Inventory management is a complex process which can involve the input of multiple parties, suppliers and producers, and can sometimes be driven by factors beyond the control of business owners and staff alike. For this reason, it is important that business owners understand key terms and phrases used when discussing inventory management, in order to ensure inventory is functioning at optimal levels. One of the terms that often come up is cycle stock. In this article, we explain what cycle stock is and how it is vital for a well-functioning inventory.
Two inventory types
Inventory levels usually include multiple types of stock, and two of these are commonly called cycle stock and safety stock. In order to understand what we mean when we discuss cycle stock, it may be useful to first compare it with another well-known type of stock called safety stock.
Safety stock can be thought of as buffer inventory, or inventory that is not planned to be consumed but is held in case of an emergency. Safety stock is typically dipped into if actual demand exceeds forecast, or if production output is less than planned. It may be useful to think of this type of stock as you treat your own personal savings account, for example.
By comparison, cycle stock is the amount of inventory that is planned to be used during a given period. 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).
What is the difference?
To understand the difference between safety and cycle stock, it may be useful to imagine a hypothetical situation where, for instance, actual demand happens to exceed forecast. In this situation, the planned cycle stock would not be enough to satisfy the excess demand, so this is when safety stock would be used as back up.
Conversely, if you were in the situation where production output turned out to be less than planned, the planned cycle stock may have been sufficient to satisfy demand, but you may have been unable to procure or produce to plan.
As you can see, both types of stock are extremely important for preventative inventory management. So how do you determine how much to carry of each?
Determining cycle stock and safety stock
The best way to determine cycle stock levels is based on the forecast. In the absence of the forecast, historical figures can be used as a proxy, being careful to take any seasonality, product lifecycle factors, or upcoming trends into consideration.
It is a good idea to invest in quality inventory management software in order to get an accurate prediction of demand using historical data. You may also want to consider doing some market research to determine what items consumers are looking for currently, and to look out for any current trends that may affect your inventory. Lastly, safety stock levels should be driven by a formula that incorporates lead time, demand and supply fluctuations, as well as a service level factor.
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.