Supply Chain Glossary: A-E

ABC - Activity Based Costing - Cost accounting where activities are identified and all costs of performing them are calculated, providing actual costs chargeable by product, product line, customer, supplier, etc. Accurately identifies sources of profit and loss. A key element of ECR implementation.

ABC Analysis - (1) A form of Pareto analysis applied to a group of products in order to apply selective inventory management controls. The inventory value for each item is obtained by multiplying the annual demand by unit cost and the entire inventory is then ranked in descending order of cost. However, the classification parameter can be varied; for example, it is possible to use the velocity of turnover rather than annual demand value.

(2) Methodology used to classify the items purchased or sold by a company.

Items are classified into 3 groups in descending order of their annual consumption, stocking volumes, respective sales, purchase amounts or any other criteria:

- a leading group, the A-Class, includes a small number of strategic items (about 20% of all items) and accounts for 60-80% of the spending/turnover of an intermediary group

- the B-Class, includes an average share of the items accounting for an average share of the spending/turnover of a queue group

- the C-Class, includes a large number of non-standard items accounting for a small share of the spending/turnover, but for which administrative costs are significant (lots of orders and different suppliers)

The abbreviation ABC comes from the American Audit Bureau of Circulation.

The ABC analysis is an application of the Pareto Principle (or 20/80 rule) according to which 20% of the items account for 80% of the global value or turnover

ABC Classification - The classification of inventory, after ABC analysis, into three basic groups for the purpose of stock control and planning. Although further divisions may be established, the 3 basic categories are designated A, B and C as follows: A Items - An item that, according to an ABC classification, belongs to a small group of products that represents around 75-80% of the annual demand, usage or production volume, in monetary terms, but only some 15-20% of the inventory items. For the purpose of stock control and planning, the greatest attention is paid to this category of A-products. A items may also be of strategic importance to the business concerned. B Items - An intermediate group, representing around 5-10% of the annual demand, usage or production value but some 20-25% of the total, that is paid less management attention. C Items - A product which according to an ABC classification belongs to the 60-65% of inventory that represents only around 10-15% the annual demand, usage or production value. Least attention is paid to this category for the purpose of stock control and planning and procurement decisions for such items may be automated.

Active Inventory - Any item or element of inventory which has been used or sold within a given period.

Aggregate Inventory Management - The size of many inventories requires that they be broken down into groupings for the purpose of control. Aggregated inventory is the further collection of these groupings into a single entity to enable the establishment of operating policies, key performance indicators, targets and reports. Aggregate Inventory Management enables such things as the overall level of inventory desired to be established and then appropriate controls implemented to ensure that individual operating decisions achieve that goal, at optimum cost.

Allocated Stock - A part that has been reserved, but not yet withdrawn or issued from stock, and is thus not available for other purposes.

All-Time Order - The last order for a particular product in the last phase of its life cycle. This order is of such a size that the stock provided will satisfy all expected future demand (see all time requirement below) for the product concerned. Sometimes known as a life of type order.

All-Time Requirement - The total requirement for a particular product to be expected in the future. Normally used for products in the last phase of their life cycles, when production is (nearly) stopped.

All-Time Stock - The stock resulting from the assessment of an all-time requirement and delivery of an all-time order. If necessary, controls can be set for such stock to avoid consumption of items for reasons over and above those for which usage was predicted.

ANSI American National Standards Institute - A clearinghouse for electronic data standards in the USA. ANSI itself does not develop standards; industry and technology specific standards committees do. ANSI's retail standards include X.12 for electronic data interchange [EDI] and X.400 for electronic mail.

Anticipation Stock - Inventory held in order to be able to: Satisfy a demand with seasonal fluctuations with a production level that does not fluctuate at all or that varies to a lesser extent than the demandCope with erratic production or deficiencies in production capacity.

API Application Programming Interface - A piece of software code written for integration of an application with another application.

APS - Advanced Planning and Scheduling APS is used for rapidly optimizing inventory levels and costs enterprise wide. An APS typically includes functionality for forecaseting/demand planning, logistics network analysis, production planning, transportation planning, and often more.

ASP - Application Service Providers ASPs aggregate, facilitate and broker IT services to deliver IT-enabled business solutions across a network via subscription-based pricing.

Availability - The primary measure of system performance relating to the expected percentage of the supported system that will be available at a random point in time and not out of service for lack of spares.

Available Stock - The stock available to service immediate demand.

Assemble to Order (ATO) - A manufacturing practice where raw goods and/or subassembled products are maintained at the plant level to expedite the manufacturing process when an actual customer order is received.

Available to Promise (ATP) - The uncommitted portion of a company's inventory and planned production, maintained in the master schedule to support customer order promising. The ATP quantity is the uncommitted inventory balance in the first period and is normally calculated for each period in which an MPS receipt is scheduled. In the first period, ATP includes on-hand inventory less customer orders that are due and overdue.

B Product (or item) - See ABC Classification

Backflushing - The deduction from inventory, after manufacture, of the component parts used in a parent by exploding the bill of materials by the production total of parents produced.

Backorder - A customer demand for which no stock is available and where the customer is prepared to wait for the item to arrive in stock.

Beyond Economic Repair (BER) - Where the projected cost of repair, normally for a repairable or rotable item, exceeds a management set percentage of the replacement value of the item concerned.

Bar Code - Information encoded into a pattern of varying width parallel bars and spaces that can be read by a scanner/bar-code reader and interpreted as a numeric or alphanumric identification code. Common symbologies used in reatil are UPC-A for merchandise marking and Code 128 (also I 2 of 5) for shipping containers. Other symbologies include Code 39 and EAN. Bar codes can also be two dimensional (2-D) that contain much more information than linear bar codes; i.e. PDF417

Baseline - The portion of a forecast derived from historical information and trends after adjusting for promotions and other unusual events.

Batch Number - A code used to identify the specific production point, for a product or an assembly, in a manufacturing or assembly process.

Batch Picking Warehousing process in which goods are selected by pickers in quantities to satisfy the demand for more than one order. Goods are first picked by SKU and later sorted by order or delivery address.

Benchmarking - Measuring a company's performances against those of competitors or of other unrelated firms achieving world-class levels - often to show where opportunities to improve are greatest.

BOL Bill of Lading - Document used to acknowledge receipt of goods; may also serve as a contract for the transport of cargo.

BOM Bill of Material - A listing of components, parts, and other items needed to manufacture a product, showing the quantity of each required to produce each end item. A bill of material is similar to a parts list except that it usually shows how the product is fabricated and assembled. Also called a product structure record, formula, recipe, or ingredients list.

Buffer Stock - See Safety Stock

Build Stock - See Anticipation Stock

Build to Order - See Make to Order; Assemble to Order

C-Product (or item) - See ABC Classification

Category Management - The management of groups of products that are interchangeable, or substitutable, in meeting consumer needs as opposed to the traditional concentration on individual products and brands

Co-Managed Inventory - A support arrangement similar to Vendor Managed Inventory but where replacement orders for the vendor-owned stock are agreed by the user prior to delivery

Component - A part, ingredient, or subassembly that is both a component to a higher level part, and a parent part to other components

Component - Part Raw material, ingredient, part, or subassembly that goes into a higher level assembly, compound, or other part

Consignment Stock - The stock of goods held by an external customer which is still the property of the supplier but for which payment is only made when stock is sold or used by the customer

Consumable - A classification of stock used to describe items or products that are totally consumed in use eg paper, oil, grease etc

Contingency Stock - Stock held to cover potential system failure situations which can be mathematically modelled

Continuous Improvement (CI) - A term that describes the many management practices and techniques used to find and eliminate waste and to general improvements in business processes, quality or costs

Control Group Cycle Counting - The repeated physical inventory taking of a small control group of parts, in the same locations, within a very short time frame to verify the design of a new inventory process. It is the only form of cycle counting not truly used to measure inventory record accuracy.

Cost-Plus - A pricing method whereby the purchaser agrees to pay the vendor an amount determined by the costs incurred by the vendor to produce the goods and/or services purchased and to which costs are added at a stated percentage or fixed sum.

Counteroffer - An offer to enter into a transaction on terms differing from those first proposed. It should be noted that vendors' acknowledgment forms given to a purchaser in response to a purchase order may be, in fact, a counteroffer.

Cycle Counting - Cycle counting is the physical counting of stock on a perpetual basis, rather than counting stock periodically. A cycle is the time required to count all items in the inventory at least once. The frequency of cycle counting can be varied to focus management attention on the more valuable or important items or to match work processes. Some of the systems used are: ABC system with the highest count frequency for items with the highest annual usage valueReorder system when stocks are counted at the time of orderReceiver system with counting when goods are receivedZero balance system to count items when a backorder situation is reached to confirm that no stock is heldTransaction system where stocks are counted after a specified number of transactions

Cycle Stock - See Working Stock

De-Coupling Stock - Inventory accumulated between dependent activities in the goods flow to reduce the need for completely synchronised operations

Deduct Point - The point in the production process up to which all the parts assumed to have been used (as defined in the bill of material) are backflushed, (automatically deducted) from the inventory records. Also see Backflushing.

Demand Forecast - See Forecast Demand

Demand Satisfaction Rate - See Fill Rate

Denomination of Quantity - See Unit of Measure

Dependent Demand - A classification used in inventory control where the demand for one item has a direct mathematical relationship with the demand for another higher level or parent component and where the demand for that item is ultimately dependent on the demand for the higher level or parent item

Deterministic Inventory Control Models - An inventory control system where all the variables and parameters used are known, or can be calculated with certainty. The rate of demand for items, and the associated inventory costs, are assumed to be known with assurance and the replenishment lead time is assumed to be constant and independent of demand.

Discount - An allowance or deduction granted by the seller to the buyer, usually when certain stipulated conditions are met by the buyer, which reduces the cost of the goods purchased. However, discounts may be granted by the seller without reference to stipulated conditions. An example of such use of discount is the application of discount to a nominal or list price to establish the net or actual price.

1. An arbitrary discount is one agreed upon between vendor and purchaser which has no relation to the vendor's usual basis for discount.

2. A broken package discount is one applying on a quantity of goods less than the quantity contained in a vendor's regular package.

3. A cash discount is an allowance extended to encourage payment of invoice on or before a stated date which is earlier than the NET date. The percent of discount allowed is as agreed between buyer and seller and is often established by industry or trade custom. Usual discounts are 1/2, 1, or 2 percent with occasional discount allowances to 10 percent. Typical cash discount terms are shown below:

• 2 percent e.o.m. - 10: 2 percent discount allowed if paid on or before the 10th of the following month.
• 2 percent 1-60X or 2 percent 10-60 extra: 2 percent discount allowed if paid on or before the 70th day.
• 2 percent 10th prox.: same as 2 percent e.o.m. 10.
• 2 percent 10th 25th or 2 percent 25th 10: 2 percent discount allowed for payment on or before the 25th of the month f or billings of the first half of the month; 2 percent discount allowed for payment on or before the 10th of the succeeding month for billings of the last half of the month.

Note: Discount payment dates, other than with e.o.m. or prox. terms, are interpreted in various ways. The usual interpretation is that the discount date is calculated from the invoice date. Other interpretations should be specifically agreed upon between the buyer and seller. Other interpretations are based on a) the date goods are shipped, b) the date goods are received by the buyer, and c) the date the goods are inspected and found acceptable by the buyer.

Discount payment terms usually are stated in conjunction with a net term. Typical are:

• 1 percent 10 days, net 30 or 1-10-30
• 2 percent 10 days, net 60 or 2-10-60
• 2 percent 10 days 60 extra, net 90 or
• 2-10-60X net 90
• 2 percent 30 net 31

Where the net date is not stated in conjunction with a discount date, the presumption is that the invoice is due net the day following the discount date.
Net terms require that vendors' invoices be paid without discount on or before due date. Typical statements of net terms are:

• Net: payment due immediately.
• Net 10 days: due on or before the tenth day.
• Net e.o.m.: due on or before the end of the month.
• Net e.o.m. 10. net 10 e.o.m. or net 10th prox: due on or before the 10th of the month following.

Net 10-60X or net 10-60 extra: due on or before the 70th day.

Net 10th 25th or net 25th 10th: payment due on the 25th of the month for billings of the first half month; due on the 10th of the following month for billings of the last half of the month.

4. A chain discount is a series of discounts, the percent of each discount in the chain applying to the amount resulting from application of the immediately preceding percent of discount. A chain discount can be reduced to a single discount by multiplying the complement of each of the discounts and determining the complement of the result. For example:

The single discount figure equal to the chain discount 30% + 20% + 10% = 49.6% and is calculated as follows: 70 x 80 x 90 = 50.4 whose complement is 49.6%.

5. A quantity discount is an allowance determined by the quantity or value of a purchase.

6. A standard package discount is one applying to goods supplied in the vendor's regular package.

7. A trade discount is a deduction from an established price for items or services, often varying in percentage with volume of transactions, made by the seller to those engaged in certain businesses and allowed irrespective of the time when payment is made.

Discount Schedule - The list of discounts applying to varying quantities of goods or applicable to differing classifications of purchasers.

Draft - A written order drawn by one party (drawer) ordering a second party (drawee) to pay a specified sum of money to a third party (payee).

• An arrival draft is prepared by the seller and, with invoice and shipping receipt for the goods sold, is deposited at his bank for collection. The bank forwards the documents to its correspondent bank at the buyer's city. The buyer secures the invoice and shipping receipt from the bank upon payment or acceptance of the draft, usually at the time the goods have arrived at destination.
• A sight draft is payable upon presentation to the drawee (as distinguished from an arrival or time draft).
• A time draft is one which is payable a stated time after acceptance by the drawee.

Efficient Consumer Response (ECR) - An initiative whereby elements of the supply chain work together to fulfill consumer wishes better, faster and at less cost

Electronic Commerce (E Commerce) - A way to execute transact ions and share information with other businesses, consumers or with government by using computer and telecommunication networks, including the Internet

Electronic Data Interchange (EDI) - The computer to computer exchange of structured data for automatic processing

Enterprise Requirement Planning (ERP ) - A further extension of MRP II whereby a single system embraces and integrates all aspects of business operations into a single database application

European Article Numbering (EAN) - An international standard of product identification used in the grocery and retail areas of business

Excess Stock - Any quantity of inventory, either held or on order, which exceeds known or anticipated forward demand to such a degree that disposal action should be considered