Advanced Inventory Management IEM Master

Master

On-hand/physical stock

The stock physically on the shelf, which is always ≥ 0

Stockout

An event where customer demand exceeds the on-hand stock

Backorders/backlog

The amount of unfilled demand waiting to be filled when a replenishment order arrives

Safety stock/buffer stock

The average net stock just before a replenishment order arrives, usually ≥ 0, but may be < 0

Net stock/inventory level

On-hand stock minus backorders, which may be < 0 or ≥ 0

Inventory position/economic inventory

The sum of on-hand stock and on-order stock minus backorders and committed stock

Continuous review

An inventory review policy where replenishment orders can be placed at any time, requiring less safety stock

Periodic review

An inventory review policy where orders can only be placed at specific points in time, facilitating multi-item coordination

Fixed lot size

A replenishment approach restricted by packaging units, such as ordering in multiples of pallets or barrels

Variable lot size

A replenishment approach without restrictions on the order quantity

(s, Q) policy

Replenishment occurs when inventory position drops to or below reorder point s, and a fixed quantity Q is ordered

(s, nQ) policy

Replenishment occurs in integer multiples of Q to raise inventory position above s

(s, S) policy

Replenishment occurs when inventory position drops to s, with variable order quantity S−IP

(R, s, Q) policy

Inventory position is reviewed every R period, and a fixed quantity Q is ordered if inventory position IP≤s

(R, S) policy

Inventory is replenished every R period, with order quantity raising inventory position to S

Undershoot

The amount by which inventory position goes below reorder point s before a replenishment order is placed

Lead time

The time between placing an order and receiving the replenishment

Replenishment cycle

The period between the receipt of two subsequent replenishment orders

Newsboy problem

A model for single-period inventory optimization with high uncertainty and costs related to understocking or overstocking

Economic Order Quantity (EOQ)

The order quantity that minimizes the total holding and ordering costs, calculated as Q = 2AD/vr ​

Cycle service level (P1)

The probability of no stockout during a replenishment cycle

Volume fill rate (P2)

The fraction of demand satisfied directly from the shelf

Ready rate (P3)

The fraction of time during which net stock is positive

Time Between Stockout occasions (TBS)

The average time or number of cycles between stockout events

Order fill rate (OFR)

The fraction of customer orders that can be fulfilled completely from on-hand inventory

Order line fill rate (OLFR)

The fraction of order lines that can be fulfilled completely from on-hand inventory

Service levels

Metrics used to measure the ability to meet customer demand, including cycle service level and fill rate

Forecasting

Estimating future demand based on historical data, explanatory variables, or human judgment

Exponential smoothing

A forecasting method that applies decreasing weights to older data for estimating trends

Moving average

A forecasting method that calculates the average demand over the last N periods, with equal weights for all observations

Holt-Winters model

A forecasting method that combines level, trend, and seasonal components to predict demand

Seasonal factors

Adjustments applied to forecasts to account for predictable seasonal demand variations

Intermittent demand

Demand characterized by periods of zero demand interspersed with occasional spikes

Lumpy demand

A demand pattern with irregular, infrequent, and highly variable occurrences

Standard deviation of forecast error

A measure of the variability in forecast errors over a specified period, used to calculate safety stock

Croston’s method

A forecasting technique for intermittent demand, separating estimates of demand size and time between demand events

Anticipation stock

Inventory accumulated in advance of expected peaks in demand or supply

Pipeline inventory

Goods in transit or being processed within the supply chain

Cycle stock

Inventory resulting from ordering larger quantities than demand to achieve economies of scale

Inventory turnover

The ratio of annual sales to average inventory value, showing how often inventory is sold or replaced

Little’s Law

A formula used in inventory management: WIP=demand rate×lead time

XYZ classification

A classification method that categorizes items based on demand uncertainty: X (low), Y (medium), and Z (high)

ABC classification

A method of categorizing inventory into A (most important), B (moderately important), and C (least important) items based on criteria like annual usage value

Safety stock in (s, Q) systems

A method balancing holding costs and service levels to determine reorder points and order quantities

Cost per stockout occasion (B1)

The cost incurred when a stockout occurs, applied per occurrence

Cost per unit short (B2)

The cost incurred for each unit of demand that cannot be met immediately

Cost per unit short per unit time (B3)

The cost applied for each unit of unmet demand per unit of time it remains unmet

Demand forecasting

The process of predicting future customer demand using data and statistical models

Simultaneous optimization of lot size and safety factor

An iterative method to jointly optimize reorder point s and order quantity Q

Marginal analysis

A technique to determine the optimal order quantity by comparing costs of understocking and overstocking

SKU classification

Categorizing stock-keeping units based on criteria like demand variability, sales value, or criticality

Functional classification of inventories

Divides inventory into categories: cycle stock, safety stock, anticipation stock, and pipeline inventory

Slow movers

Inventory items with low demand frequency or size, often modeled using discrete distributions

Fast movers

Inventory items with high demand frequency or size, often modeled using continuous distributions

Demand variability

The degree to which demand fluctuates over time, impacting inventory policies and safety stock levels

Reorder point

The inventory level at which a replenishment order is triggered

Lead time demand

The expected demand during the lead time, used to calculate safety stock

Two-bin system

An inventory control system where one bin is used for current demand, and the second triggers replenishment when opened

Fill rate target

The desired percentage of demand satisfied directly from inventory

Service level target

The goal for customer satisfaction measured through service levels like P1, P2, or P3

Forecasting accuracy

The precision of demand predictions, measured through metrics like MSE, MAD, and MAPE

Human judgment in forecasting

Incorporating qualitative inputs like market conditions and promotions into demand forecasts

Trend models

Forecasting models that incorporate linear or exponential trends in demand