Cycle Stock and Its Role in Inventory Management
In today’s marketplace, deciding how much inventory to carry is by no means a simple task. With the growth of eCommerce and a competitive international trading scene, inventory managers are finding it harder to make accurate projections to stock their inventories. In such a scenario, we are seeing more project managers depending on safety stock instead of maintaining a steady supply of cycle stock. While this seems like an easier choice, industry experts believe that relying less on safety stock is critical to free up cash and reduce imminent customer service risks.
Let us understand what cycle stock is and what it means for inventory planning and management.
Cycle stock explained
According to business dictionary online, Cycle stock is defined as the inventory that you plan to sell based on demand forecasts. It is the amount of inventory that is projected to be used during any given period. In simple words, it is the inventory needed to meet the regular customer demand in a given period of time. The period is often defined as the time between orders (for raw materials), or the time between production cycles (for work in process and finished goods).
Challenges in maintaining inventory
Industry experts understand that inventory management is usually a rather complex task that involves collaboration between multiple parties including SKUs, suppliers, producers and any such stakeholders involved. As observed by a senior consultant at Trindent consulting during one of the engagements at a major U.S. medical device management company, inventory management was usually driven by factors which were beyond the control of planning or purchasing departments. It is therefore essential to understand the factors that can help to plan and purchase the inventory with better accuracy.
Planning for inventory accuracy
The first important factor in planning for inventory accuracy is to collaborate with all the parties involved in the production, sales and distribution process. Take variables like demographics, seasonality, annual sales and discounts, the cost per unit, storage costs, supplier availability and any such historic figures that may be relevant to the stock planning and purchase process. Getting to know all these factors is half the battle won in terms of being able to make accurate predictions about the forthcoming demand.
The next step is the use an accurate measurement to plan the cycle stock. This can either be done by using the cycle stock calculation formula, or simply through a reliable inventory management software. Accurate planning will reduce dependence on safety stock and hence ensure an increased cash flow and better risk management figures for the business.
Deciding how much inventory to carry is by no means a simple task; however, a more collaborative planning process along with more accurate estimations is the first stop towards improvement and will result in sustainable benefits.