplained spikes or drops in sales might be attributed to random variation.
An inventory management practice where the stock levels are tracked and updated instantly as sales and replenishments occur. This allows for more accurate and timely decision-making. For instance, a supermarket using real-time inventory systems can immediately restock items as soon as they are running low on shelves.
A statistical method used to examine the relationship between a dependent variable and one or more independent variables. In demand forecasting and inventory management, regression analysis can help understand how different factors (like price, seasonality, or economic indicators) influence demand. A business might use regression analysis to determine how much weather conditions affect the sales of certain products.
The inventory level at which a new order should be placed to replenish stock before it runs out. The reorder point is typically calculated based on lead time and average demand. For instance, if a product’s lead time is 10 days and daily sales average 50 units, the reorder point might be set around 500 units to avoid stockouts.
Reorder Point (ROP)
The process of assigning and managing assets in a manner that supports an organization's strategic goals. In inventory and production management, this can involve allocating labor, materials, and equipment to meet production schedules and customer demands effectively. For example, a manufacturer might allocate certain machinery and workers specifically to fulfill a large, urgent order.
A frequently used measure of the differences between values predicted by a model and the values observed. The RMSE is the square root of the mean of the squared differences between prediction and actual observation. In demand forecasting, a lower RMSE signifies a more accurate model. A business forecasting demand for its product might use RMSE to measure and improve the accuracy of its forecast models.
Root Mean Square Error (RMSE)
Additional inventory held to guard against uncertainty in demand or supply. The purpose of safety stock is to ensure that there's enough inventory to meet customer demands even in the face of delays or forecasting errors. For example, if a retailer typically sells 100 units a week and replenishment is unstable, it might hold an additional 20 units as safety stock.
A process where executive leadership teams meet to ensure that a company's operational plans align with its strategic and business goals. It involves balancing demand and supply, managing resources, and aligning different functional areas. An S&OP meeting at a manufacturing company might involve discussions on sales forecasts, production plans, inventory levels, and new product development.
Sales and Operations Planning (S&OP)
The process of estimating what a company's future sales will be. Sales forecasting is crucial for making informed business decisions and for the management of logistics, inventory, and cash flow. For instance, a car manufacturer might use sales forecasting to determine how many of each model it should manufacture in the upcoming year.
A type of time series forecasting model that includes both non-seasonal (ARIMA) and seasonal elements. SARIMA models are particularly useful for forecasting data with seasonal patterns, such as monthly sales data for seasonal products. A retailer might use a SARIMA model to forecast Christmas holiday season sales, accounting for both seasonal spikes and underlying sales trends.
SARIMA (Seasonal ARIMA)
A strategic planning method used to make flexible long-term plans based on "what-if" scenarios. It is useful in demand forecasting and inventory management for preparing for various possible futures. For example, a business might use scenario planning to determine how a significant increase or decrease in commodity prices could impact its supply chain and inventory needs.
The capability of a system, network, or process to handle a growing amount of work, or its potential to be enlarged to accommodate that growth. In terms of inventory management, a scalable system can adjust to larger or smaller operational demands efficiently. A scalable e-commerce fulfillment system, for instance, can handle increases in order volumes during peak seasons without compromising performance.
The process of identifying and measuring seasonal patterns within data to forecast future trends. Seasonal analysis is crucial in many industries for optimizing inventory levels, as demand for certain products can dramatically increase or decrease during particular times of the year. For example, a beachwear retailer would perform seasonal analysis to predict increased demand during summer months.
A measure of performance that indicates the ability to fulfill customer demands in a timely and efficient manner. In inventory management, a high service level indicates that customer demands are being met without excessive stock holding. For example, a service level of 98% might mean that 98% of orders are shipped from stock on hand, without backorders or delays.
Tools used to imitate the operation of real-world processes or systems over time. In inventory management, simulation models can help managers understand the impact of different strategies on inventory levels, costs, and service. For instance, a company might use a simulation model to determine the effect of a new demand forecasting method on inventory levels and order frequency.
A set of techniques and tools for process improvement, originally developed by Motorola. Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects and minimizing variability in manufacturing and business processes. An example might be a manufacturer using Six Sigma methodologies to reduce errors and inconsistencies in its production line.
A unique identifier for each distinct product and service that can be purchased. SKUs are used to track inventory and sales and can be critical in managing product lines efficiently. For example, a clothing retailer might have different SKUs for each size and color of a particular shirt style.
SKU (Stock Keeping Unit)
The process of analyzing and determining which stock keeping units (SKUs) should be kept, discontinued, or added. This process helps businesses optimize their inventory based on performance metrics like sales volume, profitability, and customer demand. A company might discontinue SKUs that have slow sales velocity and high carrying costs.
The process of managing the goods and materials held available in stock, ensuring that appropriate levels of supply meet customer demand while minimizing holding costs. Effective stock control involves managing the balance between having sufficient stock to meet customer needs and minimizing stock holding to reduce costs. For example, a supermarket needs to exercise stock control to ensure that shelves are well-stocked but not overfilled, thereby avoiding wastage and spoilage.
The process of adding more stock to your inventory to maintain an adequate level to meet customer demand. This process is typically triggered when inventory levels fall below a predetermined threshold. For example, in a retail clothing store, automatic stock replenishment can be set up so that when stock levels of a popular shirt fall below 20 items, a new order is automatically placed.
The process of setting aside a portion of inventory to fulfill specific orders, contracts, or for other strategic purposes, ensuring that this stock isn't used to meet other demands. For instance, a computer manufacturer may reserve key components for a large corporate order, ensuring these components aren't used for regular customer orders.
An event where the inventory of a particular item is completely exhausted, resulting in the inability to fulfill a demand. Stockouts are often due to poor inventory management or unexpected demand and can lead to lost sales and unhappy customers. For example, if a toy store runs out of a popular game during the holiday season, it experiences a stockout.
A methodical and collaborative approach to sourcing that continually reassesses and re-tunes a company's purchasing activities to align with business goals and market changes. Strategic sourcing involves analyzing what a business buys, from whom, at what price, and at what volume. For instance, a smartphone manufacturer may use strategic sourcing to find the most cost-effective and reliable suppliers of screen components.
The discipline of strategically planning for, and managing, all interactions with third-party organizations that supply goods and/or services to an organization in order to maximize the value of those interactions. In practice, this often involves developing a closer, more collaborative relationship with key suppliers. For example, an automotive manufacturer might work closely with its suppliers to ensure the quality and timely delivery of auto parts.
Supplier Relationship Management
The entire network of entities, directly or indirectly interlinked and interdependent, involved in serving the same consumer or customer. It encompasses every effort involved in producing and delivering a final product, from the supplier's supplier to the customer's customer. For example, the supply chain of a smartphone includes raw materials suppliers, component manufacturers, assembly, transportation, distribution, and retail.
The use of data analysis tools and processes to improve supply chain performance, involving the analysis of data from every stage of the supply chain to enhance efficiency and effectiveness. For instance, a retailer might use supply chain analytics to identify bottlenecks in the distribution process or to optimize inventory levels across different locations.
Supply Chain Analytics
The process of coordinating and aligning the processes of an organization with those of its suppliers and customers to improve the flow of goods, information, and services across all parties. For example, a consumer electronics company may integrate its system with that of its suppliers for better visibility of its inbound logistics.
Supply Chain Integration
The oversight of materials, information, and finances as they move from supplier to manufacturer to wholesaler to retailer to consumer. It involves coordinating and integrating these flows both within and among companies. For example, effective supply chain management can ensure timely delivery of automotive parts to a manufacturing plant, avoiding production delays.
Supply Chain Management
The ability of a company to track products as they move through the supply chain, and to use this information to improve and optimize processes. High visibility in the supply chain helps companies anticipate problems and handle disruptions more effectively. For example, a logistics company may use GPS and RFID technology to track shipments in real-time, ensuring timely and accurate delivery information.
Supply Chain Visibility
The management of environmental, social, and economic impacts within the supply chain. This includes working towards a transparent, ethical, and sustainable supply chain by addressing factors such as carbon footprint, labor practices, and waste management. For instance, a clothing brand might prioritize sourcing from suppliers that use renewable energy and provide fair wages to workers.
Sustainability in Supply Chain
The rate at which goods are produced or processed in a manufacturing or business process. In inventory management, it refers to the speed at which products move through the supply chain from suppliers to customers. For instance, a high-throughput assembly line in a car manufacturing plant indicates efficiency and high production capacity.
A statistical technique that deals with time series data, or data that is observed sequentially over time. It's used in demand forecasting to analyze past sales data and predict future sales by identifying seasonal patterns, trends, and cycles. For example, a retailer may use time series analysis to forecast next month's demand for various products.
Time Series Analysis
This involves breaking down a time series into several components, typically including trend, seasonal, and random or irregular variations. It helps in understanding the underlying patterns of the time series data. For instance, in retail sales data, decomposition can help distinguish underlying trends from seasonal fluctuations and irregular events like promotions or strikes.
Time Series Decomposition
The purchase price of an asset plus the costs of operation, focusing on the total cost of owning an asset over its entire lifecycle. In supply chain management, considering TCO helps in making more informed purchasing decisions. For example, a company might find that buying a more expensive machine with lower operating costs is more economical in the long run than buying a cheaper machine with higher operating costs.
Total Cost of Ownership (TCO)
An organization-wide approach to continuous process improvement and quality enhancement in all operations. In the context of supply chain, TQM involves improving quality at every stage, from material procurement to production, to delivery. An example can be an electronics company implementing TQM to reduce defects in its products and improve customer satisfaction.
Total Quality Management (TQM)
A tool used in demand forecasting to monitor and measure the accuracy of forecasts. A tracking signal is typically used to detect when the forecast error is out of bounds and an adjustment to the forecasting model may be needed. For example, if a company's sales consistently exceed forecasts, indicating a positive tracking signal, it might adjust its model to forecast higher sales.
The practice of collecting information and attempting to spot a pattern, or trend, in the information. In inventory management, trend analysis is crucial for forecasting future demand, seasonal variations, and sales growth or decline. For example, an online retailer might use trend analysis to understand emerging product categories or changes in customer buying behavior.
In inventory management, this rate refers to how often inventory is sold and replaced over a certain period. A higher turnover indicates efficient inventory management and vice versa. For example, a grocery store typically has a high turnover rate due to the perishable nature of its products.
A model by Michael Porter used to describe the development of value in a business as it acquires raw materials, adds value to these materials through various processes, and then sells finished products to customers. In supply chain management, analyzing the value chain helps companies identify areas for improvement and value creation. For example, a manufacturer might analyze its value chain to identify inefficiencies in its production process or opportunities to add customer value.
A lean-management method used to analyze and design the flow of materials and information required to bring a product or service to a consumer. It helps in identifying waste and areas for improvement in production processes. For example, a car manufacturer may use value stream mapping to visualize and improve the flow of materials from the receipt of raw materials to the final assembly of the car.
Value Stream Mapping
An inventory management practice where the supplier determines the order quantities and inventory levels of the buyer. VMI aims to optimize inventory levels and reduce costs for both the supplier and the buyer. For instance, a major soft drink company might manage the inventory of its drinks at various retail locations, ensuring that stocks are replenished efficiently and effectively based on sales data.
Vendor Managed Inventory (VMI)
A strategy where a company expands its business operations into different steps on the same production path, such as when a manufacturer owns its supplier and/or distributor. Vertical integration can help companies reduce costs and improve efficiencies by having more control over the supply chain. An example is a fashion retailer who starts to produce its own fabrics or a tech company manufacturing its own semiconductors for its devices.
In supply chain and inventory management, this refers to the strategies and practices aimed at minimizing waste within a system, including wasted time, resources, and capital. For example, a company might implement lean manufacturing techniques to minimize the waste of raw materials and reduce production time.
The process of overseeing the receipt, storage, and movement of goods within a warehouse, to ensure that inventory is managed in the most efficient and cost-effective way. This includes processes such as inventory tracking, picking, packing, and shipping. For instance, an e-commerce company may use advanced warehouse management software to streamline these processes and ensure quick order fulfillment.
A method used in accounting to calculate the cost of goods sold (COGS) and ending inventory value, where each item is weighted according to its importance or its cost relative to the total inventory cost. In inventory management, this method helps businesses more accurately determine the value of their inventory. For example, a hardware store may calculate the weighted average cost of its inventory of screws, which vary in price by size and material.
Weighted Average Cost
Items that are in the production process but are not yet completed. WIP is a key metric in manufacturing and inventory management as it represents both unfinished goods and tied-up capital. For example, in an automobile assembly plant, cars that are on the production line but not yet fully assembled or tested would be considered WIP.
The process of identifying inefficiencies in a workflow and adjusting processes to streamline operations, enhance efficiency, and reduce costs. In supply chain management, this can involve automating certain processes or redesigning steps in production or fulfillment. For instance, a distribution center may optimize its workflow by implementing an automated sorting system to speed up package processing.
A variable pricing strategy based on understanding, anticipating, and influencing consumer behavior in order to maximize revenue or profits. Commonly used in industries like airlines, hospitality, and advertising, this strategy can also be applied in inventory management to adjust prices based on demand and supply conditions. For example, a hotel may increase its room prices during peak seasons to maximize revenue.
A method of order picking in a warehouse where the warehouse is divided into several zones, and order pickers are assigned to specific zones. Each picker is responsible for picking items from their zone. This can increase efficiency by reducing travel time and helping workers become more skilled in finding items within their zone. An example would be a large fulfillment center for an online retailer, where workers are assigned specific areas of the warehouse to expedite the picking and packing process.