Inventory and Cashflow Dictionary
This glossary explains key inventory, cash flow, and supply chain terms in plain language, with a focus on what they mean for businesses.
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Inventory Metrics and Finance Planning and Demand Operations and Supply Merchandising and Assortment Performance and Service Systems and Data Process and GovernanceInventory
Inventory Leak
Definition: Any point where stock ties up cash without adding value. Includes slow movers, overbuying, poor clearance, or inaccurate data.
Why it matters: Shows where cash is stuck and what to fix first.
Safety Stock
Definition: Buffer stock held to protect against demand or supply variability.
Why it matters: Too low creates stockouts. Too high traps cash and inflates carrying cost.
Dead Stock
Definition: Zero movement inventory that no longer sells at normal margin.
Why it matters: Pure cash drag that usually needs write down, write off, or aggressive clearance.
Slow Movers
Definition: SKUs with low sales velocity and long time on shelf.
Why it matters: Often where most excess inventory and trapped cash sits.
Obsolescence Risk
Definition: Likelihood that stock becomes unsellable due to trend, technology, regulation, or expiry.
Why it matters: Drives the need for proactive markdowns, bundles, and lifecycle management.
Aging Inventory
Definition: Stock held across multiple periods or seasons without selling as planned.
Why it matters: High aging signals rising obsolescence risk and stuck working capital.
Metrics and Finance
DIO (Days Inventory Outstanding)
Definition: Average number of days inventory stays in the business before converting into revenue.
Why it matters: High DIO points to overstock, slow productivity, and cash trapped in stock.
Inventory Turnover
Definition: Number of times inventory is sold and replaced over a period, usually a year.
Why it matters: Higher turns signal healthier inventory flow and better use of working capital.
Working Capital
Definition: Cash tied up in inventory, receivables, and payables that supports daily operations.
Why it matters: Poor inventory decisions block cash that could fund growth, marketing, or hiring.
Carrying Cost
Definition: Total cost of holding inventory. Includes storage, handling, damage, insurance, and cost of capital.
Why it matters: High carrying cost punishes slow movers and long lead time items.
Write Down
Definition: Reduction in the book value of inventory that is aging, damaged, or unlikely to sell at standard price.
Why it matters: Hits margins and signals deeper issues in planning or lifecycle management.
Days Payable Outstanding (DPO)
Definition: Average number of days you take to pay suppliers.
Why it matters: Longer DPO can ease cash pressure but may strain supplier relationships if pushed too far.
Days Sales Outstanding (DSO)
Definition: Average number of days customers take to pay you.
Why it matters: High DSO combined with high DIO creates a cash squeeze even with healthy revenue.
Variance
Definition: Difference between plan and actual for metrics such as sales, inventory, or margin.
Why it matters: Highlights where execution is off and where root cause analysis is needed.
Planning and Demand
Forecast Accuracy
Definition: Measure of how close demand forecasts are to actual sales.
Why it matters: Low accuracy drives simultaneous overstock and stockouts.
Forecast Bias
Definition: Systematic tendency to over forecast or under forecast demand across periods.
Why it matters: Bias quietly distorts buying, production, and cash planning.
Bullwhip Effect
Definition: When demand variability becomes amplified as it moves upstream from customers to suppliers.
Why it matters: Creates chronic overstock and stockouts and inflates safety stock through the chain.
Demand Variability
Definition: Fluctuations in customer demand by period, channel, or region.
Why it matters: Higher variability increases safety stock and forecast difficulty.
Reorder Point
Definition: Inventory level at which a new order is triggered to avoid future stockout.
Why it matters: Good reorder points balance service and cash. Poor ones cause chronic shortages or overstock.
EOQ (Economic Order Quantity)
Definition: Calculated order size that balances ordering cost with holding cost for a stable SKU.
Why it matters: Useful for steady demand items to avoid both under ordering and over ordering.
Scenario Planning
Definition: Modelling different demand, supply, or cost futures to test options and responses.
Why it matters: Helps anticipate risk and reduce firefighting when conditions change.
Constraints Based Planning
Definition: Planning that respects real limits in capacity, storage, and supplier capability.
Why it matters: Produces realistic plans and reduces last minute expediting and write offs.
Demand Driven Replenishment
Definition: Replenishment that reacts to actual consumption rather than relying only on forecasts.
Why it matters: Reduces inventory for stable SKUs and simplifies planning logic.
Operations and Supply
Lead Time
Definition: Time between placing an order and receiving goods ready for use or sale.
Why it matters: Longer lead times increase forecast risk and raise safety stock needs.
Lead Time Variability
Definition: Instability in how long suppliers take to deliver across orders.
Why it matters: Forces higher buffers and makes delivery promises less reliable.
MOQ (Minimum Order Quantity)
Definition: Minimum quantity a supplier will accept per order.
Why it matters: Often pushes you to overbuy and inflate DIO, especially for slow movers.
Supply Variability
Definition: Fluctuations in supplier performance, lead time, or quality.
Why it matters: Increases safety stock and complicates planning.
Backorder
Definition: Order or part of an order that cannot be fulfilled on time due to lack of stock.
Why it matters: Signals lost sales risk, customer dissatisfaction, and potential churn.
Capacity Constraint
Definition: Limit in production, warehouse, or logistics that caps throughput.
Why it matters: Creates bottlenecks that lead to delays, overtime, and stockouts.
Cycle Count
Definition: Regular partial inventory checks instead of a single full stock take.
Why it matters: Improves stock accuracy and reduces data errors that cause bad planning.
Root Cause Analysis
Definition: Structured method to find underlying reasons behind a problem.
Why it matters: Stops repeat issues instead of treating symptoms every week.
Merchandising and Assortment
SKU Productivity
Definition: Revenue or margin contribution per SKU, often measured via sales velocity or gross profit.
Why it matters: Low productivity SKUs trap cash and attention with limited return.
Assortment Complexity
Definition: Number of SKUs and their variability across sizes, colors, and variants.
Why it matters: Higher complexity increases inventory risk and operational overhead.
ABC Classification
Definition: Grouping SKUs into A, B, and C tiers based on value, volume, or velocity.
Why it matters: Helps focus effort and control on the SKUs that matter most for cash and service.
Markdown
Definition: Price reduction used to accelerate sell through of inventory.
Why it matters: Clears leaks but erodes margin if overused or poorly targeted.
Lifecycle Management
Definition: Managing products from launch through growth, maturity, and end of life.
Why it matters: Reduces waste and prevents large end of season write downs.
Sell Through Rate
Definition: Percent of available stock sold during a period.
Why it matters: Quick signal of SKU health and whether to push, protect, or clear.
Demand Shaping
Definition: Steering customer demand through pricing, promotion, display, and assortment decisions.
Why it matters: Helps rebalance inventory across fast and slow movers and reduce leaks.
Allocation Logic
Definition: Rules used to distribute limited inventory across channels, stores, or regions.
Why it matters: Critical for multi channel and multi region businesses where stock is scarce.
Performance and Service
Service Level
Definition: Percent of orders or order lines fulfilled on time without stockout.
Why it matters: Direct link to customer trust, retention, and brand strength.
Fill Rate
Definition: Percent of demand that is met without delay or substitution.
Why it matters: Core KPI for how reliable your inventory is in practice.
OTD (On Time Delivery)
Definition: Measure of whether suppliers deliver when they promised.
Why it matters: Poor OTD forces higher buffers and disrupts production and launch timing.
OTIF (On Time In Full)
Definition: Measure of whether customers receive the full ordered quantity on time.
Why it matters: Combines timing and completeness into one service metric.
Systems and Data
ATP (Available to Promise)
Definition: Real time view of stock that is free to commit to new customer orders.
Why it matters: Enables honest delivery promises and reduces chaos in order management.
MRP (Material Requirements Planning)
Definition: System that calculates what materials to buy and when based on demand and bills of material.
Why it matters: Essential for manufacturing and complex assembly businesses.
Data Latency
Definition: Time lag between real world activity and when systems reflect that activity.
Why it matters: High latency leads to decisions based on stale data and misaligned stock.
Data Hygiene
Definition: Quality of master data, including accuracy, completeness, and timeliness.
Why it matters: Dirty data makes even the best forecasting and analytics tools unreliable.
Process and Governance
S&OP (Sales and Operations Planning)
Definition: Cross functional process to align demand, supply, and inventory plans on a repeatable cycle.
Why it matters: Reduces silo decisions and creates one version of the truth for the business.
IBP (Integrated Business Planning)
Definition: Advanced form of S&OP that integrates finance, strategy, and scenario planning.
Why it matters: Links volume decisions to value and profit impact.