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SUPPLY CHAIN JARGONS

ABC Inventory Control


An inventory control approach based on the ABC classification. According to this
classification, the groups of items are placed in the decreasing order of annual dollar
volume (price multiplied by projected volume) or some other criteria. This array is then
split into three classes, called A, B, and C. The A group usually represents 10% to 20% by
number of items and 50% to 70% by projected dollar volume. The next grouping, B,
usually represents about 20% of the items and about 20% of the dollar volume. The C
class contains 60% to 70% of the items and represents about 10% to 30% of the dollar
volume. The ABC principle states that effort and money can be saved through applying
looser controls to the low-dollar-volume class items than will be applied to high-dollarvolume class items. The ABC principle is applicable to inventories, purchasing, sales, etc.
Available Inventory
The on-hand inventory balance minus allocations, reservations, backorders, and (usually)
quantities held for quality problems. Often called beginning available balance
Safety Stock
The level of inventory desired at any time to counterbalance the many uncertainties met
in a supply chain.
Cycle count
An inventory verification method that uses periodic, scheduled counts of inventory and
associated locations to determine accuracy. Count schemes may be designed based on
usage volume, all parts in specific warehouse rows, or other methods and normally
involve the use of trained count personnel.
WIP (Work in Process)
The inventory under assembly in an assembly plant
Backlog
All the customer orders received but not yet shipped. Sometimes referred to as open
orders or the order board
Bill of Material (BOM)
A listing of all the subassemblies, intermediates, parts, and raw materials that go into a
parent assembly showing the quantity of each required to make an assembly. It is used in
conjunction with the master production schedule to determine the items for which
purchase requisitions and production orders must be released.
Carrying Cost
The cost of holding inventory, usually defined as a percentage of the dollar value of
inventory per unit of time (generally one year). Carrying cost depends mainly on the cost

of capital invested as well as such costs of maintaining the inventory as taxes and
insurance, obsolescence, spoilage, and space occupied. Such costs vary from 10% to 35%
Economic Order Quantity (EOQ)
A type of fixed-order-quantity model that determines the amount of an item to be
purchased or manufactured at one time
Aggregate planning
Sales, revenue, inventory and production planning done at total organization, facility or
family levels
Backorder
Backorder is a current or past due customer order (or line item) that cannot be shipped
due to lack of inventory availability. Customer agreements govern how backorders are
handled (ship when available, ship whole order only, cancel, etc.).
Electronic data interchange (EDI)
The paperless (electronic) exchange of trading documents, such as purchase orders,
shipment authorizations, advanced shipment notices, and invoices, using standardized
document formats
Forecasting
The business function that attempts to predict sales and use of products so they can be
purchased or manufactured in appropriate quantities in advance
Buffer
Stock positioned at a processing or usage point to allow for demand or process variations,
or to maintain continued operation of a constrained resource.
Decoupling
The point in the supply chain which provides a buffer between differing input and output
rates
Distribution requirements planning (DRP)
The function of determining the need to replenish inventory at branch warehouses A
time-phased order point approach is used where the planned orders at the branch
warehouse level are exploded via MRP logic to become gross requirements on the
supplying source. In the case of multilevel distribution networks, this explosion process
can continue down through the various levels of regional warehouses (master warehouse,
factory warehouse, etc.) and become input to the master production schedule.
Continuous replenishment
A method typically used between retailers and distributors or manufacturers that uses
point-of-sale inventory and sales data to trigger automatic replenishments, with the
vendor assuming responsibility for initiation and fulfillment.

Cross docking
A logistics activity that attempts to reduce costs and total lead time by breaking down
received items on the loading dock and immediately matching them with outgoing
shipment requirements, instead of stocking the items in warehouse locations and
returning to pick for orders at a later time.
Cycle time
The total time required to complete a transformation from one status to another. Total
cycle time is composed of many elements, often broken into active (running or operating)
time and idle (queue or wait) time
Drop Ship
Directing a vendor to send purchased material directly to a third party instead of
delivering to the owner's facility for inspection or stocking.
Fill Rate
A customer order delivery performance measurement of the percentage of times line item
shipments met requested dates and quantities. Whole order shipments may be used
instead of individual line items for customers who require the entire order to be shipped
complete.
VMI
The process by which the vendor manages the inventory of its products in its distribution
center is called as VMI. The vendor receives stock information from the customer and
then calculates what should be shipped to maintain adequate inventory levels at the
retailer's facility. It is the preferred method by which customers dump their inventory
woes on vendors.
CPFR
Collaborative Planning, Forecasting, and Replenishment (CPFR) is the sharing of
forecast and related business information among business partners in the supply chain to
enable automatic product replenishment.
Bull whip effect
Bullwhip is a pervasive supply chain problem whereby order variability grows as demand
signals propagate upstream. Essentially, demand spikes as orders flow back from retailer
to distributor to original equipment manufacturers to tier-one suppliers, and so on.
Continuous Replenishment (CR)
A time-based strategy where the supplier eliminates the need for replenishment orders by
receiving daily transmission of retail sales or warehouse shipments and then assuming
responsibility for replenishing retail inventory in the required quantities, colors, sizes, and
styles. The agreement to replenish is honored as a purchase commitment. The result is a
reduction in total logistics cost and an improvement in inventory velocity.

Inventory Pull System


System whereby a firm waits to produce product until customers demand it.
Inventory Push System
System whereby a firm produces then pushes product through the channel without orders
in hand. Here, production and inventory levels are guided by forecasted or anticipated
sales to customers.
Inventory Velocity
The speed of inventory moving through a facility during a given time, as measured by
turnover (annual dollar sales volume at cost /average dollar inventory investment)
Efficient Consumer Response (ECR)
A demand driven replenishment system, common in the grocery industry, designed to link
all parties in the channel to create a massive flow-through distribution network. The
system is driven by time-phased replenishment based on consumer demand. The sharing
of information allows the manufacturer or supplier to anticipate demand and react to it.
Instead of waiting for an order to arrive, they can initiate or manufacture product based
on point of sale information. The sharing of accurate, instantaneous data is essential to
this concept.
Postponement
A cost reduction strategy that moves product differentiation nearer to the time of purchase
(and thereby reducing risk and uncertainty) by postponing changes to the form and
identity of a product or its inventory location to the last possible point in the supply
chain.
Reverse Logistics
The process of planning, implementing, and controlling the efficient, cost-effective flow
of product back upstream for the purposes of source reduction/conservation, recycling,
substitution, and disposal
Supply Chain (Value Chain)
The alignment of firms that bring products or services to market
Vertically Integrated
Where the same company owns several levels (echelons) of the supply chain
Bonded
Storage of certain goods under charge of customs viz. customs seal until the import duties
are paid or until the goods are taken out of the country. Bonded warehouse (place where
goods can be placed under bond)
Cost and Freight (CFR)
Cost and Freight" means that the seller must pay the costs and freight necessary to bring
the goods to the named port of destination but the risk of loss of or damage to the goods,

as well as any additional costs due to events occurring after the time the goods have been
delivered on board the vessel, is transferred from the seller to the buyer when the goods
pass the ship's rail in the port of shipment.
CIF
"Cost, Insurance and Freight" means that the seller has the same obligations as under
CFR but with the addition that he has to procure marine insurance against the buyer's risk
of loss of or damage to the goods during the carriage.
Detention Charges
Charges levied on usage of equipment exceeding free time period as stipulated in the
pertinent inland rules and conditions.
FTL & PTL
Manufacturing Resource Planning MRP-II
A method for the effective planning of a manufacturing company, being a direct outgrowth and extension of MRP-I.