In this article, we will explore what cycle inventory is and its benefits. We will also identify the factors that influence it and share our inventory cycle management process. Read on to learn more.
Cycle inventory refers to the portion of total inventory that is actively being used to fulfill customer orders. It represents the amount of goods a company has on hand to meet customer demand during a specific period.
Example: A retail store has 500 units of a particular brand of sneakers in stock to meet the monthly customer demand. It orders another 500 units each month as the stock depletes. In this case, those 500 units represent the cycle inventory for that month.
Cycle inventory is important for a number of reasons, some of the most common reasons include:
Cycle inventory management helps in optimizing the holding and ordering costs. By maintaining an optimal level of stock, companies can reduce excess inventory holding costs and avoid urgent, costly replenishments.
Having the right amount of cycle inventory ensures that products are readily available to meet customer demand. This leads to enhanced customer satisfaction and loyalty.
Efficient cycle inventory management ensures that capital isn't unnecessarily tied up in excess inventory. This aids in better cash flow and financial flexibility for other business operations.
Properly managed cycle inventory contributes to a smooth and efficient supply chain which reduces lead times and ensures timely delivery of products to consumers.
Businesses that manage their cycle inventory effectively can respond quickly to market demands, take advantage of opportunities, and gain a competitive edge by offering reliable service levels.
There are a number of factors that can influence cycle inventory. Here are some of the most common factors:
The level of consumer demand for a product significantly influences cycle inventory. High demand necessitates a larger inventory to meet customer needs, while lower demand reduces the required inventory levels.
The quantity of goods ordered in each replenishment cycle directly impacts the cycle inventory levels. Larger order quantities lead to a higher average cycle inventory, while smaller orders result in lower inventory levels.
The time taken for suppliers to deliver orders affects how much inventory is needed on hand to satisfy customer demand during that period. Longer lead times require maintaining higher inventory levels to avoid stockouts.
The consistency and reliability of suppliers in delivering quality products on time play a crucial role. Unreliable suppliers can lead to fluctuations in cycle inventory levels, necessitating higher safety stocks to mitigate risks of stockouts.
The formula to calculate cycle inventory is based on the assumption that inventory is used at a constant rate and is instantly replenished when it reaches zero.
The formula is:
Average Cycle Inventory = Order Quantity / 2
Where:
Average Cycle Inventory is the average amount of inventory on hand during a specific period.
Order Quantity is the total number of units ordered to replenish the inventory when it reaches the reorder point.
Example: Each time a retail store's stock of shampoo bottles runs low, it orders 400 units for replenishment.
Average Cycle Inventory = Order Quantity / 2
Average Cycle Inventory = 400 / 2
Average Cycle Inventory = 200 units
On average, the store has 200 bottles of shampoo as cycle inventory at any given time.
Use our 10 step Inventory Cycle Management process to effectively manage your inventory. Simply follow the steps below:
Predicting the expected customer demand is crucial. It involves estimating the quantity of products that customers will purchase in a future period and considering factors like historical sales data, market trends, and seasonal variations.
Example: A toy store analyzes its sales data and market trends to predict it will sell approximately 200 units of "Builder Blocks" sets monthly. They consider factors like upcoming holidays and recent toy trends to make this estimate.
Decide the number of units to order during each replenishment. This should align with the demand forecast and storage capacity while considering the supplier's lead time and minimum order requirements.
Example: Based on the monthly demand forecast, a grocery store decides to order 1000 units of "Crunchy Apples" cereal every month to ensure stock availability and minimize excess inventory.
Safety stock is maintained to mitigate the risk of stockouts caused by demand fluctuations or supply inconsistencies. It is calculated by utilizing the formula: Safety Stock = Z * σD * sqrt(L), where Z is the Z-score (derived from desired service level), σD is the standard deviation of demand, and L is the lead time. The formula accounts for demand and lead time variability to maintain the desired service level.
Example: For the "SoundWave" headphones, if a Z-score of 1.28, a standard deviation of demand of 10, and a lead time of 2 weeks are assumed, the safety stock will be 1.28 * 10 * sqrt(2) = 18 units approximately.
The reorder point triggers a new order to restock inventory factoring in lead time demand and safety stock to prevent stockouts. It is computed using the formula: Reorder Point = (Average Daily Demand * Lead Time in Days) + Safety Stock. This ensures that new orders are placed in time considering the average lead time and demand fluctuations.
Example: If the bookshop has an average daily demand of 5 "Mystery Tales" books and a lead time of 14 days, with a safety stock of 10 books, the reorder point would be (5 * 14) + 10 = 80 books.
Regularly review inventory levels to identify patterns, validate demand forecasts, and ensure that the stock is above the reorder point.
Example: A sports store checks its inventory weekly and notices that it consistently has around 30 "TrailBlazer" basketballs in stock, confirming the accuracy of their demand forecast.
Evaluate the performance of suppliers to ensure timely and quality deliveries. This analysis is pivotal for adjusting order quantities, safety stock levels, and reorder points.
Example: A clothing retailer realizes their supplier of "FashionFit" jeans is consistently late by a week which leads them to adjust their reorder points and safety stock levels accordingly.
Implement efficient storage and handling practices to minimize damages, theft, and operational costs. This is to ensure that the available cycle and safety inventory is ready for sale.
Example: A warehouse storing "Breeze" air conditioners implements a barcode system and optimal shelving to locate, count, and manage the inventory efficiently.
Regularly revisit and refine the cycle inventory management strategy to align with changes in demand, supplier performance, and business goals.
Example: An online store selling "Glow" skin care products reviews its strategy quarterly and adjusts the order quantity from 500 to 600 units. This reflects the increased customer demand.
Leverage technology like inventory management software to automate, track, and optimize cycle inventory processes.
Example: A gadget shop integrates an AI-based system that automatically reorders 200 units of "Techie" smartwatches when the stock level hits 50 considering the increased online sales trend.
Measure key performance indicators to assess the effectiveness of the cycle inventory management system and aim for continuous improvement.
Example: A furniture store assesses that its "Comfy Couch" line has reduced holding costs by 20% and increased service levels by 15% after revising its cycle inventory management strategy.
GreenLeaf Bookstore is a renowned book retail chain aiming to optimize the inventory for a bestselling novel, "The Mystic Forest.” Here’s how they implemented our simple 10 step process.
GreenLeaf utilizes past sales data and anticipates upcoming literary events. They estimate to sell around 150 copies of "The Mystic Forest" per month. The prediction accounts for seasonal reading trends and the book's continuing popularity among readers.
Aligning with the monthly demand of 150 books, GreenLeaf decides to order 150 units of "The Mystic Forest" each month. This quantity ensures that the stock is replenished regularly and aligns with customer demand while avoiding overstocking.
To safeguard against unexpected demand surges or supply delays, GreenLeaf maintains a safety stock of 20 books. This buffer ensures that even if there’s a sudden spike in sales or a delay in the next shipment, customer demand can still be met.
Knowing it takes two weeks for the new stock to arrive, GreenLeaf sets a reorder point for when there are 35 copies left in stock. This strategy ensures that the new order arrives just in time to replenish the inventory without any interruptions in availability.
GreenLeaf actively monitors the stock, observing that the inventory levels fluctuate in line with predictions, with an average of about 70 books always available. This observation confirms that the established order quantities and reorder points are effective.
GreenLeaf assesses its supplier's consistency and notices that the orders arrive timely, maintaining the quality of the books. This reliability allows the bookstore to keep a lean safety stock and confidently rely on the established reorder points.
The bookstore employs a categorization system, ensuring that "The Mystic Forest" and other inventory are stored systematically for easy accessibility and counting. The efficient arrangement prevents misplacements and enhances the speed of service to customers.
Every quarter, GreenLeaf reviews the strategy and notices a steady increase in demand. Consequently, the order quantity is adjusted to 180 books monthly to ensure that the evolving customer needs are aptly met.
GreenLeaf implements an inventory management software that automates the reordering process. The system is programmed to place an order automatically when the stock level of "The Mystic Forest" hits the 35-book mark, ensuring seamless inventory replenishment.
The bookstore has observed a 15% reduction in holding costs and a 10% increase in sales since the implementation of the new cycle inventory strategy. These metrics indicate improved efficiency and customer satisfaction which validates the effectiveness of the framework.
We hope that you now have a better understanding of what cycle inventory is and how to implement our inventory cycle management process.
If you enjoyed this article, you might also like our article on cycle counts vs physical inventory or decoupling inventory.
