What Is Cycle Inventory and How to Manage It?
Cycle inventory is the stock that is used to respond to regular sales and demand forecasts, as opposed to the safety stock used when there are fluctuations in demand or supply. Properly managing cycle stock is therefore a crucial part of any well-functioning business.
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What Is Cycle Inventory?
Cycle inventory, also known as cycle stock or working inventory, is the part of total inventory that is available to meet the usual demand. It is comprised of the products that will be used first to fulfill customer orders in the standard business cycle of a company. These items are constantly sold and replenished in a continuous loop, giving them the name of cycle inventory.
Cycle inventory is contextually related to safety stock, as they both are part of a company’s on-hand inventory, and the two concepts are often used together. Cycle stock is also tightly connected to a company’s inventory turnover rate.
Why is Cycle Inventory important?
Cycle inventory can be considered the most important part of a company’s stock as these are the goods that are used to respond to regular sales and demand forecasts. Forecasting cycle stock requirements is therefore necessary to ensure the optimum performance of the business.
Cycle stock management helps companies in quite a few different ways:
- Avoiding overstocking, i.e. ordering and holding on to excessive amounts of inventory
- Avoiding stock-outs, i.e. running out of merchandise and becoming unable to fulfill customer orders
- Reducing costs related to storing and handling inventory by only keeping optimal quantities of stock
- Increasing customer satisfaction by improving the service level of the company, i.e. keeping lead times short and making sure lost sales are kept at a minimum
- Retaining the necessary amount of safety stock by not having to dip into the inventory buffer due to an unseen cycle stock depletion
- Improving cash flow by ensuring that customer orders can be fulfilled and inventory is replenished at a reasonable rate.
Properly managing it is, therefore, a crucial part of any business operation.
Using software to manage Cycle Inventory
Implementing an inventory management software gives companies the capability to collect huge amounts of inventory-related data and to quickly and efficiently process and analyze this information. Keeping historical data about stock movements and demand for specific SKUs provides you with the possibility to create accurate demand forecasts, foresee fluctuations, and thereby optimize your cycle inventory.
Inventory management or ERP systems also give their users a real-time overview of their inventory levels and the performance of their SKUs. Setting reorder points for the SKUs helps ensure that the replenishment of inventory is done systematically when stock levels drop to a certain point.
This kind of software is also a tremendous help when it comes to inventory costing and accounting. By using methods such as First In, First Out (FIFO) or Last In, First Out (LIFO), companies can make sure that inventory is properly valued and that the expiry of goods is kept at a minimum.
The best such software systems also automatically calculate the Cost of Goods Manufactured (COGM), the Cost of Goods Sold (COGS), and gross profit, providing invaluable real-time insight into the financial health of the company.
Terms related to Cycle Inventory
There are some other inventory management terms that are related to cycle inventory, or often confused with it.
While cycle stock consists of the goods that are used or sold in a standard business cycle, safety stock signifies the goods that are kept just in case. This part of inventory acts as a buffer that is only used when there are unforeseen spikes in demand or problems with supply. Using safety stock, companies can retain their service levels and sell to customers when sales are greater than expected, when production is down, or when suppliers are unable to deliver goods within the expected timeframe.
Safety stock is best used along with a reorder point, but both of these have to be mathematically defined in order to ensure minimized costs and optimum service levels.
There are many formulas for calculating safety stock, some of which are used in very specific situations (e.g. when demand is constant but supplier lead times are inconsistent, or vice-versa). The standard formula used in many companies, however, is the average-maximum formula:
Safety Stock = (Max. Lead Time x Max Demand) – (Avg. Lead Time x Avg. Demand)
Read more about Safety Stock.
Inventory turnover and inventory turnover ratio
Cycle stock is also related to inventory turnover or the time with which the inventory of an SKU is sold and replaced. This gives an indication of how efficiently inventory is managed and how well sales and marketing work.
The inventory turnover ratio represents the number of times inventory is sold and replaced during a set period. The efficient management of cycle stock is, therefore, a prerogative for a healthy inventory turnover ratio.
Read more about the Inventory Turnover Ratio.
Cycle inventory vs. cycle count
Cycle inventory is sometimes confused with cycle count, another inventory management term that is used to describe the stocktaking practice where only a part of the total inventory is counted at once.
Cycle count contrasts with traditional physical inventory counting. During the latter, operations are put on hold in the facility to go through the whole inventory and count it. A cycle count is much less disruptive – certain parts of inventory are counted at a time, with operations continuing without stoppage.
Cycle count is often used together with ABC analysis which helps prioritize items by their value, thereby giving an indication of which items should be counted more frequently and which items should get less attention.
- Cycle inventory, also known as cycle stock or working inventory, is the part of total inventory that is available to meet the usual demand.
- Forecasting cycle stock requirements is necessary to ensure the optimum performance of the business.
- Properly managing cycle stock also helps in avoiding overstocking and stock-outs, reducing holding costs, increasing customer satisfaction, retaining the necessary amount of safety stock, and improving cash flow.
- Cycle stock is best managed with a dedicated inventory management or ERP/MRP software that provides businesses with data collection and analysis capabilities that help create more accurate forecasts and make better business decisions.
- Another part of a company’s on-hand inventory is safety stock – the buffer that is used to respond to abnormalities in supply or demand.
- Cycle inventory is often confused with cycle counting – a stocktaking method wherein only a part of the inventory is counted at a time.
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