Inventory and SCP: The Role of Cycle inventory
Session 7
What Is Cycle Stock?
• Cycle stock: is the amount of inventory available to meet
typical demand during a given period.
• It's the amount of inventory you would expect to go
through based on forecasts and historical data.
• Cycle stock is one part of a company’s total on-hand
inventory and must be replaced as the business sells its
goods (i.e., inventory turnover).
Benefits of forecasting Cycle Stock
• These are the main advantages of calculating your cycle
stock regularly:
• Efficient logistics service: consistent control of cycle
stock levels means that companies always have enough
product to satisfy customer demand.
• Optimised warehousing costs: calculating cycle stock
routinely will limit overstock in your facility
Who uses cycle inventory?
• From retail to manufacturing, if you're selling products,
you're dealing with cycle inventory. Some crucial
industries include:
• Retail
• Ecommerce
• Manufacturing
• Food and beverages
• Pharmaceutical
• Automotive
Factors that impact Cycle Inventory
• Demand forecasting: accurate predictions of customer
demand are crucial. They inform the quantity and timing
of inventory replenishments.
– How it impacts cycle inventory: Effective forecasting helps
determine how much inventory is needed to meet future sales
without overstocking.
• Order quantity: Deciding how much to order each time
affects storage, handling, and purchase costs.
– How it impacts cycle inventory: Bulk orders may reduce perunit cost but increase holding costs, while smaller, more
frequent orders might do the opposite.
Factors that impact Cycle Inventory
• Lead time: The time it takes for stock to arrive from a
supplier or to produce goods internally significantly
affects how much inventory is needed in reserve.
• To calculate lead time, follow this formula:
– Supplier Lead Time + Production Time = Total Lead Time
• How it impacts cycle inventory: Shorter lead times may
allow for lower levels of cycle inventory, while longer lead
times require higher levels to ensure product availability.
Factors that impact Cycle Inventory
• Holding costs: storing inventory isn't free. These are the
costs associated with storing unsold goods.
– How it impacts cycle inventory: Effective management aims
to minimize these costs by reducing the amount of inventory
that needs to be stored.
• Order costs: each order placed incurs costs—
– How it impacts cycle inventory: Optimizing order frequency
and quantities can help lower these costs.
Factors that impact Cycle Inventory
• Inventory turnover: this measures how quickly inventory
is sold and replaced over a period.
– How it impacts cycle inventory: High turnover indicates
efficient inventory management, while low turnover might
suggest excess stock or inadequate sales efforts.
• Reorder points: determining when to reorder stock,
based on sales velocity and lead time, is crucial.
– How it impacts cycle inventory: Properly set reorder points
ensure inventory levels are sufficient to meet ongoing customer
demand without resorting to safety stock.
Factors that impact Cycle Inventory
• Supplier performance: the reliability of suppliers in
delivering on time and meeting quality expectations
impacts inventory management.
– How it impacts cycle inventory: Dependable suppliers reduce
the need for large safety stocks and frequent reorders due to
supply uncertainties.
• Product Life Cycle
• The stage of a product's life cycle—introduction, growth,
maturity, or decline—affects its sales volume.
– How it impacts cycle inventory: Products in the growth stage
might see rapidly increasing demand, requiring more frequent
replenishment, whereas those in decline may need less.
Cycle inventory formula
The most common way to calculate cycle inventory levels is using
the Economic Order Quantity (EOQ) formula:
– EOQ = √[2(DK/H)]
Here’s what each value represents:
• D is the annual demand of the product in units.
• K is the fixed cost per order.
• H is the annual carrying cost per unit.
• So, you start with these basic smartwatch numbers: Annual
demand: 10,000 units Ordering cost: $100 per order Holding
cost: $5 per unit per year.
How Inventory Management Software Helps With Cycle
Inventory
• Here is our top ten shortlist for the best inventory management software:
1. Cin7 Core — Best for manufacturers and product sellers
2. WhereFour — Best for demand-driven inventory forecasting
3. MRPeasy — Best for manufacturers
4. SkuVault — Best for its detailed restocking recommendations
5. Settle — Best for CPG businesses
6. Linnworks — Best for multichannel management automation
7. Softengine — Best for handheld device operations
8. KORONA POS — Best for multi-location inventory management
9. Helcim — Best for small business inventory + POS in one
10. Sage X3 — Best enterprise resource tracking (ERP) package
What is Safety Stock?
• Safety stock is surplus inventory that is kept in storage in case
of a sudden surge in demand or supply chain issues to reduce
the risk of stockouts.
In summary, the main benefits of safety stock are:
• Prevents you from running out of stock, especially on your most
popular items.
• Protects you from unexpected circumstances, like sudden
spikes in demand.
• Gives you the flexibility to order more products when you make
a forecasting error.
• Keeps customers happy and prevents lost conversions.
Cycle stock vs safety stock
• Cycle stock is your everyday inventory. It's what you sell
regularly and reorder often. Think of it as your “business
as usual” stock.
• Safety stock, on the other hand, is your backup plan. It's
the extra inventory you keep just in case something goes
wrong.
Calculating safety stock
• To calculate safety stock, you can use the averagemaximum formula.
– Safety Stock = (Maximum Lead Time − Average Lead Time)
× Average Demand
• Example:
• If your maximum lead time is 14 days, your average lead
time is 10 days, and your average daily demand is 50
units:
• Safety Stock = (14 - 10) × 50 = 200 units