Supply Chain Glossary
This glossary covers the core terms in supply chain management, from inbound logistics to outbound distribution, with precise definitions oriented towards professionals and developers building AI/RAG systems in the supply chain domain.
Supply Chain
A supply chain is the integrated network of organisations, resources, activities and technologies involved in creating and delivering a product, from raw material supplier to end customer. It encompasses physical, informational and financial flows in both directions. Effective management requires end-to-end visibility and inter-organisational coordination.
Supply Chain Management (SCM)
SCM is the systematic planning and control of material, information and financial flows across the entire chain, from procurement to delivery. It includes sourcing, production, logistics and relationship management with suppliers and customers. The goal is to maximise customer value while minimising total costs.
Sales & Operations Planning (S&OP)
S&OP is a monthly cross-functional alignment process that integrates commercial plans (demand) with operational plans (supply), producing a single agreed business plan. The typical cycle includes data gathering, demand review, supply review, pre-S&OP and executive meeting. A mature S&OP balances inventory, production capacity and service levels.
Demand Planning
Demand planning is the process of forecasting future customer demand using historical data, market signals, commercial inputs and statistical models. It includes collaborative demand management (CPFR) with key customers. Accurate forecasting reduces excess inventory and stockouts.
Safety Stock
Safety stock is the amount of inventory held in excess of cycle stock to protect against uncertainty in demand and lead time. It is calculated statistically, typically as a multiple of the standard deviation of demand during the replenishment period. The optimal level balances holding costs against the cost of stockouts.
Reorder Point (ROP)
The reorder point is the inventory level at which a replenishment order is triggered. It is calculated as: ROP = Average daily demand × Lead time + Safety stock. It determines when to order, while the Economic Order Quantity (EOQ) determines how much to order.
Economic Order Quantity (EOQ)
EOQ is the optimal order quantity that minimises the sum of ordering costs and inventory holding costs. Classic formula: EOQ = √(2DS/H), where D is annual demand, S is the cost per order and H is the annual unit holding cost. It assumes constant demand and fixed lead times.
Material Requirements Planning (MRP)
MRP is a computer-based planning system that calculates component and raw material requirements based on the Bill of Materials (BOM), the Master Production Schedule (MPS) and current inventory. It generates planned orders to cover net requirements at the right time. MRP II extends MRP to capacity planning.
Master Production Schedule (MPS)
The MPS is the detailed plan specifying how many units of each finished product to produce in each future period. It is the primary input to MRP and reconciles the demand forecast with available production capacity. It defines the planning horizon and time buckets.
Bill of Materials (BOM)
A BOM is the structured, hierarchical list of all components, sub-assemblies and raw materials required to produce a finished product, with their respective quantities. A multi-level BOM reflects the production structure; a planning BOM aggregates variants for forecasting. It is the reference document for MRP and product configuration.
Lead Time
Lead time is the total elapsed time between placing an order and receiving the goods. It includes order transmission, processing, production (if applicable), transportation and receipt. Cumulative or stack lead time considers the full path from raw material to finished product. Reducing lead time is a key objective of lean manufacturing.
Cycle Time
Cycle time is the average interval between the start of successive units of the same product in a process. It differs from lead time: lead time includes waiting, cycle time measures the actual pace of production. In value stream mapping, total cycle time includes all processes from raw material to customer.
Inventory Turnover
Inventory turnover is the number of times inventory is completely consumed and renewed in a period, calculated as: Cost of Goods Sold / Average Inventory. A high ratio indicates efficiency and lower holding costs; a low ratio signals excess stock or slow sales. Benchmarks vary significantly by industry.
Days of Supply (DOS)
Days of Supply indicates how many days of future consumption can be covered by current stock: DOS = Available stock / Average daily consumption. This operational metric complements turnover and is used to monitor inventory coverage by category or SKU.
SKU (Stock Keeping Unit)
A SKU is the minimum reference unit for inventory management: it uniquely identifies a product in a specific configuration of colour, size, packaging and variant. SKU proliferation increases supply chain complexity; SKU rationalisation reduces inventory and costs.
Service Level
Service level measures the percentage of customer demand met directly from available inventory, without stockouts or late deliveries. It is expressed as OTIF (On-Time In-Full) or fill rate. The target service level balances inventory holding costs against the economic impact of lost orders.
OTIF (On-Time In-Full)
OTIF is the KPI measuring the percentage of deliveries made on time and in full according to the customer order. An OTIF of 95% means 95% of order lines were delivered in the correct quantity by the agreed date. It is the most widely used service indicator in retail and large-scale distribution.
Fill Rate
Fill rate is the percentage of requested units delivered on the first attempt, without backorders. It is broken down into line fill rate (complete order lines) and unit fill rate (units delivered / units ordered). A fill rate of 98-99% is typical in buyer-dominated markets.
Third-Party Logistics (3PL)
A 3PL provider is an external company that manages one or more logistics functions on behalf of a client: warehousing, transportation, picking, packing, distribution and returns handling. 4PL providers add strategic management of the entire logistics network, coordinating 3PLs. Logistics outsourcing converts fixed costs to variable costs.
Warehouse
A warehouse is the physical facility where goods are received, stored and prepared for shipment. WMS systems (Warehouse Management Systems) optimise layout, slotting, picking and tracking. Key metrics include inventory accuracy, picking productivity, space utilisation and throughput.
Distribution Centre (DC)
A DC is a type of warehouse optimised for cross-docking and outbound distribution, with high throughput and low dwell time. It differs from a traditional warehouse in its emphasis on flow (speed) rather than storage (capacity). Regional DCs reduce distance and delivery times to end customers.
Cross-Docking
Cross-docking is a logistics practice in which incoming goods are transferred directly from the receiving area to the shipping area, without intermediate storage. It reduces handling costs and time. It requires precise synchronisation between inbound and outbound flows and real-time visibility.
Drop Shipping
Drop shipping is a model in which a retailer sells products without physically holding them: the order is forwarded directly to the supplier or manufacturer, who ships to the end customer. It eliminates warehousing costs but reduces control over the delivery experience. Common in e-commerce.
Intermodal Transport
Intermodal transport uses multiple transport modes (road, rail, sea, air) within the same logistics chain, with minimal goods handling thanks to standardised containers. It combines the efficiency of long-distance transport (ship/rail) with the flexibility of last-mile delivery (truck). It reduces costs and environmental impact.
Incoterms 2020
Incoterms 2020 (International Commercial Terms) are the standardised ICC terms that define the allocation of costs, risks and obligations between seller and buyer in international transactions. Key terms include FCA (Free Carrier), CIP (Carriage and Insurance Paid To), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid). DPU replaced the legacy term DAT from the 2010 version.
FCA (Free Carrier)
FCA is the Incoterms term under which the seller's obligation is to deliver the goods to the carrier or another nominated party at the agreed place. Risk transfers to the buyer from delivery to the carrier. FCA is suited to containerised and intermodal transport.
DPU (Delivered at Place Unloaded)
DPU (Delivered at Place Unloaded) is the Incoterms 2020 term that replaces DAT (2010). It requires the seller to deliver the goods unloaded at the named destination place, bearing all costs and risks to that point including unloading. It is the only Incoterms term under which the seller is responsible for unloading at destination.
CIP (Carriage and Insurance Paid To)
CIP is the Incoterms term under which the seller pays for transport and insurance to the named destination. Under Incoterms 2020, the minimum insurance level for CIP was upgraded to Clause A (broad coverage), unlike CPT which retains Clause C. Risk passes to the first carrier.
Order Management
Order management covers the complete cycle from customer order receipt to fulfilment: receipt, availability check, stock allocation, confirmation, picking, packing, shipment and invoicing. An OMS (Order Management System) centralises this visibility. The key KPI is order-to-delivery lead time.
Reverse Logistics
Reverse logistics manages the flow of products from customer back to seller or recycler: returns for defects, end-of-life, excess inventory, product recalls. It includes inspection, refurbishment, return to stock, disposal or scrapping. It represents a significant cost (often 3-5% of revenue in retail) and a sustainability opportunity.
Supplier Management
Supplier management includes qualification, performance evaluation (OTIF, quality, responsiveness), development and segmentation of suppliers. The Kraljic matrix classifies suppliers by purchasing complexity and profit impact, guiding strategies: partnership for critical, leverage for leveraged, optimisation for simple items.
Strategic Sourcing
Strategic sourcing is the systematic process of analysing spend, supply markets and the supplier base to optimise the total cost of ownership over the long term. It goes beyond price negotiation: it considers reliability, innovation, sustainability and geopolitical risk. It includes the make-or-buy decision.
Total Cost of Ownership (TCO)
TCO is the total cost associated with acquiring and owning a product or service over its entire lifecycle, including purchase price, transport, warehousing, quality management, maintenance and disposal. Using TCO as a decision basis avoids optimising only the purchase price at the expense of hidden costs.
Supply Chain Visibility
Supply chain visibility is the ability to track in real time the status of orders, shipments, inventory and production across the entire network. It requires data integration between ERP, WMS, TMS and partner systems (EDI, API). Visibility reduces the bullwhip effect and enables proactive responses to disruptions.
Bullwhip Effect
The bullwhip effect describes the amplification of demand variability as one moves upstream along the supply chain, from customer to producer. Small retail fluctuations become large order oscillations upstream. Key causes: local demand forecasting based on orders, lot-sizing policies, promotions and order batching.
ERP (Enterprise Resource Planning)
An ERP system integrates core business processes (accounting, manufacturing, purchasing, sales, HR) on a single shared data platform. In the supply chain, ERP manages purchase orders, goods receipts, warehouse movements, production orders and invoicing. Leading vendors include SAP, Oracle and Microsoft Dynamics. Integration between ERP and partner systems typically uses EDI or REST APIs.
EDI (Electronic Data Interchange)
EDI is the standardised electronic exchange of commercial documents (purchase orders, order acknowledgements, ASNs, invoices) between partner IT systems. Key standards: EDIFACT (UN/CEFACT, prevalent in Europe) and ANSI X12 (USA). Replacement with REST API/JSON is underway but EDI remains dominant in mature supply chains.
Advanced Shipping Notice (ASN)
An ASN is the electronic document sent by the supplier before delivery, describing the shipment contents (items, quantities, lot numbers, expiry dates). It enables advance receipt planning in the WMS, cross-docking and automatic inventory update on arrival.
Capacity Planning
Capacity planning determines the productive capacity needed to meet future demand. It covers long-term capacity (plant investment), medium-term (outsourcing, additional shifts) and short-term (micro-scheduling). Capacity Requirements Planning (CRP) in the MRP context calculates the load for each work centre.
Lean Manufacturing
Lean manufacturing is a production philosophy oriented to eliminating waste (muda) to maximise customer value. The seven classic wastes identified by Taiichi Ohno (Toyota) are: overproduction, waiting, unnecessary transport, over-processing, excess inventory, unnecessary motion and defects. Lean tools include 5S, Kanban, SMED, VSM and kaizen.
Just-In-Time (JIT)
JIT is a production and logistics approach in which materials are received and products manufactured exactly when and in the quantity needed, eliminating buffer stocks. Originating in the Toyota Production System, it requires highly reliable suppliers, high quality and production flexibility. It reduces warehousing costs but increases vulnerability to supply chain disruptions.
Kanban
Kanban (Japanese for "signboard") is a pull control system that authorises production or replenishment only when a downstream station consumes. The visual signal (physical or digital) replaces centralised scheduling. In supply chain, supplier kanban reduces lot sizes and synchronises production with real demand.
Vendor-Managed Inventory (VMI)
In VMI, the supplier has access to the customer's inventory data and takes responsibility for maintaining agreed stock levels, autonomously placing replenishment orders. It reduces administrative burden for the customer and improves supplier planning through direct visibility of consumption.
Demand Sensing
Demand sensing is a short-term forecasting technique (1-30-day horizon) that integrates high-frequency demand signals - POS data, orders, distributor inventory levels - to correct the aggregate statistical forecast. It enables rapid adjustments to operational plans in response to real demand changes.
Distribution Network
The distribution network is the configuration of facilities (factories, DCs, hubs, outlets) and transport flows that connect production to consumption. Network design balances costs (transport, warehousing), service level (distance to customer) and risk (redundancy). Key decisions involve the number and location of DCs, transport modes and stocking policies.
Omnichannel Fulfillment
Omnichannel fulfillment is the capability to fulfil orders from any sales channel (store, web, app, marketplace) drawing on any network node (central DC, local DC, store, supplier). It requires unified inventory visibility and order orchestration logic. Models include ship-from-store, click-and-collect and ship-from-DC.
Supply Chain Risk Management
Supply chain risk management identifies, assesses and mitigates risks that can disrupt flows: natural disasters, supplier insolvency, geopolitical crises, component shortages, cyberattacks. Mitigation strategies include dual sourcing, strategic inventory, geographic diversification and cargo insurance.
Supply Chain Sustainability
Sustainability considers the environmental and social impact of the entire supply chain: CO₂ emissions from transport, working conditions at suppliers, use of natural resources, circular economy. Reporting frameworks include GRI, CDP and the requirements of the EU CSRD Directive on supply chain due diligence.
Supply Chain Digitalisation
Digitalisation uses technologies such as IoT, blockchain, AI/ML, digital twins and cloud to increase visibility, automate processes and optimise decisions. Digital twins enable "what-if" simulations of the logistics network. Blockchain supports product traceability and authenticity verification in food and pharma supply chains.
Control Tower
A supply chain control tower is a centralised visibility platform that aggregates data from ERP, WMS, TMS, suppliers and carriers in a single dashboard, with proactive exception alerts. It supports decision-making with predictive and prescriptive analytics. It can be internal or managed by a 3PL/4PL.
Collaborative Forecasting (CPFR)
CPFR (Collaborative Planning, Forecasting and Replenishment) is a process in which retailer and supplier share data, forecasts and replenishment plans to reduce inventory and costs across the chain. It is structured in three phases: planning, joint forecasting and replenishment. It requires trust, integrated systems and shared KPIs.