What is cycle inventory is an important question when it comes to the efficient management of inventory, and ultimately fulfill customers' demands and maintain the production process on time. Cycle stocks or inventory play a key role in managing the inventory movements for the business to avoid order delays. Let's know more about this type of inventory and its fundamentals.
What Is Cycle Inventory?
Cycle inventory or cycle stock is the inventory that varies due to regular and cyclical changes in demand. In other words, it is the inventory that a company needs to hold to meet demand during a typical sales cycle or production cycle for fulfilling customer orders.
This includes the management of all the raw materials starting from manufacturing and ending with the finished goods waiting to be shipped. The process is usually carried out by resellers, manufacturers, and wholesalers to meet the regular order of the day-to-day business. Businesses regularly sell and replenish their inventory if everything goes as per the plan. So, many companies automate the cycle stock process to maintain the production process and streamline the supply chain process.
Why Is Cycle Inventory Important?
As you have understood what is cycle inventory, knowing its importance is also crucial to be able to maintain the overall inventory and the demand. The worst hurdle for a company is to suffer from inventory stockouts. This usually happens when inventory runs out, and the businesses are unable to fulfill customer's orders. This can be quite a challenge when sales are dependent on seasonal factors. For example, a company that produces seasonal products, such as clothing or holiday decorations, will experience a predictable increase in demand during specific times of the year. To meet this demand, the company will need to hold a certain level of inventory during the off-season to be ready for the peak season. By enabling optimization of such seasonal inventory requirements, cycle inventory helps to avoid lost sales and dissatisfied customers.
Factors That Impact Cycle Inventory
Several factors are involved that impacts the cycle stocks of the businesses regarding the availability of products, refreshments, and organization of the inventory. Below are some of the factors you must know for effective smooth stock management and seamless production cycles.
1. Demand for the Product
The first and most important factor that impacts the whole process of cycle inventory is the demand for the product. This factor decides the cashflow of the business and other activities like procurement life cycle and production management. Higher demand can derive more frequent cycling that requires higher production and better inventory management. Similarly, lower demand will require less inventory in stocks and lower production expenditure, resulting in less cashflow.
2. Supplier Lead Time
Lead time is the period between the order being placed and the placement of the delivery. This plays a very important role in the cycle stocks process as it determines the production management approach and the shipment of the finished goods. Longer inventory lead time is required to get the supplier inventory in advance, which helps in increasing the cycle stock level when the demand increases.
3. Order Cost
Order cost plays a very important role in cycle inventory costs that affects the availability and storage of inventory. The order cost includes the expenses in freight, the cost of fuel, and driver wages. All the expenses tend to increase the cycle stock price and the product cost of the company.
4. Production Management
Production management is another factor that has a great impact on the cycle process. Efficient production management helps the company to produce the product by maintaining quality, quantity, and cost. This helps to maintain the inventory in the right quantity and fulfill customers' orders without overproduction.
5. Production Quantity
The quantity of the product plays a key role in managing cycle inventory and cycling the inventory flow. If the production is high and the demand is low, the stocks will remain stored and even increase the storing expenses. And fewer quantities result in stockouts that will impact the business and the brand value of the company. So, it is important to analyze the demand for the product, procure the right quantity of the raw material, and manage production according to the demand. This will help to manage the cycle stocks by replenishing the inventory faster.
6. Production Lead Time
Like the supplier lead time, production lead time is equally important to maintain the cycling of the inventory and fulfill the order of the customers. Long production lead time requires businesses to order raw materials in advance to increase the cycle stock inventory level. Businesses can easily access raw materials for faster production and maintain inventory for immediate shipment.
7. Seasonal Changes
Seasonal changes and some unexpected factors impact the cycling level of the inventory. Taking the example of cycle inventory, businesses dealing with winter wearables need to maintain a high level in the month leading to the winter. They also need to sell the product by the end of the season to maintain the flow of the inventory.
8. Holding Cost
Holding costs or carrying costs are the monetary costs that are associated with the storage of the company's inventory. This includes the material handling cost for moving the material in and out of the warehouses or production areas. The expenses to utilize the space of the warehouse, the insurance to protect the stored inventory, and the employee's wages are also included in the holding cost.
9. Product Price
The price of the final product has a great impact on the cycle stocks because of the fluctuation of the price and the demand. The companies either need an alternative material to manage the cost of the product or they may need to increase production.
Cycle Inventory Formula
If you are looking for an answer to how to calculate cycle inventory, then we have got you covered. Calculating the number of cycle stocks is a very challenging task because it involves several variables like forecasting the demand, the time to get the new stocks, and the inventory fill. Further, factors like seasonality, storage, lead time, demographics, reordering, and many more make the calculation more difficult. So, the accurate calculation needs a thorough understanding of the business that suggests using EOQ or Economic Order Quantity as part of the cycle inventory formula. The EOQ includes the three variables, i.e., demand, ordering cost, and carrying cost forming the equation given below. EOQ = √[2(DK/H)] Here D is the annual demand in units, K is the fixed cost per order, and H is the annual carrying cost per unit.
What Is Inventory Cycle Time?
Inventory cycle time refers to the amount of time taken to produce the product and deliver it to the customers. This phase of time is monitored in days and measures the speed of manufacturing and turning the raw material into a sellable product. Time is very important to manage every type of business to monitor the flow of inventory and stay ahead of the competitors. After understanding what is cycle inventory, its importance, the factors affecting the cycling of inventory, the calculation, and inventory cycle time, let's move forward to knowing about techniques for managing cycle inventory.
Techniques for Managing Cycle Inventory
Maintain Records
Reliable stock records can help to identify the inventory need and manage cycle inventory. It helps to account for the excess inventory levels, increasing the accuracy in the cycle stocks process.
Use Inventory Software
The use of inventory software helps to reduce manual workloads and manage the inventory effectively.
Perform Frequent Calculation
The third best technique is practicing frequent calculation to maintain the correct quantity of the inventory. An automated software is likely to use the average cycle inventory formula that helps to simplify the calculation and provide real-time data.
Communicate With Vendor
Communication with the vendor that allows you to learn more about the supply chain will keep you updated with the changes in price and material requirements.
Manage Your Inventory With Effective Cycle Inventory
Cycle inventory is the technique that can help you to maintain the flow from production to reselling of the goods. Having understood what is cycle inventory and the importance of inventory management during seasonal times, you may want to streamline this inventory for your business.
TranZact's inventory module helps you to keep an insightful overview of inventory movements to avoid stockouts during peak seasons and enhance the entire inventory process, from keeping records of each stage to the restoration of the goods in the warehouses!
FAQs on Cycle Inventory
1. What is the inventory cycle count?
The inventory cycle count is a process of calculating a small amount of inventory in a specific time without handling the entire inventory.
2. What are the different types of inventory cycle counts?
There are mainly three types of inventory cycle counting which include ABC Cycle Counting, Random Sample Cycle Counting and Control Group Cycle Counting.
