A company’s on-hand inventory stock generally consists of both safety stock and cycle stock inventory. The cycle stock is the inventory expected to be sold based on demand forecasts, while safety stock is extra or buffer stock to meet excess demand or protect against delayed shipments from your suppliers.
Cycle stock inventory
Cycle stock inventory, also referred to as working stock, is the portion of inventory available to meet normal demand during a given period. It is one of the more important chunks of overall inventory because it is the amount of inventory needed to meet customer needs. Your cycle stock inventory is the first place a customer’s order will be fulfilled from.
Cycle stock inventory is the level of inventory a retailer or manufacturer uses for their standard business cycle to satisfy regular sales orders or sales forecasts. Part of the businesses total on-hand inventory stock, cycle stock replaces older stock items as they are sold.
Companies can improve demand forecasts by implementing inventory software solutions that use historic data and consider factors such as product lifecycle, seasonality and projected trends, to determine accurate cycle stock levels.
Cycle stock inventory also serves an important role in a company’s accounting records. As a business sells and replenishes its cycle stock inventory, the stock creates cash flow from the revenue it generates and for the payments made. Cycle stock inventory also accounts for a company’s total assets on its balance sheet.
Safety stock inventory
Safety stock is buffer inventory, held as a safeguard in case of the unforeseen such as natural disasters, late deliveries or unexpectedly high demand.
Safety stock is typically used when the actual demand exceeds a sales forecast, or if production output is less than planned. In manufacturing, it is important to have raw materials and work-in-progress components on hand to reduce lost labour time. In retail, safety stock is primarily held to avoid the risk of stock-outs and the potential for lost sales and customer dissatisfaction.
Seasonal supply and demand fluctuations may require companies to hold safety stock at certain times throughout their business cycles. Likewise, any geographic remoteness or the distance of a business from its suppliers could reduce the frequency of deliveries or necessitate longer lead times. Safety stock levels should be driven by analytical data that incorporates such variables as lead times, service levels and fluctuations in supply and/or demand.
Calculating inventory stock
Cycle stock inventory is equal to the total amount of on-hand inventory minus any goods held as safety stock.
Calculating safety stock is more challenging than calculating adequate quantities of cycle stock. While cycle stock inventory is held to meet most of the projected sales, safety stock is held to cover demand fluctuations and it involves many variables, including unexpected changes in supply or delivery lead times.
In just-in-time manufacturing or for small businesses that don’t hold buffer stock, the cycle stock inventory is the available on-hand inventory, excluding inventory stock that has been paid for but not yet delivered.
Cycle stock inventory represents the quantity of inventory that a business can sell and replenish according to plan. It does not include safety stock which is held to maintain sales in times of sustained high demand. In comparison, safety stock is held to prevent stockouts that can become costly when they equate to lost sales and poor inventory management.
For optimum inventory control, both cycle stock and safety stock can be combined to determine accurate stock levels for each stock unit, based on current market factors.
Businesses should undertake regular inventory reviews and incorporate overall inventory control practices into the broader business, sales and operational planning. This will help to ensure organisational alignment and long-term sustainability.