Inventory Purchasing Terms You Must Know

PurchTips - Edition # 123 April 3, 2007

By Charles Dominick, SPSM

Do You Know These Inventory Purchasing Terms?

With companies moving their inventory functions under Purchasing, it would be smart to learn what you can about inventory, beginning with these terms.

Consignment – An arrangement where the supplier “owns” the inventory in the buying organization’s possession until it is removed from inventory for use. One of the advantages of consignment includes improvements to cash flow due to delayed payments. In addition, it eliminates a common risk among buying organizations who may buy inventory and never use it.

Dock-To-Stock – An arrangement where materials bypass an incoming quality inspection and are moved straight from the receiving dock to the warehouse.

JIT – Short for “Just In Time,” JIT inventory management is an approach where Purchasing strives to have no inventory, instead relying on suppliers to deliver material as soon to the time it is needed as possible.

Kanban – A strategy for moving materials in a multi-stage production environment. The overriding philosophy is that materials are moved to the next stage of the production process only when the next stage actually needs those materials as opposed to movement according to a schedule or forecast.

Min/Max – An approach to inventory levels where you set a minimum inventory quantity for an item and a maximum inventory quantity for that item. When the inventory level reaches the minimum quantity, you order enough to bring inventory to the maximum quantity.

Vendor Managed Inventory – An approach to replenishing inventory where it is the vendor’s responsibility to ensure that adequate stock is maintained to meet demand. The buying organization does not monitor inventory levels nor place individual orders in a Vendor Managed Inventory approach.

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