Supply Chain Terminology Glossary

This glossary should equip anyone getting into supply chain for the first time with some of the terminology that you will see around very often.

Table of Contents

Manufacturing Terminology

Manufacturing involves converting raw materials into finished products through a series of processes.

→ Types of Inventory

  • Inbound Materials: Raw materials and components purchased by factories.
  • Work in Process (WIP): Inventory that is currently being transformed through manufacturing processes.
  • Finished Goods: The final products ready for sale to end-users.

Balancing these inventories is crucial. Keeping them low reduces costs, but running out of inbound materials can halt production.

Manufacturing capacity is the maximum amount a factory can produce at a given time.

  • Constraints: Factors that limit capacity, such as equipment limitations, staffing issues, or shortages of inbound materials.
  • Utilisation Rate: The percentage of capacity currently being used. For instance, a factory with a 50% utilisation rate is using half of its capacity.

High utilisation rates are generally favourable but require careful management to prevent unplanned shutdowns. 

  • Workstations/Work Centers/Work Cells: Specific steps or stages in the manufacturing process.
  • Bill of Materials (BOM): A detailed list of components needed to produce a product.
  • Kitting: The process of pre-sorting and arranging parts for use in a workstation, often done in a distribution area called a supermarket.
  • Tact Time: The time required to complete a step in the manufacturing process. 
  • Balancing a production line: Ensuring that manufacturing steps work smoothly, having similar tact times.
  • Single-Minute Exchange of Dies (SMED): An efficiency technique to minimise setup time when changing over a production line from one product to another, improving efficiency.
  • Personal Protective Equipment (PPE): Safety gear required for workers, such as steel-toed shoes and safety glasses. Ensuring a safe working environment is a top priority in any manufacturing setting.

Warehousing Terminology

Warehouse: General term for a facility where inventory is stored temporarily.

→ Types of Warehouses

    • Distribution Centre (DC): These facilities are optimised for the quick movement of products to retailers or customers.
    • Fulfilment Centre: Similar to a DC, but focused on picking, packing, and shipping orders directly to customers.
    • Replenishment Centre: Specialised in supplying stock to other warehouses or retail locations.
    • Cross-Dock: A warehouse where products are received and shipped out the same day without long-term storage.
    • Bonded Warehouse: A storage area where goods can be stored without paying import duties until they’re moved out of the warehouse.
    • Specialised Warehouses: These include facilities for hazardous chemicals and refrigerated warehouses for perishable goods.
  • Receiving Area: Where inbound deliveries are received, inspected for accuracy, and checked for damage before being accepted into inventory.
  • OS&D Section (Over, Short, and Damage): Area dedicated to sorting discrepancies, damaged goods, and items that are over or short in quantity compared to the received order.
  • Warehouse Management System (WMS): Software used to control and manage the day-to-day operations in a warehouse, including inventory tracking, order processing, and logistics management.
  • Putaway: The process of storing received goods in their designated locations within the warehouse, guided by instructions from the WMS.
  • Picking: Retrieving items from storage to fulfil customer orders, directed by a Warehouse Execution System (WES).
  • Pack and Ship Area: Where items are packaged, labelled, and prepared for shipment.
  • Outbound Area/Shipping Bay: The designated area where packed goods are staged and loaded onto carriers for transport to customers or distribution centres.
  • Stock Keeping Units (SKUs): Unique identifiers for each product type and packaging. For example, a 12-pack and a 24-pack of the same soda are different SKUs.
  • Order Line: Each distinct SKU and its quantity on a customer order.
  • Fill Rate: A key performance indicator (KPI) measuring the percentage of customer orders fulfilled as requested. It can be calculated for individual items (item fill rate) or entire order lines (line fill rate).
  • Forecasting Demand: Predicting the quantity of products needed to meet customer demand.
  • Scheduling Replenishment: Planning the restocking of inventory to maintain adequate levels.
  • Safety Stock: Additional inventory maintained above regular demand to safeguard against fluctuations in demand, supply chain disruptions, or delays.

Procurement Terminology

Procurement is the process of acquiring goods and services necessary for a business to operate efficiently. It involves not only purchasing products but also ensuring they are obtained in the right quantities, at the right time, and at the best possible price. This process is crucial for maintaining the supply chain and supporting the overall operations of the business.

Structure of Procurement Within Organizations:

  1. Chief Purchasing Officer (CPO). The CPO is the top executive responsible for overseeing all procurement activities within an organization. They strategise, manage budgets, and ensure that procurement aligns with the organisation’s goals and objectives.

  2. Directors and Managers. Directors and managers within the procurement function specialise in purchasing different categories of goods:

    • Direct Materials. These are items that are directly incorporated into the production of goods. For example, in car manufacturing, direct materials include metal, glass, plastic, etc.

    • Indirect Materials. These are items necessary for running the business but are not part of the final product. Examples include office supplies, maintenance tools, and cleaning materials in a manufacturing facility.

  3. Roles Within Procurement Categories:

    • Buyers. Buyers are professionals responsible for directly interacting with suppliers. They manage supplier relationships, negotiate contracts, and ensure that purchases align with the organisation’s needs and budget. Buyers typically initiate purchases through requisitions and issue purchase orders (POs) to suppliers.

    • Purchasing Analysts. Purchasing analysts monitor market trends and analyse data to anticipate potential shortages or changes in pricing within specific categories of goods. They provide insights that help procurement teams make informed decisions about sourcing and inventory management.

    • Supplier Quality Professionals. These professionals ensure that the materials received from suppliers meet the company’s quality standards. They may conduct inspections, audits, and quality checks to verify compliance with specifications and requirements.

Have you ever wondered why it’s so challenging to purchase anything when you work for a large company? Or why it takes so long for big companies to pay their bills? 

These challenges arise because companies must follow a structured process to manage their expenditures. In supply chain terms, this entire process is known as the procure-to-pay (P2P) or source-to-pay cycle.

The Seven Steps of Procure-to-Pay Process

    1. Requisition Order (Req)
      • A requisition order initiates the purchasing process, granting approval to make a purchase.
    2. Vendor Selection
      • Decide on a vendor from pre-approved suppliers or issue a Request for Proposals (RFP) to gather bids.
    3. Purchase Order (PO)
      • Issue a PO to the chosen vendor, detailing quantities, pricing, timing, and payment terms.
    4. Order Fulfilment and Receipt
      • The vendor fulfils the order based on the PO, and upon receipt, it undergoes inspection to ensure quality and completeness.
    5. Invoice Reception
      • Upon shipment, the vendor sends an invoice, marking the start of the payment process.
    6. Three-Way Match
      • Validate the invoice against the PO and receipt document to reconcile discrepancies.
    7. Invoice Approval and Payment
      • Once validated, approve the invoice for payment through the accounts payable process.
      • Getting an invoice approved can take a while, but you want to make sure that invoices are paid within the time shown on the invoice. Otherwise, you could end up paying late charges and penalties to your suppliers. 

Basic Forecasting Terminology

Forecasting is essential for making informed decisions in supply chain management. Accurate forecasts help in:

  • Lowering Costs: By avoiding overproduction and excessive inventory.
  • Increasing Sales: By ensuring sufficient stock to meet demand.
  • Growing Profits: By aligning production and inventory with market demand.

→ Types of Forecasts

    • Quantitative Forecasts: Based on historical data and statistical analysis. For example, analysing past sales data to predict future sales.
    • Qualitative Forecasts: Based on expert judgement and insights. This method is used when there is no historical data available, such as predicting sales for a new product or accounting for changes in regulations or taxes.

→ Forecasting Methods

    • Trend Analysis: Looking at the historical growth rate to predict future sales. For instance, if sales have grown by 10% annually over the past five years, you might forecast a similar growth rate for the next year.
    • Seasonality: Accounting for cyclical variations that occur at specific times of the year. An example is higher ice cream sales in summer compared to winter.

→ Short-term vs. Long-term Forecasts:

    • Short-term forecasts predict outcomes in the near future, usually within days, weeks, or a few months. They tend to be more accurate because there are fewer unknowns or uncertainties over this shorter time frame. For example, weather forecasts for the next few days are generally more accurate than those for the next few months.

    • Long-term forecasts extend further into the future, often covering months or years. They are inherently less accurate because more variables can affect outcomes over longer periods, such as economic changes, technological advancements, or shifts in consumer behaviour.

→ Measuring Forecast Accuracy

    • Mean Average Percent Error (MAPE) is a common metric used to quantify forecast accuracy. It calculates the average percentage difference between forecasted and actual values over a set of predictions. A lower MAPE suggests that the forecasts are more accurate because they have smaller average errors.
  •  
    • Bias. It refers to a consistent tendency of forecasts to either overestimate or underestimate actual outcomes. Identifying and correcting bias is important because it helps in making more reliable predictions in the future. For instance, if forecasts consistently overestimate sales, adjustments can be made to improve accuracy by considering factors that were previously overlooked.

Freight and Transportation Terminology

Freight is essentially the “stuff that your company moves.” Also called goods, cargo, load, or shipment of goods.

→ Types of Freight

    • Inbound Freight: Shipments received from suppliers.
    • Outbound Freight: Shipments sent to customers.
  • Shippers (Beneficial Cargo Owners – BCOs): This is the recipient of the shipping container and its contents at the destination
  • Carriers: Companies that physically transport the freight.

Sometimes, shippers do not directly manage their transportation needs with carriers. Instead, they may engage a freight forwarder, a NVOCCs or a third-party logistics:

    • Freight Forwarders:
      • Specialise in arranging and managing the transportation of goods.
      • Coordinate shipments via various carriers (airlines, shipping lines, trucking companies).
      • Prepare and manage documentation, including customs paperwork.
      • Provide value-added services such as warehousing and packing.
      • Act on behalf of shippers (BCOs) to streamline the shipping process.

    • Non-Vessel Operating Common Carriers (NVOCCs):

      • Operate as carriers for ocean freight without owning vessels.
      • Consolidate smaller shipments into full container loads (FCLs) for efficiency.
      • Issue their own bills of lading and assume responsibility for cargo.
      • Arrange transportation and manage logistics for ocean freight.
      • Provide comprehensive shipping services including booking, documentation, and compliance.
    • Third-Party Logistics (3PLs):
      • Provide outsourced logistics services to companies (shippers/BCOs).
      • Offer a range of services including freight forwarding, warehousing, distribution, and fulfillment.
      • Act as intermediaries between shippers and carriers to optimize logistics operations.
      • Handle transportation needs, match them with available capacity, and manage shipping relationships.
      • Enhance supply chain efficiency and reduce costs for businesses through logistics expertise.

Shipping Rules Terminology

Ensuring that you’re following all the rules, getting the proper insurance, and specifying the right shipping terms is crucial. Errors in any of these areas can be very costly. Therefore, as you prepare for your learn about supply chain, make sure to spend time learning about shipping rules and regulations:

  • Australian Domestic Shipping: Within Australia, domestic shipping terms are typically governed by standard business contracts and practices. It’s essential to specify the point of delivery and transfer of risk clearly.
  • Incoterms: For international shipping, the rules are called Incoterms. These terms help define the responsibilities of buyers and sellers in international transactions. You can find a comprehensive description of Incoterms here.

Understanding which laws apply to ships that travel between different countries is also essential:

  • Territorial Waters: The water near a country’s coast is considered to belong to that country.
  • International Waters: When you move far enough away from the shoreline, the ocean doesn’t belong to any country; these are international waters.
  • Law of the Sea: A special set of international laws, including the principle of general average.

→ Principle of General Average. This principle states that if cargo is lost at sea, all companies with cargo on that vessel may be required to pay a portion of the loss. Here’s how it works:

      • If you ship a container that is one of 10,000 on the same ship, and another container falls overboard, you could owe money to the company whose container was lost.
      • Even if you have no idea who they are or that their container was on the same ship, you may still be liable.
      • It might seem unfair, but it’s part of the Law of the Sea and enough reason  to carry insurance on international cargo (usually referred to as cargo insurance).

Ocean Shipping Terminology

Shipping containers are standardised metal boxes used to transport goods by sea, land, or air. They come in various sizes and are designed to be easily loaded, unloaded, stacked, and transported between different modes of transportation.

→ Types and Sizes:

  • Standard Containers: Also known as dry vans, these are the most common type used for general cargo.

    • Sizes: Typically 20 feet (TEU) or 40 feet (FEU) long, with heights of 8 feet 6 inches or 9 feet 6 inches (for high cube containers).

  • Refrigerated Containers (Reefers). Maintain specific temperature settings for transporting perishable goods like food and pharmaceuticals.

  • Open Top Containers. Lack a solid roof, allowing for top loading of oversized or bulky cargo.

  • Flat Rack Containers. Open sides and ends, suitable for heavy or oversized cargo that can be loaded from the top or sides.

  • Tank Containers. Transport liquids and gases, equipped with built-in tanks and valves.

Container ships are specialised vessels designed to transport standardised containers across oceans and seas.

  • Container Capacity: Measured in TEUs (Twenty-foot Equivalent Units) or FEUs (Forty-foot Equivalent Units), indicating the number of standard containers (2o-foot) a ship can carry. 

The size of a ship actually determines where it can travel. 

  • Canal Limitations: The Suez Canal and Panama Canal restrict vessel size, impacting global shipping routes.
  • Port Requirements: Ships are also limited by the depth of water and the equipment in a port.

Do you remember the Ever Given, that ship that was the size of the Empire State Building and got stuck in the Suez Canal back in 2021? Well, that container ship had a capacity of just over 20,000 TEUs. It barely fit through the Suez Canal, and it was too big for the Panama Canal. Ships are also limited by the depth of water in a port and the equipment in the port. 

→ Container Terminal. Facility equipped for loading, unloading, and storing containers, with infrastructure for intermodal transport.

→ Freight Rates / Charter Rates. Cost of chartering a container ship for a specific voyage or period, influenced by market demand and vessel availability.

→ Ocean Carrier Alliances. Cooperation between shipping lines to optimise routes, share vessels, and enhance service frequency.

→ SOLAS (Safety of Life at Sea). International treaty ensuring safety standards for ships, including container vessels.

→ Container Yard (CY). Storage area for shipping containers pre- or post-transportation.

    • Role: Stacking, sorting, and container inspection.

→ Container Freight Station (CFS): Facility for consolidating and deconsolidating cargo from containers.

    • Role: Customs clearance, documentation, and cargo distribution.

→ Demurrage and Detention:

    • Demurrage: Charges for delaying container pick-up from the port beyond allowed free time.
    • Detention: Charges for holding containers longer than allowed at destination or customer facilities.

→ Bill of Lading (B/L):  Legal document issued by carriers to shippers, confirming receipt of goods for shipment.

→ Customs Clearance: Formalities required by customs authorities to allow goods to enter or leave a country.

→ Cargo Insurance: Protects against loss, damage, or theft of goods during transportation.

→ Route and Sailing Schedule. Specifies vessel paths and timing for arrivals and departures at ports.

→ Drayage: Short-distance movement of containers between ships and nearby warehouses.

→ Stuffing: Loading containers with goods for transport.

→ Dunnage: Packing materials used to protect freight during transport.

Air Shipping Terminology

Air freight plays a crucial role in global logistics, offering rapid transportation for time-sensitive goods over long distances, albeit at a higher cost.

  • Unit Load Devices (ULDs), also known as pods or cans, are containers or pallets used to secure and load freight onto large aircrafts.

→ Types of Air Carriers:

  • Cargo Airlines: Companies like FedEx, UPS, DHL, and Amazon operate dedicated cargo fleets for air freight.
  • Passenger Airlines: Utilise cargo holds, known as belly cargo, beneath passenger cabins for transporting freight.
  • Calculating Chargeable Weight. When it comes to air freight, both size and weight matter. Airlines use a formula to divide the volume of a package by a standard weight. If your freight is heavier than the standard, then you’ll have to pay a higher price.   
  • Load Planning. Process used for balancing aircraft weight distribution and stability during flight, preventing accidents. If the cargo were to roll around inside an aeroplane, it could cause an accident by changing the balance or even bumping against the fuselage.

There are some special paperwork requirements for air cargo. For example:

  • Packing list or Manifest: list of the products that each ULD is carrying.
  • Airway Bill of Lading (AWB): Essential document detailing the cargo being transported and terms of carriage.

Safety Regulations: Prohibitions and restrictions on hazardous materials, governed by standards set by the International Air Transport Association (IATA). Lots of products that seem safe on the ground can become hazardous in aeroplanes. Oxygen canisters and lithium batteries, for example, can get hot enough to start a fire, and compressed gases like oxygen or CO2 can explode.

Truckload Shipping Terminology

  • Shippers: These are companies that own the products and hire carriers to transport them.
    • Example: Large shippers like Woolworths often own their own trucks and hire their own drivers. These are known as dedicated fleets.
  • Carriers: Companies hired by shippers to move products.
  • Third-Party Logistics Providers (3PLs):
    • Asset-Based 3PLs: Own a fleet of trucks and trailers.
    • Non-Asset-Based 3PLs: Act as brokers, subcontracting work to independent drivers called owner-operators.
  • Dry Vans:
    • Dimensions: Eight feet wide and 53 feet long.
    • Capacity: Can carry 26 pallets (each pallet being four feet square).
    • Features: Big boxes on wheels, loaded and unloaded through rear doors.
  • Flatbeds:
    • Usage: Ideal for long products like pipes and boards, or for side loading/unloading.
  • Refrigerator Trailers (Reefers): Used to keep food cold.
  • Chassis: Haul shipping containers.
  • Lowboys: Haul heavy equipment like bulldozers.
  • Tankers: Transport liquids such as milk or gasoline.

The trucking industry is far more sophisticated than many people realise. Since trucks are crucial for moving products in a supply chain, it will come in handy to understand how the trucking market works.

When planning a shipment, it starts at an origin and gets delivered to a destination. Each combination of an origin and destination is called an O-D pair, or it’s also referred to as a route or a lane. These are two common shipping options within this industry: 

  • Less Than Truckload (LTL): If you’re shipping only a few boxes or pallets, using an LTL makes sense. An LTL carrier operates like the post office, combining your shipment with others and routing it through a series of distribution centres. This adds time to the journey and increases the risk of freight damage.
  • Full Truckload (FTL): With FTL, the truck transports your load directly from the origin to the destination without stopping at a distribution centre. If your shipment is large enough to take up most of a trailer, it makes sense to use FTL.

→ The FTL transportation market is dynamic, similar to the stock market. Prices fluctuate based on demand. When demand is high, prices increase; when demand is low, prices decrease.

    • Contracted Rates: Shippers predicting a need to ship numerous loads in a particular lane can negotiate a contracted rate with their carriers.
    • Spot Market Rates: Shippers without a contracted rate pay the spot market rate. The shipper asks the carrier to move a shipment by tendering a load, which the carrier can accept or reject. Rejections can occur due to lack of availability or hoping for a higher-paying offer.
  • Driver restrictions: In addition to the general duty to not drive a fatigue-regulated heavy vehicle on a road while fatigued, drivers must comply with certain maximum work and minimum rest limits.
  • Live Load or Unload: When a driver waits for freight to be loaded or unloaded from their trailer.
  • Detention Fee: Charged if a driver has to wait too long for loading or unloading.
  • Drop and Hook: Preferred by many drivers, this involves dropping off an empty trailer and picking up a loaded one without waiting.
  • Headhaul and Backhaul: Truckers view each load as a project, divided into two parts:
    • Headhaul: The journey from the origin to the destination.
    • Backhaul: The return journey, ideally carrying another load. If no load is available, the driver must drive empty, known as deadheading.
      • Challenges of Deadheading
        • Neither the truck nor the trucker are earning money.
        • An empty trailer is light and can be dangerous, with higher risks of being blown over by strong winds.
        • Some areas have numerous head hauls but few backhauls. For instance, an area with a single large manufacturer might receive many parts from suppliers but send out few finished products, raising head haul prices due to the likelihood of deadheading for the return journey.

Rail Shipping Terminology

Any piece of equipment that moves on railroad tracks is called rolling stock. The two most common types of rolling stock are:

  • Locomotive Engines: These power the train.
  • Railcars: These carry the cargo.
    • Types of Railcars for different kinds of cargo:
      • Boxcars: Ideal for hauling freight that needs protection from rain and wind.
      • Reefers: Refrigerated boxcars used for products like food that need to be kept cold.
      • Flatcars: Used for freight that doesn’t need the protection of walls and a roof, such as shipping containers.
      • Auto Racks: Specialised railcars for hauling automobiles.
      • Gondolas: Open-top railcars for commodities like grain and coal.
      • Tanker Cars: Used for transporting liquids and gases.

 

If you’re shipping a large amount of freight at once, you can load a series of railcars to travel together, known as a unit train.

  • Railhead: The place where you load or pick up cargo onto/from a train.
  • Rail Spur: Private tracks owned by big factories and distribution centres.
  • Railcars get connected and disconnected several times along their journey, a process called switching or shunting, done in special freight yards with numerous tracks.
  • Inland Ports: Rail yards connected to an ocean port. They reduce congestion around ocean ports by using trains to move freight inland for sorting and distribution. These ports are used to transload cargo to and from trains, trucks, and aeroplanes.

→ Intermodal Transportation

Intermodal transportation refers to using multiple modes of transport over long distances. For instance, shipping products from China to Perth might involve:

      1. Stuffing Containers: The products are loaded into a shipping container.
      2. Transport by Ship: The container is carried by ship to a port.
      3. Transloading onto a Train: The container is then placed on a flatcar and transported by rail.
      4. Shunting: The flatcar might get shunted at several switching stations.
      5. Final Leg by Truck: The container is then transloaded onto a chassis and hauled by a truck to its final destination.