Inventory Glossary
Plain-language definitions of the inventory, warehouse, and manufacturing terms you run into every day, with examples and answers to common questions.
A
A/B testing
A/B testing is an experiment method that compares two versions of something, A and B, with live users to find which one performs better against a chosen goal.
ABC analysis
ABC analysis is an inventory method that ranks items into three tiers (A, B, and C) by value and consumption, so teams focus on the stock that matters most.
Actual cost
Actual cost is a cost accounting method that records the real materials, labor, and overhead expenses a business incurs to make or acquire a product, instead of estimated or standard costs.
Anticipation inventory
Anticipation inventory is extra stock a business builds up in advance to meet a predictable rise in demand, or to hedge against an expected price increase or supply shortage.
ASIN
An ASIN (Amazon Standard Identification Number) is a unique 10-character alphanumeric code that Amazon assigns to every product in its store to identify that item across its catalog.
ASN (Advance Shipping Notice)
An advance shipping notice (ASN) is an electronic document a supplier sends before a shipment arrives, detailing what is in the delivery, how it is packed, and when it will arrive.
Available to build
Available to build (ATB) is a manufacturing figure that shows the maximum number of a finished product you can make right now from the component inventory you have on hand, based on the product’s bill of materials (BOM).
Available to Promise
Available to promise (ATP) is an inventory metric that tells a business how much uncommitted stock it can safely promise to new customer orders, based on what is on hand plus incoming supply, minus what is already committed.
Average inventory
Average inventory is an inventory management metric that estimates the typical value or quantity of stock a business holds over a set period, found by adding beginning and ending inventory and dividing by two.
Average weighted cost
Average weighted cost, also called weighted average cost (WAC), is an inventory valuation method that assigns one blended average cost per unit by dividing the total cost of goods available for sale by the number of units available.
B
Backflush costing
Backflush costing is a cost accounting method that records production costs in one entry after goods are finished, working backward from the bill of materials for manufacturers running short, standardized production.
Backorder
A backorder is a customer order for an item that is temporarily out of stock, which the seller accepts and commits to fulfill once inventory is replenished.
Barcoding
Barcoding is the practice of assigning machine-readable symbols to products so businesses can scan and track each item’s identity, location, and quantity across inventory and supply chain operations.
Bill of materials
A bill of materials (BOM) is a structured list of every raw material, part, component, and subassembly, with quantities, that a business needs to manufacture, assemble, or repair a finished product.
Bin tracking
Bin tracking is an inventory management method that records the exact storage location, or “bin,” of each item in a warehouse so teams always know what is stored where and in what quantity.
Break bulk shipping
Break bulk shipping is a freight method that loads goods onto a vessel as individually counted units, such as crates, drums, bags, or palletized pieces, instead of inside standard shipping containers.
Bullwhip effect
The bullwhip effect is a supply chain phenomenon in which small shifts in customer demand grow into progressively larger swings in orders and inventory as they move upstream to suppliers and manufacturers.
C
Capacity requirement planning
Capacity requirement planning (CRP) is a manufacturing process that calculates the labor and machine hours each work center needs to complete the orders a material requirements planning (MRP) system has planned, and checks whether that workload is feasible.
Carrying costs
Carrying costs are the total expenses a business pays to hold and store inventory over time (including capital, storage, service, and risk costs), on top of what the goods cost to buy or make.
Composite forecast
A composite forecast is a single prediction created by blending two or more individual forecasts, such as time-series, causal, and judgmental methods, usually through averaging or weighted averaging to improve accuracy.
Configure to order
Configure to order (CTO) is a manufacturing approach where customers select from predefined options, and the final product is assembled only after the order is placed.
Consignment inventory
Consignment inventory is a supply arrangement in which a supplier (the consignor) ships goods to a retailer (the consignee) who displays and sells them but only pays after a sale, while the supplier keeps ownership until then.
Cost of goods sold (COGS)
Cost of goods sold (COGS) is the accounting figure that captures the direct cost of producing or buying the goods a business sold during a set period, including materials and direct labor but not overhead like rent or marketing.
Cumulative lead time
Cumulative lead time is the total time needed to source every component and complete a finished product, from ordering the lowest-level raw materials through final production and delivery.
Cycle counting
Cycle counting is an inventory accuracy method in which a rotating subset of stock is counted on a regular schedule, so records stay accurate without shutting down operations for a full annual physical count.
Cycle stock
Cycle stock is the portion of inventory a business plans to sell and replenish on a regular basis to meet normal, expected customer demand between supplier orders.
D
Days inventory outstanding
Days inventory outstanding (DIO) is an efficiency ratio that measures the average number of days a company holds inventory before selling it, helping operators and finance teams see how quickly stock turns into cash.
Days sales of inventory
Days sales of inventory (DSI) is a financial metric that measures the average number of days a business takes to sell its entire inventory during a period.
Deadstock
Deadstock is inventory a business has failed to sell and is unlikely to sell in the future because it has expired, gone out of season, or become obsolete.
Decoupling inventory
Decoupling inventory is buffer stock of raw materials, subassemblies, or work-in-process that manufacturers hold between production stages so a slowdown at one stage doesn’t stop the others.
Demand forecasting
Demand forecasting is the practice of using historical sales data, market trends, and statistical or AI models to predict how much of a product customers will buy over a future period.
Demand planning software
Demand planning software is an inventory tool that forecasts future customer demand and turns it into stocking, purchasing, and production decisions for operators who need the right products on hand.
Direct shipping
Direct shipping is a fulfillment method that sends goods straight from the supplier or manufacturer to the end customer or retail store, bypassing the retailer’s own warehouse or distribution center.
Distributed inventory
Distributed inventory is a fulfillment strategy that stores a company’s stock across multiple warehouses or fulfillment locations, rather than one central facility, so each order can ship from the site closest to the customer.
Dropshipping
Dropshipping is a retail fulfillment method where an online store sells products without holding inventory, forwarding each order to a third-party supplier who ships it directly to the customer.
E
Economic order quantity
Economic order quantity (EOQ) is the order size that minimizes the combined cost of ordering and holding inventory, calculated with the formula EOQ = √(2DS/H).
Electronic point of sale
An electronic point of sale (EPOS) is a computerized system of hardware and software that a business uses to record sales, process payments, and update stock at the moment a transaction happens.
ERP
Enterprise resource planning (ERP) is business management software that connects core processes like finance, inventory, manufacturing, and supply chain into one shared database, giving a company a single, real-time source of truth.
F
FIFO (first in, first out)
FIFO, or first in, first out, is an inventory method that assumes the oldest stock is sold or used first, so its cost is the first assigned to cost of goods sold.
Finished goods inventory
Finished goods inventory is the stock of completed products that have passed all manufacturing and quality checks and are ready to sell to customers.
Forecasting
Forecasting is the practice of using past and current data to predict future demand, sales, or inventory needs, so a business can plan what to buy, make, and stock before it is needed.
G
Gross margin
Gross margin is a profitability metric that shows the percentage of revenue left after subtracting the cost of goods sold (COGS), revealing how much a business keeps from each sale to cover other expenses and profit.
H
Hedge inventory
Hedge inventory is extra stock a business buys ahead of a specific, expected event, such as a price increase, tariff, or supply shortage, to protect against paying more or running out later.
I
Inventory classification
Inventory classification is a method that groups inventory items into tiers by value, usage, or importance so a business can apply the right level of control and attention to each group.
Inventory planning
Inventory planning is the process that forecasts demand and decides how much stock to hold, where to hold it, and when to reorder, so businesses can meet demand while controlling cost and freeing up working capital.
Inventory shrinkage
Inventory shrinkage is the loss of stock that shows up as a gap between the inventory a business has recorded and the smaller amount it actually has on hand, caused by anything other than a sale.
Inventory turnover ratio
The inventory turnover ratio is a financial metric that measures how many times a business sells and replaces its average inventory over a set period, usually one year.
Inventory valuation methods
Inventory valuation methods are the accounting rules a business uses to assign a dollar cost to unsold inventory and to the goods it sells, which sets the value on the balance sheet and the cost of goods sold.
J
Just in time inventory
Just-in-time (JIT) inventory is a stock management method that orders and receives materials only as customer demand requires, keeping on-hand stock as low as possible.
K
Kitting
Kitting is an inventory and fulfillment process that groups several separate products or components into one package with its own stock keeping unit (SKU), so a business can sell, assemble, or ship them as a single unit.
L
Landed cost
Landed cost is the total amount a business pays to get a product from its supplier into its own warehouse, including the purchase price plus shipping, insurance, customs duties, taxes, and handling fees.
Lead time
Lead time is the total time from when an order is placed to when goods are received and ready to use or sell, covering procurement, production, and delivery.
Lean inventory
Lean inventory is an inventory management approach that keeps stock levels as low as possible while still meeting customer demand, cutting waste and carrying costs.
Lean warehousing
Lean warehousing is a storage and fulfillment approach that removes waste from every step of the operation so businesses ship orders faster with less tied-up cash.
LIFO (last in, first out)
LIFO (last in, first out) is an inventory valuation method that assigns the cost of your most recently purchased or produced goods to the items sold first, raising cost of goods sold and lowering taxable income when prices climb.
M
Make-to-stock
Make-to-stock (MTS) is a production strategy in which manufacturers build finished goods ahead of demand, using sales forecasts to decide what and how much to produce so products are ready to ship when orders arrive.
Manufacturing execution system
A manufacturing execution system (MES) is software that tracks and controls production on the factory floor in real time, connecting shop-floor activity to planning systems like ERP.
Material requirements planning
Material requirements planning (MRP) is a production-planning system that calculates the materials and components a manufacturer needs, in what quantities, and when, so production stays on schedule without excess stock.
Merchandise planning
Merchandise planning is the retail process of deciding which products to buy, in what quantities, and when, so stores meet customer demand while hitting sales, margin, and inventory goals.
Moving average costing method
Moving average costing is an inventory valuation method that recalculates average unit cost after each purchase, then applies that blended cost to cost of goods sold and remaining stock.
Multi-channel inventory management
Multi-channel inventory management is the practice of tracking and syncing stock levels across every sales channel from one central system, so a business selling on its website, online marketplaces, and physical stores never oversells or runs out.
O
Order cycle
An order cycle is the full journey a customer’s order travels, from the moment it is placed to the moment it is delivered, that businesses track to measure and improve fulfillment speed and accuracy.
Order fulfillment
Order fulfillment is the operations process that moves a customer order from purchase through picking, packing, delivery, and returns for retailers, manufacturers, and ecommerce sellers.
P
Periodic inventory system
A periodic inventory system is an accounting method that measures stock levels and cost of goods sold through a physical count at set intervals, such as monthly, quarterly, or annually, instead of updating records after every transaction.
Perpetual inventory system
A perpetual inventory system is an inventory management method that continuously updates stock records in real time as items are received, sold, moved, or returned.
Pick and pack
Pick and pack is a warehouse fulfillment process that retrieves ordered items from storage and prepares them for shipment, so businesses can ship individual customer orders accurately.
Purchase order
A purchase order (PO) is a formal document a buyer sends to a supplier listing the items, quantities, and agreed prices for a purchase.
R
Raw materials
Raw materials are the basic inputs, components, and substances a business buys or sources and then transforms through production into finished goods.
Reorder point formula
The reorder point formula is a simple equation that tells you the exact inventory level at which to reorder an item: (average daily sales x lead time) + safety stock.
Retail price
Retail price is the final amount a customer pays for a product in a store or online, set by the retailer to cover its costs and add a profit margin.
S
Safety stock
Safety stock is buffer inventory a business holds above expected demand to protect against stockouts caused by demand spikes, supplier delays, and forecast errors.
Sales order
A sales order (SO) is an internal document a seller creates to confirm a customer’s purchase, capturing the items, quantities, prices, and delivery terms, and authorizing fulfillment.
SKU
A SKU (stock-keeping unit) is an internal alphanumeric code a business assigns to each distinct product variant so it can track that item across its inventory, sales, and fulfillment systems.
Stock replenishment
Stock replenishment is the inventory management process of restocking products at the right time and in the right quantities so a business can meet customer demand without running out or overstocking.
Stock transfers
Stock transfers are internal inventory moves that shift products from one of a company’s own locations to another, such as between warehouses, stores, or storage bins, without involving a sale.
Stockout
A stockout is an inventory event in which a business runs out of a product, so customers cannot buy or order it until stock is replenished.
T
Transit inventory
Transit inventory is stock a company has purchased and owns but that is still moving between supply chain locations, such as from a supplier to a warehouse, and has not yet arrived.
U
Unit of measure
A unit of measure is a standard quantity, defined by convention or by law, that a business uses to count, price, buy, sell, and track a given item consistently.
Units
Units are the individual items or standard quantities a business counts, tracks, and values so it always knows how much inventory it has on hand and in what form.
V
Vendor managed inventory
Vendor managed inventory (VMI) is a supply chain arrangement in which the supplier, not the buyer, monitors a customer’s stock levels and decides when and how much to replenish, using shared sales and inventory data.
W
Warehouse labeling
Warehouse labeling is the practice of applying scannable codes, such as barcodes, QR codes, or RFID tags, to a warehouse’s locations, racks, bins, and products so people and systems can identify and track them quickly and accurately.
Warehouse management system
A warehouse management system (WMS) is software that helps businesses control daily warehouse operations, from receiving and storing inventory to picking, packing, and shipping orders.
Warehouse reports
Warehouse reports are documents that summarize a warehouse’s inventory, activity, and performance data so managers can track stock, orders, and operations and make informed decisions.
Work in process inventory
Work in process inventory is the value of partially finished goods moving through production, past raw materials but not yet finished goods, that manufacturers track to measure production progress, cost, and total inventory value.
#
3PL
A third-party logistics (3PL) provider is an outside company that handles warehousing, order fulfillment, and shipping for a business so it can outsource part or all of its supply chain.