A-B-C approach Classifying inventory according to some measure of importance, and allocating

control efforts accordingly.

cycle counting A physical count of items in inventory.
cycle stock The amount of inventory needed to meet expected demand.
economic order quantity (EOQ) The order size that minimizes total annual cost.
excess cost Difference between purchase cost and salvage value of items left over at the end of a
period.
fill rate The percentage of demand filled by the stock on hand.
fixed-order-interval (FOI) model Orders are placed at fixed time intervals.
holding (carrying) cost Cost to carry an item in inventory for a length of time, usually a year.
inventory A stock or store of goods.
inventory turnover Ratio of average cost of goods sold to average inventory investment.
lead time Time interval between ordering and receiving the order.
Little's Law The average amount of inventory in a system is equal to the product of the average
demand rate and the average time a unit is in the system.
ordering costs Costs of ordering and receiving inventory.
periodic system Physical count of items in inventory made at periodic intervals (weekly, monthly).
perpetual inventory system System that keeps track of removals from inventory continuously, thus
monitoring current levels of each item.
point-of-sale (POS) system Record items at time of sale.
purchase cost The amount paid to buy the inventory.
quantity discounts Price reductions for larger orders.
reorder point (ROP) When the quantity on hand of an item drops to this amount, the item is
reordered.
safety stock Extra inventory carried to reduce the probability of a stockout due to demand and/ or lead
time variability.
service level Probability that demand will not exceed supply during lead time.
setup costs The costs involved in preparing equipment for a job.
shortage costs Costs resulting when demand exceeds the supply of inventory; often unrealized profit
per unit.
single-period model Model for ordering of perishables and other items with limited useful lives.
two-bin system Two containers of inventory; reorder when the first is empty.
universal product code (UPC) Bar code printed on a label that has information about the item to which
it is attached.