Cycle Inventory: What It Is, How To Calculate & Top Tools
Stocking Struggles: A Retail Nightmare: Running an ecommerce store with constant stock shortages or overstock issues can be incredibly frustrating, leading to potential sales losses or wasted resources.
The Overstock Ordeal: Overstocking popular items means tying up capital in unsold inventory, possibly leading to wasted storage space and financial strain.
Shortage Woes: Stock shortages can lead to missed sales opportunities and dissatisfied customers, affecting overall business performance and customer loyalty.
Balancing Act: Inventory Management: Finding a perfect balance between stock shortages and overstock is crucial for running a successful ecommerce store, necessitating proper inventory management.
Smart Stock Solutions: Implement smart inventory solutions and forecasting methods to prevent these issues, ensuring a seamless shopping experience for your customers.
Imagine running an ecommerce store that constantly face stock shortages or overstock on popular items. Frustrating, right?
This ties up your cash and can lead to lost sales and unhappy customers.
Now, what if there was a way to manage your inventory that keeps your storage costs low and ensures you have just the right amount of stock? That’s what cycle inventory is.
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It’s a strategy that smart merchants use to streamline operations and boost profitability.
In this guide, I’ll walk you through what cycle inventory is, why it's crucial, and how you can calculate it to make your business more efficient.
We’ve got the tools and insights you need to get started.
What is Cycle Inventory?
Cycle inventory, also known as active or working inventory and buffer or cycle stock, is the portion of your stock you actively use to fulfill regular sales orders.
Unlike excess stock that sits waiting for its turn, cycle stock is all about keeping your business running smoothly day in, day out.
How is cycle inventory determined?
It's not guesswork. It starts with analyzing sales data and forecasting to identify which items are sold regularly and replenished frequently.
By categorizing inventory based on sales velocity—how quickly items sell—companies can strategically manage their stock to ensure that high-demand items are always ready to meet customer needs.
This initial step is critical in developing an effective cycle inventory system, and we'll dive deeper into the specific strategies and tools used to refine this process later in the article.
Why does cycle inventory matter?
Managing your cycle inventory effectively means you're not just saving on storage costs—you're also making sure that popular items are always in stock when your customers need them.
Example: Imagine “Culinary Corner,” a fictional kitchenware shop that offers everything from basic spatulas to high-end blenders. Their cycle inventory primarily consists of regularly sold items such as chef’s knives, measuring cups, and non-stick pans.
For Culinary Corner, effective cycle inventory management goes beyond just cutting storage costs. It’s about ensuring availability—when a customer comes in looking for a popular santoku knife or a set of mixing bowls, they find them in stock every time.
This strategy is key to maintaining customer satisfaction while balancing cost-efficiency.
Who uses cycle inventory?
Pretty much everyone.
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
📚Case Study: How Cycle Inventory Delivers For an Auto Accessories Brand
Bogdan Krstic, founder of Krstic SEO, takes a unique approach in ecommerce. His agency doesn't just advise clients—they become deeply involved, even taking equity in client companies.
The challenge: Bogdan shares a compelling story with us about a client who dealt with significant inventory issues.
This close relationship with their clients provides Bogdan with a unique perspective on the operational challenges they face.
This one client was having major issues keeping popular items in stock, like custom rims and body kits.
It was also hurting their rankings because Google doesn't like showing out-of-stock products.
Implementing cycle inventory: To address these issues, Bogdan’s team suggested a cycle inventory system.
We set up their inventory management software to track their 'working inventory'—the parts that were selling quickest and needed to be restocked most often.
We categorized products based on how fast they turned over.
The A-list items that sold weekly got way more attention than the slow-movers. We established automatic reorder points for these high-demand products to ensure they would never fall below a certain stock level,
Results: The implementation, though initially challenging, yielded impressive results.
It was a bit of a pain to set up initially, but it made a difference in the end.
"Within a couple of months, their out-of-stock rates dropped from like 15% to under 5%. We were able to fulfill orders way faster too,” Bogdan explains.
The improvements didn't stop there.
The best part was seeing their organic traffic climb as Google started showing their products more.
People searching for specific car parts were way more likely to see their listings now that stuff was consistently in stock.
Bogdan's experience highlights how crucial effective cycle inventory management is for enhancing both logistical operations and online visibility, significantly improving overall business performance in ecommerce.
Examples of cycle inventory across industries
To truly grasp the concept of cycle inventory, let’s see it in action across various sectors:
- Retail: A supermarket chain manages its cycle inventory by restocking items like milk and bread multiple times a week based on anticipated daily sales.
- Manufacturing: An automotive manufacturer keeps a cycle inventory of parts like screws and bolts, which are regularly used in assembly processes.
- Wholesale distribution: A book distributor maintains cycle inventory based on the regular ordering patterns of various bookstores, replenishing stocks as they deplete.
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.
Here's a table highlighting the key differences between cycle stock and safety stock:
| Cycle Stock | Safety Stock | |
| Purpose | Inventory kept to meet regular sales demand. | Extra inventory to handle unexpected surges in demand or delays from suppliers. |
| Frequency of Use | Continuously used and restocked as part of normal operations. | Only used when regular stock is depleted. |
| Turnover Rate | High turnover, indicating frequent sales and restocking. | Low turnover, kept as a buffer. |
| Ordering | Orders placed frequently to replenish sold items. | Orders placed occasionally to maintain buffer levels. |
| Calculation Base | Determined by average sales volume over a period. | Determined by variations in demand and lead time. |
| Cost Implication | Costs are directly related to sales activity. | Incurs additional holding costs due to extra inventory. |
| Risk Management | Helps manage routine business needs and demand. | Acts as a safeguard against supply chain disruptions and demand spikes. |
| Stock Levels | Regular fluctuations based on ongoing sales. | Typically remains steady until needed. |
| Planning Horizon | Short to medium-term focus, based on regular sales cycles. | Medium to long-term focus, providing a safety net for unforeseen events. |
| Stockout Impact | Direct and immediate impact on ability to meet sales if depleted. | Helps prevent stockouts by providing a backup when cycle stock runs out. |
Calculating safety stock
To calculate safety stock, you can use the average-maximum formula. This method considers the maximum lead time and average demand to determine the appropriate safety stock level:
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
This formula helps ensure that you have an additional buffer of 200 units to cover sales during any unexpected delays beyond your average lead time.
Cycle inventory vs cycle counting
Cycle inventory (AKA cycle stock) is the amount of stock you keep on hand to meet regular demand between orders. It's about what you have.
Cycle counting is a method of inventory auditing. It's about checking what you have against what you think you have.
So cycle inventory and cycle counting are partners, ensuring your most important stuff is ready to be picked for your excited customers.
Here's a table comparing cycle inventory and cycle counting:
| Cycle Inventory | Cycle Counting | |
| Definition | Inventory kept to meet regular sales demand | Periodic checks to verify actual inventory levels |
| Purpose | Ensure enough stock to fulfill ongoing orders | Ensure inventory records match actual stock |
| Frequency | Continuously monitored and managed | Conducted periodically, either scheduled or random |
| Focus | Managing the quantity of stock available | Verifying the accuracy of inventory counts |
| Key Metric | Levels of stock on hand | Accuracy of inventory counts |
| Primary Goal | Satisfy customer demand consistently | Maintain precise inventory records |
| Timing | Ongoing, throughout daily operations | At specific intervals or randomly |
| Staffing Needs | Integrated into daily operations | May need dedicated staff or teams |
| Tech Involvement | Uses inventory management systems | Utilizes counting and audit tools/software |
| Impact on Ops | Directly influences ability to meet daily sales | Minimal operational disruption during counts |
| Financial Aspect | Directly impacts working capital availability | Affects financial accuracy indirectly |
| Outcome | Maintains optimal stock levels for operations | Ensures updated and accurate inventory records |
Incorporating ABC analysis
ABC analysis is a method used to categorize inventory into three classes—A, B, and C—based on their value and importance to the business.
This categorization helps businesses prioritize their inventory management efforts, focusing more resources on the most valuable items. Let’s look at how it interacts with cycle inventory.
Items are categorized into three groups:
- Category A: These items represent the highest value and typically account for about 70-80% of the inventory value but only about 10-20% of the total items. For cycle inventory, these are managed most closely, with frequent reviews and tighter inventory control to minimize stockouts and optimize the replenishment cycles.
- Category B: These items are of moderate value and importance, generally making up about 15-25% of the inventory value and about 30% of the total items. The management of cycle inventory for B items may not be as stringent as for A items, but still requires regular review to ensure adequate availability without overstocking.
- Category C: Representing the lowest value and often about 5% of the inventory value but 50-70% of the total items, C items are managed with the least rigor. The cycle inventory for these items might involve less frequent replenishment and larger order quantities to reduce ordering costs, accepting somewhat higher holding costs due to their lower value.
For example, an electronics store might count smartphones (A items) weekly, accessories (B items) monthly, and old model chargers (C items) quarterly.
In cycle inventory management, not all categories are treated equally due to their differing impacts on financials and operations.
A items require tight control and frequent reviews, B items need a balanced approach, and C items, while numerous, demand less immediate focus due to their lower per-unit value.
This prioritization ensures that resources are allocated efficiently, maximizing both inventory effectiveness and profitability.
11 Benefits of Cycle Inventory
Nobody goes changing their inventory strategy on a whim. They do it because it’ll make their lives easier and boost their revenue. Of course, this goes for today’s topic as well.
Here's why smart brands are all over it:
- Lower holding costs. Less inventory means less warehouse space, insurance, and handling. Your accountant will thank you.
- Cash flow boost. Money tied up in excess stock? Not anymore. Free up cash for growth, marketing, or that office ping pong table.
- Happy customers. With the right stock levels, you'll rarely disappoint. Quick fulfillment equals smiling faces and glowing reviews.
- Supplier sweet spot. Regular, predictable orders make you a supplier's dream. Expect better terms, pricing, and priority treatment.
- Goodbye, overstocking. No more dusty shelves or clearance sales. You'll stock what sells, when it sells.
- Stockouts? What stockouts?. Keep your virtual (or physical) shelves stocked without going overboard. It's a delicate dance, but worth mastering.
- Safety stock stays safe. With optimized cycle inventory, your safety stock can be what it's meant to be—a rarely touched backup plan.
- Improved forecasting. As you dial in your cycle inventory, you'll get better at predicting demand. It's like developing a business sixth sense.
- Reduced waste. Especially crucial for perishables. Less spoilage means more profit and less environmental impact.
- Operational efficiency. Streamlined inventory means smoother operations across the board. Your team will thank you.
- Better response to market changes. With effective cycle inventory practices, businesses can quickly adapt to market trends and changes in consumer demand, keeping them competitive and responsive.
We implemented cycle inventory a few years ago when we noticed discrepancies between our recorded inventory and actual stock levels.
We use inventory management software that allows us to schedule regular counts for different product categories.
For instance, we might count our most popular lab gloves every week, while less frequently sold items like specialized beakers might be counted monthly.
This approach helped us catch discrepancies quickly, reorder popular items before we run out, and also reduced our end-of-year inventory headaches significantly.
Factors Impacting Cycle Inventory
Let's take a look at some critical factors that impact cycle inventory. We'll use the hypothetical brand we used before, Culinary Corner, to elaborate on each factor.
1. 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.
Example: Culinary Corner analyzes past sales of their popular non-stick pans before the holiday season to ensure they have enough stock to meet the increased demand without overloading their storage.
2. Order quantity
Deciding how much to order each time affects storage, handling, and purchase costs.
How it impacts cycle inventory: Bulk orders may reduce per-unit cost but increase holding costs, while smaller, more frequent orders might do the opposite.
Example: Culinary Corner opts for smaller, more frequent orders of high-end blenders to avoid high holding costs and adapt quickly to changing consumer preferences.
3. Lead time
The time it takes for stock to arrive from a supplier (supplier lead time) or to produce goods internally (production lead time) 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.
Example: If Culinary Corner’s supplier for high-end blenders has a lead time of three weeks, they must order these items well in advance to avoid stockouts during peak sales periods like Black Friday.
4. Holding costs
Storing inventory isn't free. Consider warehouse space, insurance, handling, and depreciation. These costs push you to keep less stock. 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.
Example: Culinary Corner uses vertical storage solutions to optimize warehouse space, thereby reducing holding costs for their extensive range of kitchen gadgets.
5. Order costs
Each order placed incurs costs—administrative procedures, shipping fees, handling expenses.
How it impacts cycle inventory: Optimizing order frequency and quantities can help lower these costs.
Example: Culinary Corner schedules combined shipments for multiple items to reduce shipping fees per unit.
6. Demand variability
Seasonal trends and market fluctuations can impact inventory needs.
How it impacts cycle inventory: High variability often requires more sophisticated inventory strategies to prevent overstocking and stockouts.
Example: Culinary Corner increases stock for grill accessories during the summer and decreases it in winter, responding to seasonal buying patterns.
7. 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.
Example: Culinary Corner reviews turnover rates monthly to adjust purchasing decisions, especially for seasonal items like ice cream makers.
8. 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.
Example: Culinary Corner sets automated reorder points for their best-selling chef’s knives, which triggers a reorder once stock drops below a predefined level.
9. 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.
Example: Culinary Corner maintains a preferred supplier list and regularly evaluates supplier performance to ensure consistent supply quality and timeliness.
10. Cost of capital
The cost of funds used to purchase inventory can affect inventory management decisions.
How it impacts cycle inventory: High cost of capital may discourage large stock holdings, prompting more just-in-time inventory practices.
Example: With rising interest rates, Culinary Corner shifts towards a just-in-time ordering system to minimize the cost of holding inventory.
11. 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.
Example: As silicone baking mats become more popular, Culinary Corner might increase cycle inventory to keep up with growing demand, while phasing out less popular items like old-fashioned tin baking trays.
12. Economic factors
Broader economic conditions can influence consumer spending patterns and, in turn, inventory needs.
How it impacts cycle inventory: Economic downturns might reduce demand, leading to decreased cycle inventory, whereas economic booms could boost sales and inventory levels.
Example: During a recession, Culinary Corner might reduce its cycle inventory of luxury items like high-end espresso machines, anticipating lower consumer spending on non-essential goods.
How To Calculate Cycle Inventory
Calculating cycle inventory isn't just number crunching. It's about understanding your business rhythm. Here are the key metrics:
- Annual demand: Total units sold per year
- Ordering cost: Cost per order placed
- Holding cost: Annual cost to store one unit
Calculate economic order quantity (EOQ)
The economic order quantity (EOQ) is a classic formula used to determine the most efficient order quantity that minimizes the total cost of inventory.
This includes the costs of holding stock and placing orders. Here is how you calculate EOQ:
EOQ = √[(2 * Annual Demand * Ordering Cost) / Holding Cost]
Find your average cycle inventory number
Once you have your EOQ calculated, finding your average cycle inventory is simple. All you need to do is half your EOQ to find it, like so:
Average Cycle Inventory = EOQ / 2
This gives you the sweet spot between ordering too often and holding too much.
Example cycle inventory calculation
Let's say you're running "SuperGadget", an electronics store. You're optimizing inventory for your bestselling smartwatch.
1. Find your key metrics
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
2. Calculate your EOQ
With your metrics in hand, you can calculate your economic order quantity (EOQ).
EOQ = √[(2 * 10,000 * $100) / $5] = √400,000 = 632 units (rounded)
3. Determine your average cycle inventory
Then, you can cut the EOQ in half to find your average cycle inventory number.
Average Cycle Inventory = 632 / 2 = 316 units
4. Find your total orders per year
Orders per year = Annual demand / EOQ = 10,000 / 632 = 15.82 (rounded to 16 orders)
What this means is that you:
- Order 632 smartwatches every time you order
- Keep an average of 316 smartwatches in stock at any time
- You place about 16 orders per year
Best Practices For Effective Cycle Inventory Management
Now that we've explored what cycle inventory is and how it benefits operations, let's look at some best practices to ensure your cycle inventory management is as efficient and effective as possible.
- Regularly update inventory parameters. Adjust reorder points and safety stock levels based on changing demand patterns and sales data.
- Leverage technology. Use inventory management software to automate tracking, reordering, and analytics for accuracy and efficiency.
- Perform regular audits. Conduct cycle counts frequently to ensure the accuracy of inventory records and identify discrepancies early. Implement accurate demand forecasting techniques.
- Optimize inventory layout. Arrange inventory to prioritize accessibility for high-turnover items, reducing picking time and effort. Use ABC analysis to prioritize inventory management efforts
- Train staff. Ensure that all team members understand inventory processes and the importance of accurate data entry and management.
- Analyze data. Regularly review inventory data to identify trends, forecast future needs, and optimize stock levels.
- Collaborate with suppliers. Maintain good communication with suppliers to ensure timely deliveries and handle supply chain disruptions proactively.
- Implement cloud-based inventory management tools. You can use cloud-based IMS to gain deeper insights into your stock levels, optimize reorder points, and enhance overall inventory turnover.
Optimize your cycle inventory management by incorporating a perpetual inventory system for continuous stock monitoring.
How Inventory Management Software Helps With Cycle Inventory
In today's high-tech online world, managing cycle inventory manually is like trying to sail a ship with a paper map.
Inventory management software (IMS) is your high-tech navigation system for the seas of stock control.
Your inventory management system automates all the mind-numbing work of calculating metrics, forecasting demand, and cycle counting, so you can implement cycle inventory with little effort.
We’ve got favorite software for just about everything, and inventory management is no exception.
Here is our top ten shortlist for the best inventory management software:
An IMS has many features that enhance your cycle inventory strategies, including:
- Automated inventory tracking. With features like real-time data updates and barcode scanning, IMS keeps a precise track of stock levels. This means no more guessing games about how much inventory is available—it’s all there at your fingertips.
- Streamlined reordering. IMS can automate reorder points and help calculate EOQ, ensuring that orders are placed at the ideal time and in the optimal quantity. This reduces both overstock and stockouts, maintaining just the right inventory balance.
- Advanced demand forecasting. By analyzing historical sales data and recognizing seasonal patterns, IMS provides accurate forecasts. This predictive power allows businesses to prepare for future sales trends, adjusting their inventory levels proactively.
- Improved accuracy. Regular cycle counts, aided by IMS, enhance inventory accuracy. This system can categorize products and detect errors early, preventing them from ballooning into bigger issues.
- Optimized warehouse operations. IMS can guide the layout of a warehouse and optimize the placement of goods within it, making retrieval processes faster and reducing handling costs. This optimization extends to staff movements and equipment usage, ensuring peak operational efficiency.
- Detailed reporting. With IMS, businesses gain access to detailed analytics and reporting tools that offer insights into inventory performance, cost analysis, and other critical metrics. These insights can drive better decision-making and strategic planning.
- System integrations. A good IMS doesn't work in isolation; it integrates smoothly with other business systems like ERP software, accounting systems, and e-commerce platforms. This connectivity ensures that inventory data flows seamlessly across all areas of the business, enhancing overall operational coherence.
For further reading on all things inventory management:
- How to choose inventory management software
- Ecommerce inventory management
- IMS requirements you must know
- How to improve inventory management
Final Thoughts
Mastering cycle inventory is key to cutting costs and keeping your business running smoothly.
With the right inventory management software, you can streamline this process, making sure you have just enough stock without wasting resources.
As markets change and customer demands shift, maintaining optimal cycle inventory becomes increasingly important. Keep refining your approach and use technology to enhance your inventory strategies.
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Cycle Inventory FAQs
Before you leave, we’ve got a few final questions to pose and then answer.
What is inventory cycle time?
Inventory cycle time refers to the duration from when an inventory item is received until it is sold or used. This metric helps businesses understand how quickly their inventory moves and is a key indicator of supply chain efficiency.
Why is cycle inventory used?
Cycle inventory is used to meet regular customer demand between restocks. It helps businesses balance the costs of holding inventory with the need to fulfill orders promptly.
By optimizing cycle inventory, companies can reduce holding costs, improve cash flow, and maintain customer satisfaction without risking stockouts.
What are the common challenges in managing cycle inventory?
Common challenges include:
- Accurately forecasting demand
- Balancing stock levels across multiple locations
- Dealing with supplier inconsistencies
- Managing product seasonality
- Handling long lead times
- Coping with sudden demand changes
- Integrating new products into existing systems
- Effective inventory management software and strategies can help address these issues.
How do seasonal trends affect cycle inventory levels?
Seasonal trends can lead to fluctuations in demand, requiring businesses to adjust their cycle inventory levels accordingly.
For instance, retailers may increase inventory during holiday seasons to meet higher demand, and reduce it in slower periods to avoid excessive holding costs.
