Cycle Inventory Management: Riding the Waves of Efficiency
January 09, 2024
Cycle inventory management is a vital part of supply chain management. It focuses on controlling and optimising inventory levels during the production cycle. The goal is to achieve a balance between having enough inventory to meet customer demand and having excessive stock and extra costs.
A strong supply chain requires managing stock throughout the manufacturing process. It’s all about keeping just the right amount of product on hand—enough to meet orders without overspending. A solid system for this keeps businesses ahead in the competitive game by being smart about meeting customer needs and cutting costs. In this article, we’ll dive into the common challenges with managing inventory cycles and share some hands-on tips to tackle them well.
What is Cycle Inventory
Cycle inventory refers to the stash of goods and basic items a business holds to hit its production goals. Cycle inventory fluctuates due to regular and cyclical changes in demand. It is crucial to keep things running smoothly, as these inventory are used up often.
It includes managing all the raw materials, from manufacturing to finished goods waiting to be shipped. Resellers, manufacturers, and wholesalers carry out this process to fulfil daily orders. Businesses regularly sell and replenish their inventory as planned. Many companies automate the cycle stock process to maintain production and streamline the supply chain.
The Role of Cycle Inventory
Cycle inventory is essential for maintaining inventory and meeting customer demand. Running out of inventory and being unable to fulfil orders is the worst thing for a company. This is even more challenging for businesses that rely on seasonal factors. Like companies that sell holiday decorations. They see a sudden surge in demand during specific times of the year. To meet this demand, the company needs to hold inventory during the off-season. By optimising seasonal inventory requirements, cycle inventory prevents lost sales and keeps customers happy.
Cycle Inventory Formula
Calculating cycle stocks is challenging because it involves many variables such as demand forecasting, lead time, and inventory fill. Factors like seasonality, storage, demographics, and reordering also make it difficult. To accurately calculate, you need a deep understanding of the business and can use the Economic Order Quantity (EOQ) as part of the formula. The EOQ includes demand, ordering cost, and carrying cost in the equation
Cycle inventory = √[(2 x D x S) / (C x I)]
D= Annual demand for the product
S= Fixed cost per unit
C= Unit cost
I = Storage cost per unit.
However, sometimes a variation is used for calculating Cycle inventory wherein, Unit cost (C) and Unit storage cost (I) are pre-calculated and represented in another variable as annual carrying cost per unit (H). In this case, the formula is given as,
Cycle inventory = √[(2 x D x S) / H]
Where,
D represents annual demand, S is the fixed cost per order, and H is the annual carrying cost per unit.
Inventory Cycle in Days Formula
How many days inventory a company has is an important calculation in cycle inventory management. The inventory cycle in days formula comes out as:
Days in Inventory = (Average Inventory / Cost of Goods Sold) x Period Length
Where,
Period length is the length of time you want to calculate for. Usually, it’s 365 days or annual basis.
Average inventory is the typical number of units a company has in stock.
Cost of goods sold is the money needed to make the products in inventory.
Average Cycle Inventory Formula
The figure of average cycle inventory will help you streamline the operations of your business and set off any issues with regards cycle inventory. You just need to use a simple calculation with average cycle inventory formula that is:
Average Cycle Inventory = Lot Size / 2
Cycle Inventory in Operation Management
Inventory cycle counts are crucial for regulating stock and maintaining operational efficiency. Operations managers must prioritise proper inventory control. If inventory levels are not properly managed, warehouse operations can come to a halt or become overwhelmed. This is where ABC inventory analysis comes in handy, as it provides a reliable method for ensuring smooth operations.
Supply Chain Cycle Inventory
Cycle inventory in supply chain management has a direct impact on businesses in the chain. It affects the goods they have on-hand and their ability to fulfil orders. The factors that cause cycle inventory issues are: demand, order lead time, and storage costs.
When demand changes, it directly affects the amount of inventory moving in the supply chain. Properly understanding and reacting to demand changes can increase sales and limit costs. Improper order management processes based on incorrect data can lead to backlogs and losses.
The time it takes for an order to arrive can cause issues with cycle inventory. Investing in route optimization software can help mitigate these issues. The cost of storing inventory is dependent on inventory levels and the cycle length.
Related article to read: Streamlining Inventory Management
Factors Affecting the Cycle Inventory
Stock management and production cycles are influenced by various factors. These factors include the availability of products, refreshments, and the organisation of inventory. Understanding these factors is crucial for efficient stock management and smooth production cycles.
Product Demand: The demand for a product affects cash flow, procurement life cycle, and production management. Higher demand leads to more frequent cycling, requiring better inventory management and higher production. Lower demand means less inventory and production expenditure, resulting in lower cash flow.
Supplier Lead Time: The time it takes from placing an order to receiving the delivery affects production management and the shipment of finished goods. When demand increases, a longer lead time is needed to make sure we have enough inventory from suppliers to meet the demand and increase the cycle stock level.
Order Costs: Order costs, which include freight expenses, fuel costs, and driver wages, play a crucial role in cycle inventory costs. These expenses contribute to an increase in the cycle stock price and the overall product cost of the company.
Inventory Holding Costs: The cost of moving materials in and out of warehouses or production areas, including expenses for utilising warehouse space, insurance for inventory protection, and employee wages.
Product Price: The price of the final product affects the cycle stocks due to the fluctuation of price and demand. Companies have two options to manage the cost of the product: find an alternative material or increase production.
Managing Cycle Inventory Effectively
1. Recordkeeping of inventory is important.
It helps you keep track of inventory and figure out what you need. Make sure to keep good records for accuracy and to deal with any extra inventory.
2. Get onboard inventory software.
It can make managing inventory easier. It’s a more efficient way to handle things.
3. Stay on top of calculations.
Prices and vendors can change, so you need to keep calculating to find the best way to order inventory.
4. Keep in touch with vendors.
Talking to them often helps you learn more about the supply chain. It also keeps you updated on any changes in price or availability. Being informed helps you adapt to changes quickly and effectively.
Conclusion
It is obvious that cycle inventory management is the anchor to keep operations steady in supply chain management. It not only helps businesses steer clear of the rocky shores of overstock and obsolescence but also propels them towards the bustling ports of customer satisfaction and heightened efficiency.
Let’s not forget that the waves of efficiency are there for the riding. It takes a proactive mindset and a willingness to harness the innovative solutions at our disposal. With the right approach to cycle inventory management, businesses can confidently set sail towards a horizon lined with satisfied customers, lean inventory, and a treasure of operational success.
FAQs
How to manage the inventory cycle process?
Prioritize important products. Don’t waste time counting rarely-used or sold products. Focus on high demand products and count them regularly to avoid surprises.
Count as often as possible to keep your inventory in check without needing to shut down for a full physical count.
Have a plan– consider when, where, and how you want to count your goods to save time and money.
Allocate a budget to ensure consistent counts.
Assign counting to one or two employees and choose experienced employees for cycle counting.
What is an inventory cycle flowchart?
Inventory flow chart helps businesses regulate and control product activity. It includes everything from sourcing raw materials to stocking finished goods. Ensuring a smooth flow of inventory is essential for all processes involved in handling stock. By understanding inventory flow phases and implementing best practices, businesses can effectively optimise their stock management.
What is cycle inventory meaning?
Fluctuating due to regular changes in demand, cycle inventory is the inventory held by a company to meet demand during a sales or production cycle. Carried out by resellers, manufacturers, and wholesalers to fulfill daily orders, it includes managing raw materials to finished goods waiting to be shipped. Companies regularly sell and replenish their inventory as planned, often automating the process to maintain production and streamline the supply chain.
What are four types of inventory?
There are four inventory types: Raw materials used to make products, like oil for shampoo, Components parts like screws, Work-in-progress or WIP, and Finished goods ready to be sold. There are again maintenance supplies, packing stuff for shipping, extra stock for surprises, and items bought before busy times or price jumps. Some companies keep spare parts to avoid delays, while others track services they can offer, like hotel room stays.
What is the annual cycle inventory cost?
Typically, inventory turnover is measured every three months or once a year. To figure out the turnover rate, just divide last year’s sales cost by the average inventory value. So, if a company forked out $100,000 on product-making and kept an average stock of $20,000 in parts, their turnover rate is 5.
