Backorder Policy

A prescription of what to do when there is a stockout. Under a backorder policy, any units demanded but not provided immediately are provided later, when available.

Fill Rate

An item availability metric that measures the fraction of items demanded that are supplied immediate from stock on hand. Expressed as a percentage: A 90% fill rate means that 90% of the units demanded, on average, are immediately available. Fill rate differs from service level in that it takes account of how large a stockout is, not just how often a stockout happens. Accordingly, fill rate and service level can be very different numbers. What’s the difference between fill rate and service level?

Lead Time

Lead time is the interval between inventory realizing that you need more stock, i.e., detecting that inventory has dropped to or below the reorder point or min, and its arrival back in stock. The lead time might be composed of several intervals: the time to sense the problem, the time to request purchasing to get more, the time until purchasing actually cuts a purchase order, the time for the vendor to deliver, and then the time to restock. The shorter the lead time, the more lean and agile your operation. You can use SmartForecasts to do “what if” analysis, examining the gains to be made from reducing lead times.

Min level of inventory

The level of inventory which, when reached or breached, triggers replenishment. Identical to the reorder point R. The Min is comprised of the cycle stock (expected lead time demand) and safety stock (to protect against demand and supply variability).

Order Quantity

A fixed number of units to order when the reorder point has been reached or breached

Order Quantity Minimum

Order quantities are often negotiated with suppliers rather than simply calculated from an item’s demand history. Some suppliers require that any order be at least of a certain size. If you would like to order 7 but your supplier has an order quantity minimum of 10, you are stuck ordering 10.

Rule of Thumb

A way to determine inventory requirements based on an easy-to-understand rule such as “order 10 days’ worth of supply every time inventory falls to 5 days of supply.”

Safety Time

The amount of days added to the lead time to accommodate for increases in supplier lead time.   By increasing safety time, orders will be triggered sooner thereby minimizing the risk of stockouts.

Cycle Stock

The portion of inventory that is expected to cover the lead time demand. In an inventory control system, the reorder point is comprised of the cycle stock and the safety stock. The more safety stock, the lower the risk of stocking out.

Inventory Forecasting

An inventory management process that predicts future inventory levels, costs, and service level performance.  

Lead Time Demand

Lead time demand is a random quantity totaling all the demands that arrive during the lead time. SmartForecasts’ key analytical computation is estimation of the probability distribution of lead time demand. From this flow assessments of service level, fill rate, and reorder point (min).

Loss Policy

A prescription of what to do when there is a stockout. Under a loss policy, any units demanded but not provided immediately are considered lost: either the customer gets those units elsewhere or just doesn’t get them at all.

Make/Procure to Order

An item is produced or ordered from a supplier when ordered by the customer.   Inventory is not automatically replenished with Make to Order items.

Max level of inventory

The “order-up-to” level in min/max systems. The actual order quantity is random in the min/max system: How much is ordered depends on the current gap between available inventory and the max.

Order Quantity Multiple

As with order quantities, order multiples are often imposed by suppliers, who may insist that order quantities be an even multiple of some basic unit. For instance, if a supplier only provides six packs, you cannot order either 5 or 7 units; instead, you must order 6 or 12 

Order Up to Policy

Represents a replenishment policy driven by the Order Up to Level and a fixed replenishment frequency.   For example, every two weeks (the replenishment frequency)

Safety Stock

The amount of inventory added to the average lead time demand to accommodate random increases in demand, thereby minimizing the risk of stockouts, with their attendant lost sales or backorders. The safety stock is strongly influenced by the volatility of demand. In an inventory system, a replenishment order is triggered when the supply of inventory is forecasted to hit the safety stock level. The order is placed at the Reorder Point.