Inventory Management Cheat Sheet

The core ideas of Inventory Management distilled into a single, scannable reference — perfect for review or quick lookup.

PiqCue — piqcue.com/inventory-management/cheatsheet

Quick Reference

Economic Order Quantity (EOQ)

A formula that determines the optimal order quantity that minimizes total inventory costs, which include ordering costs (placing and receiving orders) and holding costs (storage, insurance, capital). The classic EOQ formula is Q* = sqrt(2DS/H), where D is annual demand, S is ordering cost per order, and H is holding cost per unit per year.

Safety Stock

Extra inventory held as a buffer against uncertainty in demand or lead time. Safety stock prevents stockouts when actual demand exceeds forecasts or when supplier deliveries are delayed. The level of safety stock depends on desired service level, demand variability, and lead time variability.

Just-in-Time (JIT)

An inventory strategy originating from the Toyota Production System that aims to receive goods only as they are needed in the production process, thereby reducing inventory holding costs, waste, and storage requirements. JIT requires highly reliable suppliers and accurate demand forecasting.

ABC Analysis

An inventory categorization technique based on the Pareto principle. Items are classified into three groups: A items (high value, low quantity, ~70-80% of total value), B items (moderate value and quantity, ~15-20% of value), and C items (low value, high quantity, ~5-10% of value). Each class receives a different level of management attention.

Reorder Point (ROP)

The inventory level at which a new order should be placed to replenish stock before it runs out. It is calculated as: ROP = (Average Daily Demand x Lead Time) + Safety Stock. Setting the correct reorder point ensures continuous availability while minimizing excess inventory.

Carrying (Holding) Cost

The total cost of holding inventory over a period of time, including storage and warehousing expenses, insurance, taxes, depreciation, obsolescence, and the opportunity cost of capital tied up in stock. Carrying costs typically range from 20% to 30% of the inventory's value annually.

Lead Time

The total elapsed time from when a purchase order is placed until the goods are received and available for use or sale. Lead time includes supplier processing time, manufacturing time (if applicable), transit time, and receiving/inspection time. Reducing lead time allows companies to hold less inventory.

Demand Forecasting

The process of estimating future customer demand using historical sales data, market trends, seasonal patterns, and statistical or machine learning models. Accurate demand forecasting is the foundation of effective inventory planning and reduces both overstock and stockout risks.

Inventory Turnover Ratio

A financial ratio that measures how many times a company's inventory is sold and replaced over a given period, calculated as Cost of Goods Sold divided by Average Inventory. A higher turnover indicates efficient inventory management, while a low turnover may signal overstocking or weak sales.

Vendor-Managed Inventory (VMI)

A supply chain arrangement in which the supplier monitors the buyer's inventory levels (often via shared data systems) and takes responsibility for maintaining agreed-upon stock levels. VMI shifts replenishment decisions to the supplier, reducing the buyer's planning burden and often improving fill rates.

Key Terms at a Glance

ABC Analysis:An inventory categorization technique that divides items into three classes (A, B, C) based on their value contribution, applying the Pareto principle to focus management effort.

Backorder:An order placed for a product that is currently out of stock, to be fulfilled when inventory becomes available.

Bill of Materials (BOM):A comprehensive list of raw materials, components, and sub-assemblies required to manufacture a finished product, including quantities for each.

Bullwhip Effect:The amplification of demand variability as information moves upstream through the supply chain from retailer to manufacturer.

Carrying Cost:The total cost of holding and storing inventory over time, including warehousing, insurance, depreciation, obsolescence, and opportunity cost of capital.

Cycle Counting:An inventory auditing method where a subset of items is counted on a regular rotating schedule rather than performing a single annual physical count.

Dead Stock:Inventory items that have not been sold for an extended period and are unlikely to be sold in the future without significant markdowns.

Demand Forecasting:The process of predicting future customer demand using historical data, statistical methods, market analysis, and increasingly machine learning models.

Dropshipping:A retail fulfillment model where the store does not keep products in stock but instead transfers orders to a third-party supplier for direct shipment to customers.

Economic Order Quantity (EOQ):The mathematically optimal order size that minimizes total annual inventory costs by balancing ordering costs against holding costs.

Enterprise Resource Planning (ERP):An integrated software system that manages core business processes including inventory, procurement, production, sales, and finance in a unified database.

FIFO (First In, First Out):An inventory valuation and flow method where the oldest inventory items are assumed to be sold or used first.

Fill Rate:The percentage of customer demand that is met from available inventory without delays or backorders.

Inventory Turnover:A ratio measuring how frequently inventory is sold and replaced over a given period, calculated as Cost of Goods Sold divided by Average Inventory.

Just-in-Time (JIT):A production and inventory strategy that aligns raw material orders and deliveries with production schedules to minimize waste and holding costs.

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