Inventory Terminology

Inventory management , over the period has acquired a sound status in the arena of business management. It has a body of knowledge besides its having its own language. Various terms have got into use that are explained here too:   Terminology used in Inventory management / control  Maximum Limit : When devising a suitable Inventory model ,the Maximum limit establishes the upper limit to which the stock of an inventory item shall be allowed. Minimum Limit :  It is the lower limit to which the stock can be allowed to fall in course of replenishment of the stock of an item. Normally, this is taken to be the safety stock also. Safety Stock : This is the stock that is maintained to counter the variation in demand of an item during the replenishment lead time. Demand or Usage: Replenishment of stock and usage of an item is an ongoing phenomenon in inventory control. Demand thus is the rate of usage of an item. Over a period of time demand is considered to be stable. However , demand can be seasonal or cyclical in nature depending upon an item's nature. Lead Time (LT) : It is the total time taken from the day procurement action has been initiated to the day the stock is replenished. Lead Time has two components viz. Internal Lead time and External Lead time. Internal Lead time is the time taken between raising the materials requisition request and placing the order. External Lead time is the time taken between placement of an order to actual receipt of the item. Thus, Total Lead time (LT) = Internal Lead time + External Lead time. Demand or Usage of an item (D) : Expressed in terms of consumption per unit of time, demand or usage of an item is the average quantity of an item consumed in a particular period of time. Often D is expressed as average consumption per month and is assumed to be a stable one. Safety Stock (SS) : It is the stock of an item maintained to cater to the fluctuation in its demand during the Lead time. In common parlance, it is the stock that protects occurrence of a stock out situation. Maximum Limit (MaxL) : While drawing the Inventory policy, MaxL is the desired highest level to which an item's inventory can be maintained. Minimum Limit (MinL) : It is that limit on the lower side for an inventory item to which the level can go down and by which the stock is to be replenished. Reorder Level (ROL) : This is the level at which if the stock of an item falls , in course of its consumption, fresh replenishment action is initiated by way of raising the Materials procurement requisition or Indent.  Review Period (RP) : This is the time period defined for an item or a group of similar inventory items, during which a review on whether to raise procurement requisition or not is done. Often ,it decides the number of procurement requisitions to be raised during the period