Inventory Management Terms and Definitions Explained

What inventory management means

Inventory management is the process of ordering, storing, tracking and selling the goods a business holds, so that it has enough to meet demand without tying up more money than necessary in stock. The terms below are common across retail, manufacturing and e-commerce, though exact usage can differ by company or software.

Types of inventory

• Raw materials: inputs used to make a product.
• Work in progress (WIP): items partly made but not finished.
• Finished goods: completed products ready to sell.
• MRO supplies: maintenance, repair and operations items used to run the business but not sold.
• Cycle stock: stock that is expected to be sold in the normal course of business.
• Safety stock: extra stock held as a buffer against uncertain demand or late supply. Supply buffers also feature in organizational resilience.
• Dead stock: items that are unlikely to sell.

Stock level terms

• SKU (stock keeping unit): a unique code identifying a product variant, such as a particular size and colour.
• On-hand inventory: what is physically in stock.
• Available inventory: on-hand stock minus quantities already promised to customers.
• Lead time: how long it takes from placing an order with a supplier to receiving it.
• Reorder point: the stock level at which a new order should be placed.
• Par level: a target minimum quantity to keep on hand.
• Stockout: running out of an item when a customer wants it.
• Overstock: holding more than is needed.
• Backorder: an order accepted for an item that is not currently in stock.

Cost and valuation terms

• Carrying (holding) cost: the cost of keeping inventory, which can include storage, insurance, handling and the money tied up in stock.
• Ordering cost: the cost of placing and receiving an order. Price differences against plan are tracked as purchase price variance.
• COGS (cost of goods sold): the direct cost of the products a business sold in a period.
• FIFO (first in, first out): assumes the oldest stock is sold first.
• LIFO (last in, first out): assumes the newest stock is sold first. Its use for accounting depends on the country and rules, so check local requirements.
• Weighted average cost: values stock at an average of purchase costs.
• Shrinkage: loss of stock from theft, damage, error or spoilage. (In workforce planning the same word has a different meaning; see workforce management terms.)

Ordering models and methods

• EOQ (economic order quantity): a formula-based order size that aims to balance ordering and carrying costs.
• JIT (just-in-time): receiving goods only as they are needed to reduce stock held. Its origins in lean thinking are covered in lean management terms.
• ABC analysis: sorting items by importance, with A items being the most valuable and C items the least, so that effort focuses where it matters.
• Cycle counting: counting a small part of stock regularly instead of one large annual count.
• Perpetual inventory: a system that updates stock records continuously.
• Periodic inventory: stock updated only at set counts.
• Dropshipping: the seller does not hold stock; the supplier ships directly to the customer.
• 3PL (third-party logistics): an outside company that stores and ships goods.
• Demand forecasting: estimating future sales to plan stock.

Performance metrics

• Inventory turnover: how many times stock is sold and replaced in a period, commonly COGS divided by average inventory.
• Days sales of inventory (DSI): roughly how many days it takes to sell the stock held.
• Fill rate: the share of customer demand met from stock.
• Stock accuracy: how closely records match what is physically on the shelf.

Common acronyms

Common questions

What does inventory management mean?

Controlling the flow of goods so that the right amount is in the right place at the right time.

What are the main categories of inventory?

Commonly raw materials, work in progress and finished goods, plus supplies used for operations.

What are the four inventory models?

Sources name different sets. Frequently mentioned models include EOQ, JIT, ABC analysis and safety stock approaches, but there is no single official list.

For the wider vocabulary, see the management terms list.