Having enough inventory on hand to meet customer demand is crucial to maintain and grow your business. Companies must not only carry enough inventory to meet forecasts, but a cushion of additional goods that can help them cover unexpected demand or problems like late shipments from suppliers.
One important component to inventory management is cycle stock. Understanding cycle stock inventory and the amount you need available over a predetermined period will help you meet customer demands while also keeping costs as low as possible.
What Is Cycle Stock?
Sometimes referred to as working inventory, cycle stock is the amount of inventory available to meet typical demand during a given period. It's the amount of inventory you would expect to go through based on forecasts and historical data. Cycle stock is one part of a company’s total on-hand inventory and must be replaced as the business sells its goods (i.e., inventory turnover).
Cycle Stock vs. Safety Stock
What is the difference between cycle stock and safety stock? It ultimately comes down to the expected use for each type of inventory. Cycle stock are the goods allocated to meet regular customer demand over a certain amount of time. Safety stock, on the other hand, is more like backup inventory. Think of it as product kept in your facility to cover unforeseen circumstances, such as when planned production output falls short or when actual sales comfortably exceed forecasts.
For instance, perhaps your company runs a major promotion in the lead-up to the holidays, and sales outperform the previous season’s sales and latest forecast by a wide margin. In this case, you will run out of cycle stock, so you tap into your safety stock. Without those additional reserves that you hold for just this type of occurrence, the company will lose sales and customers, who may never return after this kind of frustrating experience.
However, if your sales forecast is spot-on or customer demand even falls short of it, you can fulfill all orders from cycle stock. Determining the right amount of cycle stock is a tricky balancing act, because companies also don’t want to carry more inventory than they need to.
The formula for calculating cycle stock is based on safety stock as well:
Cycle stock = Total inventory on hand – Safety stock
Here are the key differences between cycle stock and safety stock:
|Cycle Stock||Safety Stock|
|Definition||Inventory planned to be used in a certain period||Buffer inventory to cover any unplanned issues|
|Intended use||Replenishes old stock as it’s sold||Used when demand outpaces predicted sales, production output is less than planned or supplier orders are late|
|Reordering||New orders placed regularly after existing inventory is sold||Only replaced on as-needed basis|
Why Is Cycle Stock Important to Businesses?
Cycle stock plays an important role in a business’s daily operations because it’s used to fulfill most sales orders. Without it, a company would not have enough inventory available to meet customer demand and the business would not last long.
This stock is also critical to businesses generating cash flow. As items are sold, the organization collects money and generates cash flow. As those goods leave the warehouse, the business then has to place replenishment orders with various suppliers and uses revenue from sales of cycle stock to fund those orders.
How to Manage Cycle Stock Inventory
Once you identify consistent sales trends and have historical information to look back on, managing cycle stock inventory becomes easier. Done right, businesses can rest assured that the right products are available in the right amounts and replenished efficiently.
When a company is first starting out, the amount of cycle stock needed can be hard to predict. It might be useful to consult with similar businesses or industry experts to get an idea of the appropriate amount to carry. Also account for major marketing campaigns, seasonality and relevant trends when figuring out the ideal amount of cycle stock.
Once businesses have some data to work from, they can develop more detailed and reliable demand forecasts. They will have a sense of how sales fluctuate over the course of a year, which SKUs are the fastest movers or slowest sellers, and other valuable information. Inventory management software typically plays a key role here, as many solutions include a demand planning engine that looks at historical data, trends, seasonality and other factors to predict future sales. This software can calculate the expected amount of cycle stock needed to cover a certain period of time for every product the company sells.
The key is to have enough cycle stock to last until the next purchase order arrives at your facility (whether a manufacturing plant, warehouse or store). Companies usually use the time between receiving orders or between production runs (in manufacturing settings) as the time period for calculating cycle stock. Ideally, the business has sold most of its cycle stock by the time the next replenishment order shows up.
Benefits of Forecasting Cycle Stock
Forecasting plays a central role in determining the appropriate amount of cycle stock to carry. Here are a few key benefits of forecasting cycle stock:
- Fewer Lost Sales: Forecasts minimize the chances of running out of certain items. If a few sizes of swimsuits started flying off the shelves last spring, the system will recognize that and increase the order size for those particular items. Under-ordering may save a little money up front, but business leaders will be frustrated when they realize the demand is there but your supply isn’t and they’re missing out on revenue.
- Reduced Carrying Costs: Just as forecasts prevent you from not having enough products on hand, they also prevent you from holding too much inventory. It costs money to have goods sitting in a store or warehouse, and by keeping the optimal amount, you prevent unnecessarily high inventory carrying costs.
- Preserve Safety Stock: Companies that don’t order enough inventory will frequently burn through their safety stock, which negates the whole reason for having it. Safety stock should be saved for major disruptions, like a supplier that’s shut down due to a natural disaster or unprecedented demand for a particular item. Forecasts help ensure your safety stock remains safety stock — not another name for cycle inventory.
- Avoid Fire Drills: If your business is quickly running out of certain items, it will start scrambling to try to get more goods or materials from vendors. That often means rush shipments, which cost more and cut into profit margins. Or it may even try to find another supplier that can provide the same or similar products in short order, and that’s a lot of work. Forecasts can help you avoid the chaos and headaches.
- Fewer Oversights: Leading forecasting tools take a lot of information into account and use algorithms to come up with estimates. It’s hard to replicate that by crunching the numbers yourself and using simple math. Forecasting software may factor in a new trend you haven’t yet noticed or something from a year ago you forgot about.
Accounting for Cycle Stock Inventory
We’ve already mentioned that cycle stock is important to accounting in that it brings in cash, and purchasing more of this inventory to meet demand also affects cash flow. Any inventory a company owns also shows up as an asset on its balance sheet.
When determining the costs of goods sold (COGS) for inventory, companies can use a few different methods. Since prices fluctuate, the inventory costing method chosen can affect the COGS and, consequently, gross profit. The most popular and GAAP-approved costing methods include:
- First In, First Out (FIFO): The cost of inventory is based on the oldest items purchased and the price paid for those goods. So if someone orders 50 items, the company will base the cost on the products it purchased two months ago for $20 each (COGS = $1,000).
- Last In, First Out (LIFO): The cost of inventory is based on the most recently purchased items and the price paid for those. If someone orders 50 items, the company will base the cost on the purchase price two weeks ago of $25 each (COGS = $1,250).
- Weighted Average Cost (WAC): This simply takes the average cost of all inventory sold. Using the same example, the weighted average cost for those 50 items would be $22.50 (COGS = $1,125).
How to Calculate Cycle Stock With EOQ
How can businesses calculate their order size for cycle stock? Many use the economic order quantity (EOQ) formula. This formula allows a business to order enough stock to meet demand while minimizing the costs per order.
When calculating EOQ, you’ll need to consider your ordering costs, holding costs and demand for that product.
The EOQ formula is as follows
Q = √ (2 x D x S / H)
H = Annual holding costs per unit
Let’s say you own a retail shop selling paper planners and you sell 10,000 units each year. Your fixed order cost is 50 cents, and it costs you $1 every year to store a paper planner in your inventory.
Using the formula above, you’ll arrive at the following: Q = √ (2 x 10,000 x .5 / 1) = 100
This means that your ideal order size is 100 paper planners. However, you would also want to calculate the ideal amount of safety stock and add that to this number to find the total amount of inventory you should keep on hand.
Cycle Stock Inventory in Supply Chain Management
Cycle stock is a big part of your overall supply chain management strategy (SCM). Keeping the optimal amount of inventory available means sending orders to the right suppliers at the right time, and making adjustments based on how quickly you’re selling through products. Finding the most cost-effective way to make everything work as planned is complex and explains why businesses have dedicated more resources to SCM in recent years.
For example, perhaps cycle stock for a particular item jumps from 500 to 1,500 because a morning TV show and influential blogger both feature your product. Your existing vendor of that item may only be able to supply 1,000 units, so you need to find another partner that can provide the additional 500.
Similarly, if the forecast projects sales will triple for a category of items this summer based on consistent growth over the last year and a consistent surge in demand during the summer, that could impact downstream supply chain partners. Can your current shipping couriers handle that volume, and if so, do you receive volume discounts? If the costs are too high or they don’t have the capacity, you might need to find a new courier.
It’s essential to consider the full impact on your supply chain as you monitor and adjust cycle stock.
Cycle Stock Example
Since cycle stock consists of items you're using to fulfill regular sales orders, you need to count all of the items you have on hand. For instance, in a retail setting, the store should include items in the storeroom and on its shelves at brick-and-mortar locations. You then simply subtract safety stock from that total inventory number to find the amount of cycle stock.
So let’s say an auto parts retailer completes a physical count of all the windshield wiper blades in its store and counts 350. The inventory management system tells the manager 75 of those blades are allocated for safety stock. That means the wiper blades cycle stock that the retailer plans to sell as part of normal operations is 350 – 75 = 275. The company could get a more detailed count of cycle stock by breaking down the wipers by size, brand or both.
Managing Cycle Stock With Inventory Management Software
Calculating the amount of cycle stock your organization currently has and the ideal size for replenishment orders manually is not only cumbersome and time-consuming, but error-prone. To efficiently track inventory levels by SKU and across locations, companies need a robust solution like NetSuite’s inventory management system. The software can display not only total inventory numbers, but distinguish between cycle stock and safety stock. It can also alert users when on-hand inventory of specific items reaches a certain threshold to trigger reorders and prevent stockouts.
In addition, NetSuite’s demand planning solution can use a variety of algorithms to forecast future demand for different products. It considers multiple data sets to estimate future sales and determine how much businesses should order to replenish their cycle stock, helping them strike the right inventory balance.
Cycle stock directly impacts your company's ability to make sales and earn a profit. Using software to help manage your inventory and improve sales forecasts allows you to keep the optimal amount of inventory on hand. That enables companies to save money while providing a positive experience for more customers.