Stock keeping units (SKUs), shrinkage, turnover — do you speak retail? If you run a store, these aren’t industry jargon. They’re how you stay stocked, profitable, and ahead of the curve.
Inventory management language is used in every industry that handles physical goods, from liquor and vape shops to high-volume convenience stores.
Here are 20 essential inventory management terms every business owner should know.
Section 1: Core Inventory Concepts
Mastering these core inventory management terms can improve how your business tracks stock, avoids shortages, and plans ahead. These concepts shape the daily decisions behind every product that moves through your organization.
1. SKU (Stock Keeping Unit)
A stock keeping unit (SKU) is a product-specific code used to track inventory — usually a combination of letters and numbers unique to each item or variation. SKUs help you identify products by size, color, flavor, or packaging, like a medium blue T-shirt vs. a large red one.
2. On-Hand Inventory
This refers to the quantity of a product physically available to sell in your store, online, or on display in areas like a garden center’s greenhouse or outdoor lot. On-hand inventory doesn’t include items that are on order or in transit.
3. Lead Time
Lead time is the total time between placing a purchase order and when it’s in your hands, ready to hit the shelves, or ship. This includes order processing, shipping, and receiving. Lead time can vary depending on the supplier’s speed, your location, and the type of product.
4. Reorder Point (ROP)
Your reorder point tells you when to restock. It’s calculated using average sales speed and delivery time, helping you avoid stockouts without overordering. For instance, a boutique that sells five linen jumpsuits a week and waits two weeks for delivery would place an order when inventory drops to 10, so it has enough to cover sales during the wait.
5. Safety Stock
Safety stock buffers against sudden demand spikes or delivery delays, keeping shelves stocked even when sales fluctuate. For example, let’s say a convenience store typically sells 50 cases of bottled water weekly. It might keep 20 extra cases on hand during summer to avoid running out during a heat wave or supplier delay.
Next, let’s look at how you track and value that inventory once it’s on hand.
Section 2: Inventory Valuation Methods and Tracking Terms
These inventory management terms shape how you price products, report taxes, and make better restocking decisions. How you value inventory shapes your item pricing, profits, and tax reports, especially for businesses like grocery stores, convenience stores, or manufacturers that handle large volumes or frequent shipments.
6. FIFO (First In, First Out)
FIFO means the oldest inventory is sold or used first. Food service, cosmetics, and convenience stores commonly use this method when products have expiration dates or short shelf lives. This method reduces waste and keeps inventory turnover consistent by selling older items first.
7. LIFO (Last In, First Out)
LIFO assumes that the most recently purchased inventory is sold first. This increases your cost of goods sold (COGS) and lowers reported profits. That can result in lower taxable income, which is why it’s often used in industries like auto parts or oil and gas, where costs rise over time. However, it may not reflect your actual inventory usage or margins.
8. Average Cost Method
This method values inventory using the average cost of all units available during a given period. For instance, if a hardware store restocks boxes of nails at different prices throughout the month, the system averages those costs to assign a single value per unit sold.
9. Perpetual Inventory System
A perpetual inventory system tracks stock in real time using point of sale (POS) software or barcode scanners. Sales, returns, and restocks instantly update your records, reducing the need for manual counts to help you reorder accurately, spot shrinkage, and see what’s in stock across locations.
10. Periodic Inventory System
With a periodic system, you update your inventory at set intervals, such as weekly, monthly, or quarterly, rather than after every transaction. Periodic systems work for smaller businesses, like tobacco stores, but can create blind spots between counts and make loss detection harder.
11. Cycle Count
Cycle counting is an inventory auditing method that checks small batches of stock on a set schedule instead of doing a complete physical count. Businesses review select items daily, weekly, or monthly — often focusing on high-value or fast-moving products — to catch discrepancies early and keep records accurate without disrupting operations.
Once you’ve got tracking down, it’s time to focus on movement — what’s selling, what’s not, and where you’re losing money.
Section 3: Stock Status and Movement
These terms help you understand product flow, meaning what’s selling, sitting, and where you may be missing sales.
12. Stockout
Stockouts happen when an item is out of inventory and can’t be sold, like when a grocery store misses a milk delivery. They usually occur when demand spikes or reordering is delayed, leading to lost sales or canceled orders.
13. Overstock
Overstock means holding more inventory than you need, like shelves packed with unsold seasonal candy or extra phone chargers from older models. It ties up cash, takes up storage space, and increases the risk of write-offs or markdowns.
14. Dead Stock
Dead stock includes products that haven’t sold for months and aren’t expected to, like outdated tech accessories or discontinued items. Unlike overstock, these items rarely regain value. Retailers typically mark down, bundle, or write off these items as a loss.
15. Backorder
A backorder occurs when a customer buys an item that’s temporarily out of stock, like a popular vape flavor or brand-name batteries. The sale goes through, but the product is shipped or picked up once new inventory arrives.
16. Turnover Rate
Turnover rate measures how often you sell and replace inventory over a set period. What counts as a “high” rate varies by industry. For example, food store chains turn inventory every 32 days, while hardware stores average a turnover every 60 to 90 days.
Once you understand how products move through your store, the next step is managing how they’re packed, shipped, or assembled behind the scenes.
Section 4: Logistics and Fulfillment
Logistics and fulfillment inventory management terms help you control what happens after products hit the shelf — from packing and shipping orders for your e-commerce store to tracking components and catching losses.
17. Pick and Pack
Pick and pack refers to locating ordered items and boxing them for shipment or pickup. Though often associated with e-commerce, it’s also common in retail settings like convenience or grocery stores that offer local delivery or prep orders for curbside pickup as part of a hybrid sales model.
18. Dropshipping
Dropshipping lets retailers sell products without having to keep them in stock. For example, a cell phone repair shop might list replacement screens or cases on its website, but once a customer orders, the supplier ships the item directly. It helps reduce storage costs but gives the retailer less control over inventory and delivery speed.
19. Bill of Materials (BOM)
A bill of materials (BOM) lists all the materials, parts, or ingredients needed to assemble or bundle a product. You’ll find it in phone repair shops (for parts), grocery stores that sell prepared foods, or retailers offering product kits or gift sets. It helps you track components, manage stock, and price bundled items correctly.
20. Inventory Shrinkage
Inventory shrinkage refers to stock losses caused by theft, damage, or record-keeping mistakes like miscounts or system input errors. Shrinkage affects margins by reducing the amount of sellable inventory, and often signals problems with security, receiving, or inventory tracking.
Keeping shrinkage under control is key to protecting your margins, and it’s one of many reasons why understanding the terms behind inventory strategy is so important.
Study Inventory Management Terms and Build a Stronger Strategy
Understanding inventory management terms helps you gain more control over your stock. It also makes vendor conversations clearer by setting shared expectations around lead times and deliveries.
Modern POS software benefits retailers of all kinds, including convenience, tobacco, and liquor stores. Many solutions have built-in tools for barcode scanning, reordering, and running detailed sales and inventory reports. You can also get employee management, vendor tracking, and multi-location features to keep every part of your store connected.
Turn these inventory terms into real workflows with POS Nation-recommended tools. Book a demo today to see how our point of sale partners can help with daily stock decisions in your store.