Making better use of the data in your inventory system

# Glossary

Active inventory  –  inventory (stock) which likely to sell in the near future.

Continuous review – An item is ordered as soon as it falls below its reorder point, i.e. the reorder review period is zero.

Exponential smoothing  –  This is a technique for maintaining an estimated mean (average). For example, if it is used to maintain an estimate of the mean demand per month then, each month, the estimate is updated, giving most of the weight to the old estimate and the remainder of the weight to the most recent month’s demand. The weight given to the most recent month’s demand is called the “smoothing constant”.

Inventory level  –  Stock on hand minus the quantity on customer back order.

Inventory position  –  Inventory level plus the quantity on order from the supplier.

Maximum level  –  When and item is ordered, the order quantity should be such as to increase the stock on hand of an item plus the quantity on order from the supplier minus the quantity on customer back order to the “maximum level”.

Mean  –  This is the “ordinary” average, e.g. the mean of 5, 2 and 4 is (5+2+4)/3 = 11/3 = 3.67. The term is also used to mean expected value. Under these circumstances, it is also called the “theoretical mean”.

Median  –  The middle quantity when they are sorted. For example, to find the median of 3, 1, 7, 1 and 5, first sort them, giving 1,1,3,5,7. The median is then the number in the middle, i,e. 3. If there are two in the middle then average them. For example, to find the median of 3, 1, 5 and 1, first sort them, giving 1,1,3,5. The median is the average of 1 and 3, i.e. 2.

Minimum level  –  When the inventory position of an item falls below a level known as the “minimum level”, the item should be reordered. The “minimum level” is also called the “reorder point” but, unfortunately, that term is used inconsistently (See the definition of “reorder point” given below).

Periodic review – Periodic listing, by the computer, of all items which should be ordered from a particular supplier at that time. The amount of time between the production of those listings for a particular supplier is called the “reorder review period”.

Reorder point  –  When the inventory position of an item falls below a level known as the “reorder point”, the item should be reordered. The reorder point is often referred to as the “minimum level”. Sometimes the reorder point is regarded as the inventory position at which the item should be reordered, i.e. one less than the above definition. With the first definition, a non-stock item would have a reorder point of 0 and with the second definition, it would be -1. A non-stock item is only reordered to fill customer back orders.

Reorder review  –  determination (usually by the computer) of which items should be ordered at that time.

Reorder review period  –  The amount of time between successive occasions on which the computer produces reordering recommendations for a particular supplier.

Service level  –  This can be regarded as the probability that the next customer demand will be supplied off the shelf. This definition can be regarded as the instantaneous service level. The service level is usually regarded as the percentage of customer demand which is supplied immediately off the shelf. This can be regarded as the average of the instantaneous service level over the period of time for which the service level is measured.

Trend  –  Progressive increase or decrease in demand rate.