ABC Classification: Classification of a group of items in decreasing order of annual dollar volume or other criteria. This array is then split into three classes called A, B, and C. The A group represents 10 – 20% by number of items and 50 –70% by projected dollar volume. The next grouping, B, represents about 20% of the items and about 20% of the dollar volume. The C class contains 60 – 70% of the items and represents about 10 – 30% of the dollar volume.
Absorption Costing: In cost management, an approach to inventory valuation in which variable costs and a portion of fixed costs are assigned to each unit of production. The fixed costs are usually allocated to units of output on the basis of direct labor hours, machine hours, or material costs. Synonym: Allocation Costing.
Acceptable Quality Level (AQL): In quality management, when a continuing series of lots is considered, AQL represents a quality level that, for the purposes of sampling inspection, is the limit of a satisfactory process average. Also see: Acceptance Sampling.
Acceptable Sampling Plan: In quality management, a specific plan that indicates the sampling sizes and the associated acceptance or non-acceptance criteria to be used. Also see: Acceptance Sampling.
Acceptance Number: In quality management, 1) A number used in acceptance sampling as a cutoff at which the lot will be accepted or rejected. For example, if x or more units are bad within the sample, the lot will be rejected. 2) The value of the test statistic that divides all possible values into acceptance and rejection regions. Also see: Acceptance Sampling.
Acceptance Sampling: 1) the process of sampling a portion of goods for inspection rather than examining the entire lot. The entire lot may be accepted or rejected based on the sample even though the specific units in the lot are better or worse than the sample. There are two types: attributes sampling and variables sampling. In attributes sampling, the presence or absence of a characteristic is noted in each of the units inspected. In variables sampling, the numerical magnitude of a characteristic is measured and recorded for each inspected unit; this type of sampling involves reference to a continuous scale of some kind. 2) A method of measuring random samples of lots or batches of products against predetermined standards.
Accounts payable (A/P): The value of goods and services acquired for which payment has not yet been made.
Accounts receivable (A/R): The value of goods shipped or services rendered to a customer on whom payment has not yet been received. Usually includes an allowance for bad debts.
Accuracy: In quality management, the degree of freedom from error or the degree of conformity to a standard. Accuracy is different from precision. For example, four-significant-digit numbers are less precise than six-significant-digit numbers; however, a properly computed four-significant-digit number might be more accurate than an improperly computed six-significant-digit number.
Acknowledgment: A communication by a supplier to advise a purchaser that a purchase order has been received. It usually implies acceptance of the order by the supplier.
Activation: In constraint management, the use of non-constraint resources to make parts or products above the level needed to support the system constraint(s). The result is excessive work-in-process inventories or finished goods inventories, or both. In contrast, the term utilization is used to describe the situation in which non-constraint resource(s) usage is synchronized to support the needs of the constraint.
Activity Analysis: The process of identifying and cataloging activities for detailed understanding and documentation of their characteristics. An activity analysis is accomplished by means of interviews, group sessions, questionnaires, observations, and reviews of physical records of work.
Activity Based Budgeting (ABB): An approach to budgeting where a company uses an understanding of its activities and driver relationships to quantitatively estimate workload and resource requirements as part of an ongoing business plan. Budgets show the types, number of and cost of resources that activities are expected to consume based on forecasted workloads.
The budget is part of an organization’s activity-based planning process and can be used in evaluating its success in setting and pursuing strategic goals.
Activity Based Costing (ABC): A methodology that measures the cost and performance of cost objects, activities and resources. Cost objects consume activities and activities consume resources. Resource costs are assigned to activities based on their use of those resources, and activity costs are reassigned to cost objects (outputs) based on the cost objects proportional use of those activities. Activity-based costing incorporates causal relationships between cost objects and activities and between activities and resources.
Activity Based Costing System: A set of activity-based cost accounting models that collectively define data on an organization’s resources, activities, drivers, objects, and measurements.
Activity-Based Management (ABM): A discipline focusing on the management of activities within business processes as the route to continuously improve both the value received by customers and the profit earned in providing that value. ABM uses activity-based cost information and performance measurements to influence management action.
Actual Cost System: A cost system that collects costs historically as they are applied to production and allocates indirect costs to products based on the specific costs and achieved volume of the products.
Actual Demand: Actual demand is composed of customer orders (and often allocations of items, ingredients, or raw materials to production or distribution). Actual demand nets against or “consumes” the forecast, depending upon the rules chosen over a time horizon. For example, actual demand will totally replace forecast inside the sold-out customer order backlog horizon (often called the demand time fence), but will net against the forecast outside this horizon based on the chosen forecast consumption rule.
Actual to Theoretical Cycle Time: The ratio of the measured time required to produce a given output divided by the sum of the time required to produce a given output based on the rated efficiency of the machinery and labor operations.
Advanced Planning and Scheduling - Advanced planning and scheduling systems includes constraint models that deal with both materials and capacity. In many instances, the systems download data from ERP systems. When applied to operations scheduling or short-term planning, these modeling systems perform simulations designed to optimize potential schedules prior to actual production.
Advanced Shipping Notice (ASN): Detailed shipment information transmitted to a customer or consignee in advance of delivery, designating the contents (individual products and quantities of each) and nature of the shipment. May also include carrier and shipment specifics including time of shipment and expected time of arrival. See also: Assumed Receipt
Agile Manufacturing – å phrase coined by the Iococca Institute at Lehigh University to describe a manufacturing enterprise in which “information flows seamlessly among inventory, sales, and between the organization and its suppliers and customers.” Work within an agile organization occurs concurrently rather than sequentially.
Allocated item: In an MRP system, an item for which a picking order has been released to the stockroom but not yet sent from the stockroom.
Allocation: A distribution of costs using calculations that may be unrelated to physical observations or direct or repeatable cause-and-effect relationships. Because of the arbitrary nature of allocations, costs based on cost causal assignment are viewed as more relevant for management decision-making. (Contrast with Tracing and Assignment.)
Alternate Routing: A routing, usually less preferred than the primary routing, but resulting in an identical item. Alternate routings may be maintained in the computer or off-line via manual methods, but the computer software must be able to accept alternate routings for specific jobs.
Assemble To Order - A production environment where a product or service can be made after receipt of a customer's order. The end item finished product is generally a combination of standard components and custom designed components that meet the unique needs of a specific customer. Where options or accessories are pre-stocked prior to customer orders, the term assemble-to-order is frequently used. Also known as make to order, make to stock.
Artificial Intelligence (AI) – Computer programs that can learn and reason in a manner similar to humans. Example: a problem is defined, the computer uses input data received, and search capabilities to gather pertinent data related to the problem, and then apply logic rules, and mathematical algorithms to simulate human reasoning.
Assembly: A group of subassemblies and/or parts that are put together and that constitute a major subdivision for the final product. An assembly may be an end item or a component of a higher-level assembly.
Assembly Line: An assembly process in which equipment and work centers are laid out to follow the sequence in which raw materials and parts are assembled.
Asset Management - Asset management systems have evolved from maintenance management systems. Maintenance management systems use work orders for preventive and predictive maintenance, equipment recording and tracking, replacement parts inventory, and maintenance labor scheduling. The goal of asset management is to optimize asset use and manage all maintenance efforts involved in making assets as reliable, accurate, and efficient as possible. A further crucial element in enterprise asset management is integration with financial, human resources, and purchasing functions, as well as production and enterprise resources planning systems.
Assignable Cause – A source of variation in a process that can be isolated, especially when its significantly larger magnitude or different origin readily distinguishes it from random causes of variation.
Automated Guided Vehicle System (AGVS): A transportation network that automatically routes one or more material handling devices, such as carts or pallet trucks, and positions them at predetermined destinations without operator intervention.
Automated Storage/Retrieval System (AS/RS): A high-density rack inventory storage system with un-manned vehicles automatically loading and unloading products to/from the racks.
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. Three methods of calculation are used: discrete ATP, cumulative ATP with look ahead, and cumulative ATP without look ahead.
Backorder: 1) the act of retaining a quantity to ship against an order when other order lines have already been shipped. Backorders are usually caused by stock shortages. 2) The quantity remaining to be shipped if an initial shipment(s) has been processed. Note: In some cases backorders are not allowed, this results in a lost sale when sufficient quantities are not available to completely ship and order or order line. Also see: Balance to Ship
Back Scheduling: A technique for calculating operation start dates and due dates. The schedule is computed starting with the due date for the order and working backward to determine the required start date and/or due dates for each operation.
Back flush: A method of inventory bookkeeping where the book (computer) inventory of components is automatically reduced by the computer after completion of activity on the component’s upper-level parent item based on what should have been used as specified on the bill of material and allocation records. This approach has the disadvantage of a built-in differential between the book record and what is physically in stock. Synonym: explode-to-deduct.
Bar Code: A symbol consisting of a series of printed bars representing values. A system of optical character reading, scanning, and tracking of units by reading a series of printed bars for translation into a numeric or alphanumeric identification code. A popular example is the UPC code used on retail packaging.
Base Inventory Level: The inventory level made up of aggregate lot-size inventory plus the aggregate safety stock inventory. It does not take into account the anticipation inventory that will result from the production plan. The base inventory level should be known before the production plan is made.
Batch Manufacturing – The technique of manufacturing in groups, lots, or batches in which each part or finished good is identical.
Batch Picking: A method of picking orders in which order requirements are aggregated by product across orders to reduce movement to and from product locations. The aggregated quantities of each product are then transported to a common area where the individual orders are constructed. Also See: Discrete Order Picking, Order Picking, Zone Picking
Benchmarking: The process of comparing performance against the practices of other leading companies for the purpose of improving performance. Companies also benchmark internally by tracking and comparing current performance with past performance.
Best in Class: An organization, usually within a specific industry, recognized for excellence in a specific process area.
Best Practice: A specific process or group of processes, which have been recognized as the best method for conducting an action. Best Practices may vary by industry or geography depending on the environment being used. Best practices methodology may be applied with respect to resources, activities, cost object, or processes.
Bill of Lading (BOL): A transportation document that is the contract of carriage containing the terms and conditions between the shipper and carrier.
Bill of Material (BOM): A structured list of all the materials or parts and quantities needed to produce a particular finished product, assembly, subassembly, manufactured part, whether purchased or not. Zit is used in conjunction with the master production schedule to determine the items for which purchase requisitions and production orders must be released.
Bin: 1) A storage device designed to hold small discrete parts. 2) A shelving unit with physical dividers separating the storage locations.
Blanket Purchase Order: A long-term commitment to a supplier for material against which short-term releases will be generated to satisfy requirements. Often blanket orders cover only one item with predetermined delivery dates. Synonym: Blanket Order, Standing Order.
Blanket Release: The authorization to ship and/or produce against a blanket agreement or contract.
Blow through: An MRP process which uses a “phantom bill of material” and permits MRP logic to drive requirements straight through the phantom item to its components, but the MRP system usually retains its ability to net against any occasional inventories of the item. Also see: Phantom Bill of Material
Book Inventory: An accounting definition of inventory units or value obtained from perpetual inventory records rather than by actual count.
Bottleneck: A constraint, obstacle or planned control that limits throughput or the utilization of capacity.
Bottom-up Replanning: In MRP, the process of using pegging data to solve material availability or other problems. This process is accomplished by the planner (not the computer system), who evaluates the effects of possible solutions. Potential solutions include compressing lead-time, cutting order quantity, substituting material, and changing the master schedule.
Box-Jenkins Model: A forecasting method based on regression and moving average models. The model is based not on regression of independent variables, but on past observations of the item to be forecast at varying time lags and on previous error values from forecasting. See: Forecast.
Breadman: A specific application of Kanban, used in coordinating vendor replenishment activities. In making bread or other route type deliveries, the deliveryman typically arrives at the customer's location and fills a designated container or storage location with product. The size of the order is not specified on an ongoing basis, nor does the customer even specify requirements for each individual delivery. Instead, the supplier assumes the responsibility for quantifying the need against a prearranged set of rules and delivers the requisite quantity.
Break-Even Point: The level of production or the volume of sales at which operations are neither profitable nor unprofitable. The break-even point is the intersection of the total revenue and total cost curves. Also see: Total Cost Curve
Bucketed System: An MRP, DRP, or other time-phased system in which all time-phased data are accumulated into time periods, or buckets. If the period of accumulation is one week, then the system is said to have weekly buckets.
Bucket less system: An MRP, DRP, or other time-phased system in which all time-phased data are processed, stored, and usually displayed using dated records rather than defined time periods, or buckets.
Buffer: 1) A quantity of materials awaiting further processing. It can refer to raw materials, semi-finished stores or hold points, or a work backlog that is purposely maintained behind a work center. 2) In the theory of constraints, buffers can be time or material and support
Buffer Management: In the theory of constraints, a process in which all expediting in a shop is driven by what is scheduled to be in the buffers (constraint, shipping, and assembly buffers). By expediting this material into the buffers, the system helps avoid idleness at the constraint and missed customer due dates. In addition, the causes of items missing from the buffer are identified, and the frequency of occurrence is used to prioritize improvement activities.
Burden Rate – A cost, usually in dollars per hour that is normally added to the cost of every standard production unit to cover overhead expenses.
Business Performance Measurement (BPM): A technique, which uses a system of goals and metrics to monitor performance. Analysis of these measurements can help businesses in periodically setting business goals, and then providing feedback to managers on progress towards those goals. A specific measure can be compared to itself over time, compared with a preset target or evaluated along with other measures.
Business Process Outsourcing (BPO): The practice of outsourcing non-core internal functions to third parties. Functions typically outsourced include logistics, accounts payable, accounts receivable, payroll and human resources. Other areas can include IT development or complete management of the IT functions of the enterprise.
Business Process Reengineering (BPR): The fundamental rethinking and radical redesign of business processes to achieve dramatic organizational improvements.
Business-to-Business (B2B): Many companies are now focusing on this strategy, and their sites are aimed at businesses (think wholesale) and only other businesses can access or buy products on the site. Internet analysts predict this will be the biggest sector on the Web.
Business-to-Consumer (B2C): The hundreds of e-commerce Web sites that sell goods directly to consumers are considered B2C. This distinction is important when comparing Websites that are B2B as the entire business model, strategy, execution, and fulfillment is different.