Inventory planning, term by term

The terms

Sales velocity

Sales velocity is the average number of units of a product sold per day, usually measured over a recent window and weighted so newer sales count for more than older ones.

sales velocity = units sold ÷ days in window

540 units sold over the last 90 days is a velocity of 6 a day. Refunds should be subtracted first, or you are planning for sales that were reversed.

Days of cover

Days of cover is how many days your current stock will last at the current sales rate. It is also called days of supply or days of inventory.

days of cover = stock on hand ÷ sales velocity

320 units at 6 a day is about 53 days of cover. This is the most useful single number in planning, because it is directly comparable to a supplier's lead time.

Lead time

Lead time is the number of days between placing a purchase order and the stock being available to sell, including production, shipping, customs and putaway.

A supplier who quotes 21 days production but reliably takes 30 door to door has a lead time of 30, not 21. Shopify does not store lead times anywhere, which is why they have to live in your planning tool.

Reorder point

The reorder point is the stock level at which you must place an order to avoid running out before the new stock arrives.

reorder point = (sales velocity × lead time) + safety stock

6 a day, a 30-day lead time and a 9-day cushion gives (6 × 30) + 54 = 234 units. Ordering when stock hits 234 means arriving stock meets falling stock at roughly the cushion.

Safety stock

Safety stock is the buffer held on top of expected demand to absorb the two things that routinely go wrong at once: demand running hotter than average, and a supplier running later than promised.

safety stock = sales velocity × cushion in days

A cushion should be sized per product against how much that product's sales actually vary. A flat percentage across a catalogue over-buys the steady sellers and still stocks out of the spiky ones.

Service level

Service level is the share of demand periods you intend to satisfy from stock, expressed as a percentage, and it sets how large a safety cushion you are willing to pay for.

A 95% service level aims to have stock in 95 of every 100 demand periods. Going from 90% to 99% costs disproportionately more stock, which is why it is a business decision rather than a default.

Stockout

A stockout is any period during which a product is unavailable to sell because stock has reached zero.

Stockouts are expensive and nearly invisible: the lost sales never appear in any report, because they never happened. Tracking stockout days per product is the only way to see the cost.

Overstock

Overstock is stock held well beyond what current demand justifies, tying up cash that could be funding products that are selling.

A product with 400 days of cover is overstocked even if it is selling steadily. The stock is not wrong, the timing of the money is.

Dead stock

Dead stock is inventory that has had no meaningful sales over a long period and is unlikely to sell at its current price.

Usually judged over 90 to 365 days depending on the category. The cost of holding it is not just storage, it is the reorder you could not afford to place on something that does sell.

Sell-through rate

Sell-through rate is the percentage of available stock that sold during a period, showing how efficiently inventory is converting into revenue.

sell-through = units sold ÷ (units sold + units remaining) × 100

Selling 30 of 200 available in a month is 15% sell-through. Persistently low sell-through on a product you keep reordering is the earliest warning that cash is about to get stuck.

Inventory turnover

Inventory turnover is how many times you sell and replace your entire stock in a year, and it is the clearest measure of how hard your cash is working.

turnover = cost of goods sold ÷ average inventory value

Turning stock 6 times a year means your money does six laps. Turning it twice means the same money does a third of the work.

Minimum order quantity (MOQ)

A minimum order quantity is the smallest quantity a supplier will accept on an order, applied either per product line or across the whole order.

If you need 189 units but the MOQ is 240, you either buy 240 or you do not order. A planning tool should show you that the number moved because of the MOQ, not silently round it.

Order multiple (case size)

An order multiple is the increment a supplier ships in, so quantities must be rounded up to the nearest multiple of it.

With a case size of 12, a shortfall of 189 becomes an order of 192. Small on one line, meaningful across a hundred.

Stock on order

Stock on order is inventory that has been purchased but not yet received, and it must be subtracted before calculating a new order quantity.

Forgetting this term is the most common cause of accidental double-ordering in a spreadsheet: the reorder point is breached, an order is placed, and the units already on a lorry are counted twice.

Replenishment

Replenishment is the ongoing process of restoring stock to a target level as it sells down, as opposed to buying in one-off batches.

Replenishment thinking asks 'what needs topping up this week', which is a smaller and far more reliable question than 'what should I buy this quarter'.

ABC analysis

ABC analysis sorts products into three bands by their contribution to revenue or profit, so attention and safety stock can be concentrated where they matter.

Typically the A band is roughly 20% of products driving 80% of revenue. Those deserve tight reorder points and a real cushion. C-band products rarely justify either.