Managing cycle inventory is a key part of inventory management. It helps you fill customer orders and keep production running smoothly.
Overall, your goal is to maintain an optimal cycle inventory level. Doing so will help you avoid costly problems, like stockouts, dead stock, and out-of-date inventory.
What is cycle inventory?
Cycle inventory, also known as cycle stock, is the inventory needed to keep production running and customer orders filled. It usually includes raw materials used in manufacturing and finished goods ready for shipment. Basically, it’s the inventory needed to meet your minimum production requirements.
To calculate cycle stock, you need to factor in:
Manufacturing lead time demand
The amount of time it takes to get an item from the supplier or for raw materials to reach the production line.
Production quantity
The number of units manufactured in each production run.
Why is cycle inventory important?
Good cycle inventory practices protect you from stockouts, which is when inventory runs out and you’re unable to fulfill customer orders on time.
Stockouts can lead to several problems, such as:
Lost sales
If you can’t deliver customers the products they want, they’ll look to your competitors, leading to lost revenue for your business.
Damaged reputation
Stockouts can damage your credibility and show that you can’t meet customer demand. Worse, customers might avoid buying from you even after your stock levels are back up.
Inefficient production
If your raw materials or subassemblies inventory levels are weak, you could suffer from production stoppages.
What influences cycle inventory levels?
Many factors that influence cycle inventory levels. Generally, these factors can be both external (like customer and supplier issues) and internal (production timelines, etc).
The most likely factors you’ll come across are:
Demand
The most important factor in forecasting cycle inventory is customer demand. If you’re seeing more demand, you need higher stock levels to meet customer orders without delay.
On the other hand, catching declining customer demand is also important. You don’t want to enter a sales cycle with excess stock, which costs you extra money to hold.
Order costs
This is the cost of ordering your cycle inventory. Imagine you’re a bakery. If the prices of flour, sugar, and eggs go up, then the cost of your cakes (the ‘inventory’) will rise too. Likewise, the cost of fuel, electricity, and many other factors can feed into your order costs.
Supplier lead time
This is the time it takes for your vendor to deliver the things you need for your product. Going back to the bakery example, if it takes a longer time for a farm to send you eggs or milk, then you’ll need to order further in advance. Otherwise, you might have a shortage of raw materials, which can lead to a stockout of cakes.
Production Quantity
If you’re able to manufacture something at a higher rate in each production run, then you might not need to worry about holding a small inventory. Generally, you’d expect to refill your inventory levels quicker with faster production.
Production Lead Time
If your production process takes more time, then you’d need to order raw materials further out in advance. So, you might want to keep higher levels of cycle stock of raw materials to prevent any production interruptions.
Seasonal Changes
Seasonal changes in demand can impact cycle inventory levels. For example, a business selling winter coats would need higher stock levels in the months leading up to winter.
Holding Costs
These are the costs of storing raw materials or goods, such as leasing warehousing space, taking out insurance, paying salaries, and handling materials.
Some businesses prefer keeping their holding costs low by keeping their cycle inventory levels low. Others might have to deal with those costs because their production processes take more time, or their suppliers have trouble delivering on time.
Product Cost
The cost of your product can impact your cycle inventory in a few ways. For example, if raw material prices go up, you might opt to raise prices on your customers. But doing so can push some customers away and lower demand. So, in those situations, you might look at reducing the cycle inventory of your final product and lean on higher pricing to keep ROI up.
Discounts
Discounts can impact your cycle inventory in multiple ways. Let’s say a supplier cuts the price of some raw materials, you might take advantage of the lower pricing and buy more materials. This can lead to larger amounts of inventory for those materials.
On the other side, you might have excess stock of a certain product, so you could discount it as a way of clearing inventory.
What is inventory cycle time?
The inventory cycle time is the number of days, weeks, or months it takes from receiving raw materials and shipping the final product. This phase is also known as “work in process” (WIP).
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.
To keep it simple, imagine you’re a store that sells, on average, 1250 cakes a day. It costs you $100 every time someone places an order, and the cake has a carrying cost of $1 a day.
The EOQ here would be the square root of 2(1250 x 100)/1, which equals around 500. So, the optimal number of cakes your store should order each time from the oven (whether it’s your own oven or another supplier) is 500. That means you’d make two and a half cake orders of that size a day (2.5).
Benefits of strong cycle inventory management
Getting cycle inventory management right is important as it ties into a lot of important growth indicators for your business, such as:
Avoiding stockouts
You want to ensure that you have enough of the right inventory on hand to fill customer orders without any delays or backorders. Stockouts can lead to a drop in cash flow.
Avoiding overstocking
Good cycle inventory management also protects you from holding too much inventory, which can lead to higher holding costs.
Raising customer satisfaction
When you have enough of the right products on hand, you’ll prevent delays in filling customer orders. This leads to happier and more loyal customers.
Improving cash flow
Building on the previous point, having enough products on hand to fulfill orders also keeps your cash flow healthy, leading to more revenue.
Determining safety stock
Good cycle inventory management also helps you calculate how much stock you need to keep in reserve in case of major interruptions, like a supplier closing.
Keeping your business growth engine running
When you have your cycle inventory levels under control, you can give your sales, marketing, and other front office teams the confidence they need to push. They’ll know that getting new customers will drive quicker revenue because you can reliably fulfill orders.
What causes cycle inventory problems? How do you solve them?
The tough thing about cycle inventory levels is that the factors affecting it are both within and beyond the production line. So, focusing on just one part of the equation – like inventory management – without looking at customer relationships and sales will give you an incomplete picture.
Rapid changes in customer demand
Unexpected spikes and drops in customer demand can make it harder to forecast the right inventory cycle levels.
One way to reduce this risk is by connecting your inventory tracking with your front office, like sales and customer service teams. You can get early visibility of customer demand trends.
Lack of accurate forecasting
Building off the last point. When your forecasting is off, you’ll be at higher risk of getting your cycle inventory levels wrong. You might end up with either a stockout or overstock situation.
This is where connecting your inventory management to sales and customer service in your forecasting software will help.
Not accounting for supplier lead times
You’ll have an intuitive sense of supplier lead times when you’re working with a few vendors. But as your business grows, you might be tapping into many different suppliers, at which point you’ll need to automate the tracking process.
One way to do that is by using software that tracks the information in your purchase orders to them and their invoices to you. Over time, you can catch trends in lead time, especially during seasonal months (like winter) or in response to certain issues (like rising gas prices).
Production issues
This can happen from both internal and external factors. Your production site may suffer from faulty equipment or an electricity shortage, for example. Other times, your suppliers might have shipped your raw materials too late.
In such situations you’ll want to respond rapidly. CRM software helps you drive communications quicker. You can get a call for repairing or replacing equipment sooner, or if a supplier fails, find an alternate vendor faster.
Summary: Cycle inventory tips
By this point, you likely sensed the importance of software. As your business operations grow, you’ll deal with more suppliers, more customer issues, and more bad surprises.
When you reach that point, knowing what’s happening on the sales side is important, it directly ties back to your inventory. You need 360-degree visibility, more employees involved in tracking and communicating, and reports to show where costs are rising or falling.
You can do this with a combination of manufacturing CRM software and inventory management software. But before you make a call on which ones to get, it’d be a good idea to explore all of your options. Check out the guides below for more information:
- Best manufacturing inventory management software: Top picks for 2024 and beyond
- QuickBooks Online inventory management: Everything you need to know
- What are manufacturing CRM systems and how could they help
Cycle inventory FAQs
Cycle stock vs. Safety stock
Cycle stock and safety stock are crucial components of inventory management:
- Cycle Stock: It is the inventory expected to be sold based on demand forecasts.
- Safety Stock: It is extra or buffer stock maintained to meet excess demand or guard against delays from suppliers or unforeseen problems.
Cycle inventory vs. Cycle count
Cycle inventory and cycle count are not the same:
- Cycle Inventory: Refers to the inventory needed to meet regular demand.
- Cycle Count: Is the practice of performing regular stocktakes to maintain accurate stock levels. It involves counting a sample of inventory regularly to project the total inventory.
