For a business owner, deciding on how much inventory stock alone can be a massive undertaking. When a business owner is trying to decide how much inventory stock to order, it is important to understand what components are involved in inventory levels.
Integral components of inventory stock
The basics of inventory levels can be broken down into cycle stock and safety stock.
Essentially, cycle stock is inventory that a business plans to sell over a specific period of time. It is one of the most integral components of inventory stock, primarily because it’s the first place merchandise is taken from in the warehouse. Since it was factored into the normal demand order for that period, it is considered cycle stock. Cycle stock is the allocated inventory that can fulfil regular sales orders.
Cycle stock remains on-hand, so it is inventory that is in the business’s current position. Another way to think of on-hand inventory is what you have available in all of your business locations. These locations can include warehouses and storefront shelves. Other locations include storerooms and other stock areas. Effectively, cycle stock will move off the shelves as customers buy up merchandise. With this turnover, new items will replace what has been sold. The cyclical replenishment of these goods makes it cycle stock.
Safety stock falls into a different segment of inventory stock. Safety stock acts like a buffering system that protects you during unpredictable circumstances. For instance, during times of high demand, having additional safety stock can protect you from stockouts. Moreover, safety stock helps if something goes wrong during shipments from your suppliers. Perhaps some of your materials come from overseas and travel on a cargo ship. The ship could run into bad weather or difficulty at customs. Either way, there is a delay or you don’t have your desired goods. That’s where safety stock comes into play. It helps fill demand in times of need; this way you can keep your business moving and your customers happy.
Let’s use an example to understand the relationship between cycle stock and safety stock. During the holiday season, let’s say you forecast that a video game product you sell was going to fly off the shelves at 300 units each week for the month of December. To protect yourself, you order two weeks extra supply as safety stock. Now you have 600 units of safety stock and 1200 units of cycle stock for the month of December. In the week leading up to Christmas, you might have an order for 320 units. This is 20 units higher than you anticipated with your cycle stock. Luckily, you have extra safety stock that can help fill that large order. 300 units will be dispatched out from the cycle stock inventory, and the extra 20 units used to complete the order from the safety stock are considered forecast error.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.