Top 20 Inventory Management Terms to Know.

1. Inventory Turnover

Inventory turnover measures how frequently inventory is sold and replaced during a specific period.

• Formula: Inventory Turnover = Cost of Goods Sold (COGS) ÷ Average Inventory

• Why it matters: A high turnover rate indicates strong sales or efficient inventory use. A low rate may signal overstocking or weak demand.

2. Economic Order Quantity (EOQ)

EOQ is a mathematical formula that determines the most cost-effective quantity to order, minimizing total inventory costs.

• Balances: Ordering costs (like shipping or paperwork) and holding costs (like storage or insurance).

• Formula: EOQ = √(2DS/H), where D = demand, S = ordering cost, and H = holding cost.

EOQ helps businesses optimize their inventory replenishment strategy for long-term savings.

3. Just-in-Time (JIT) Inventory

Just-in-Time is a lean inventory management method that aligns deliveries closely with production or sales.

• Key Benefit: Reduces storage needs and minimizes waste.

• Risk: Requires reliable suppliers and accurate forecasting to avoid stockouts.

JIT supports lean operations and is popular in industries like automotive and electronics.

4. Safety Stock

Safety stock is extra inventory held to prevent stockouts caused by demand surges or supply delays.

• Calculation: Based on average usage and lead time variability.

• Purpose: Acts as a buffer to maintain service levels.

Maintaining safety stock ensures customer satisfaction during demand uncertainty.

5. Reorder Point (ROP)

Reorder Point is the inventory level that triggers a new order.

• Formula: ROP = Average Daily Usage × Lead Time

• Optimization: ROP helps avoid running out of stock while preventing early reordering.

ROP is a critical tool in automating inventory replenishment processes.

6. Lead Time

Lead time is the total time from placing an order with a supplier to receiving the goods.

• Components: Order processing, production, and shipping.

• Impact: Affects when and how much to reorder.

Accurate lead time data is vital for maintaining efficient inventory control systems.

7. ABC Analysis

ABC analysis ranks inventory based on importance:

• A items: High value, low quantity — tight control needed.

• B items: Moderate value and volume.

• C items: Low value, high quantity — less frequent monitoring.

ABC prioritization helps focus resources on what matters most in inventory planning.

8. Cycle Counting

Cycle counting is a regular auditing process of selected inventory segments instead of a full stock count.

• Advantage: Minimizes disruption while maintaining accuracy.

• Best Practice: Count high-value or fast-moving items more often.

Cycle counting improves inventory accuracy and identifies shrinkage early.

9. Stock Keeping Unit (SKU)

An SKU is a unique identifier for each item in inventory, including variations in size, color, or configuration.

• Use: Crucial for barcoding, inventory tracking, and reporting.

• Helps with: Sales analysis, reordering, and space management.

Efficient SKU management boosts performance in multi-channel retail and e-commerce.

10. Inventory Carrying Costs

Carrying costs include storage, insurance, depreciation, shrinkage, and opportunity cost of capital tied up in stock.

• Target: Carry just enough inventory to meet demand without excessive overhead.

• Benchmark: Carrying costs typically range from 20–30% of inventory value annually.

Lowering carrying costs increases profitability and cash flow.

11. Perpetual Inventory System

A perpetual inventory system continuously updates stock levels in real time via software, scanners, or POS systems.

• Advantage: Instant visibility and accuracy.

• Requires: Integrated systems and proper data entry.

Perpetual systems are essential for real-time inventory management.

12. Periodic Inventory System

Periodic systems update inventory levels at fixed intervals (e.g., monthly, quarterly).

• Benefit: Simpler and cheaper to operate.

• Drawback: Lacks real-time accuracy.

Periodic systems are suitable for smaller businesses or those with limited tech budgets.

13. Dead Stock

Dead stock refers to unsold items that have been in inventory too long.

• Causes: Poor forecasting, low demand, or seasonal changes.

• Solutions: Discounts, liquidation, or donations.

Managing dead stock reduces storage costs and frees up warehouse space.

14. Obsolete Inventory

Obsolete inventory is outdated stock that can no longer be sold (e.g., expired products or discontinued models).

• Impact: Ties up capital and may require disposal.

• Avoidance: Through accurate forecasting and product lifecycle management.

Write-offs from obsolete inventory can significantly affect your bottom line.

15. Backorder

A backorder occurs when demand exceeds inventory and sales are made for future fulfillment.

• Risk: Can damage customer satisfaction if poorly managed.

• Prevention: Improve forecasting, monitor lead times, maintain safety stock.

Use backorder tracking tools to communicate proactively with customers.

16. Demand Forecasting

Demand forecasting uses historical data, trends, and market insights to predict future product demand.

• Types: Qualitative (expert judgment) and quantitative (data-driven).

• Goal: Improve stock availability and reduce waste.

Accurate demand forecasting drives better procurement and production planning.

17. First-In, First-Out (FIFO)

FIFO assumes the first items received are the first sold.

• Benefits: Reduces spoilage, ensures older inventory moves first.

• Used in: Food, pharmaceuticals, and perishable goods.

FIFO improves inventory freshness and aligns with GAAP for accounting.

18. Last-In, First-Out (LIFO)

LIFO assumes the most recently received items are sold first.

• Used primarily in: Accounting to match current costs with current revenue.

• Downside: May leave older inventory unused or expired.

LIFO is rarely used today but may offer tax advantages in inflationary markets.

19. Inventory Shrinkage

Shrinkage is the loss of inventory due to theft, errors, damage, or fraud.

• Common in: Retail, electronics, and high-value goods.

• Prevention: Strong internal controls, cycle counting, surveillance.

Reducing shrinkage helps protect profits and inventory accuracy.

20. Vendor-Managed Inventory (VMI)

In VMI, suppliers take responsibility for managing stock levels at the customer’s location.

• Benefits: Reduces stockouts, lowers admin costs, improves collaboration.

• Requires: Trust, data sharing, and clear agreements.

VMI enhances supply chain visibility and reliability.

📌 Final Thoughts: Mastering Inventory Management Terms

Whether you’re in retail, manufacturing, or distribution, these 20 inventory management terms are essential for optimizing your supply chain operations, reducing costs, and improving customer satisfaction.