Cycle times are crucial to production scheduling, inventory management, and manufacturing operations. Cycle times relate to the speed at which the goods or services delivered by your organization reach the market.
Businesses are able to meet their customers' needs by keeping their inventory available for them. There are many ways in which suppliers organize their inventory, such as by using a cycling inventory, which is usually necessary for their day-to-day operations but can also be organized by its assigned use.
You can improve your understanding of business needs and help manage inventory to meet those needs by gaining a better understanding of cycle inventory. By the end of this article, you will have a better understanding of what cycle inventory is. Why it's important, and how the maintenance of accurate cycle inventories affects your inventory organization.
What is the inventory cycle time?
Depending on who is asking, different answers are offered to what is inventory cycle time. A general definition of inventory cycle time is "the time for producing and delivering an order to the customer, typically expressed as a number of days." There are several ways that a customer may be referred to as in this phrase, such as a distributor, retailer, or consumer.
What does cycle inventory mean?
It's the stock that gets replenished every time a company meets its maximum production quota. Inventory turnover is very important to a company's activities since it is necessary to use inventory frequently in order to conduct regular business operations. Management of cycle inventories effectively ensures that the business can meet the demands of customers and maintain a high level of quality.
Why is cycle inventory used and its importance?
It is important for a business to maintain a cycling inventory as it provides the materials necessary to operate day-to-day. It is important for the business to replace the inventory it regularly uses due to the frequent cycling of inventory. Furthermore, the success of an organization's production efforts can hinge on the ability to manage and track its cycle inventory, and this can be absolutely critical to the overall success of the company.
There is a great deal of interest among both B2B (business-to-business) and DTC (direct-to-consumer) businesses in tracking and managing cycle inventory. Businesses around the world rely on modern inventory software for more accurate and scalable data management, as well as better organization.
Factors that impact cycle inventory
Cycle inventory is affected by a variety of factors, including availability, replenishment, and organization. Among these factors are:
Cycle inventory management can be significantly impacted by the demand for a company's products, as increased demand may lead to more frequent cycling and better inventory management. During periods of low demand, the company may maintain fewer stocks and reduce production costs.
The bakery, for instance, needs a certain amount of flour to fulfill its typical order if it keeps flour in the warehouse for preparing bread loaves. By tracking this cycle inventory, the bakery can ensure that they have enough flour for each batch of bread, as well as be able to respond promptly to demand fluctuations.
- Costs associated with orders
In addition to affecting the availability and the amount of inventory held in storage, the cost of purchasing cycle inventory also affects its availability. The cost of bringing merchandise into the country, as well as tracking and storing it, is included in the order costs. Increasing shipping costs, such as fuel prices and driver wages, can result in an increase in the company's cycle inventory price.
It is possible, for instance, that the same bakery would experience an increase in its order costs if fuel prices increased significantly. Due to these rising fuel prices, the shipper or the company that processes raw sugar may need to increase its rates in order to cover the increased costs of fuel.
- Lead time
The lead time refers to the period of time that elapses between the time a company places an order and the time when the product arrives. In order to meet its basic requirements, the company must plan ahead more frequently, owing to longer lead times. Lead time reductions allow the company to avoid higher shipping costs of expedited merchandise and give them more time between orders.
The baker may, for example, need to order up to one month's supply of flour in advance if there is a flour shortage. If the company finds a better supplier locally, then the cost would likely be lower, but the quality would be inferior.
- Costs of holding
An inventory holding cost is a monetary cost incurred by the business when storing its inventory. Costs associated with storage, materials handling, insurance, and managing warehouses and production areas can be included. In order for businesses to maintain a competitive price and to be able to deliver their product more quickly and efficiently, they can hold low cycle inventory costs on hand.
It should be noted that the cost of maintaining a commercial cold storage facility is included in the holding costs for bakeries that store their eggs there (Take the previous example of bakeries). It will result in a reduction of the costs associated with holding eggs if the lead time between ordering eggs and baking batches is reduced.
- The price of the product
Price fluctuations and demand may result in the need for alternate materials or a higher level of production as a consequence of the price of the final product. Increasing market demand or rising raw material and production costs are often factors that lead to companies raising their product prices.
A bakery, for example, might decide to raise the prices of its baked goods in response to a shortage of raw cane sugar, which increases the bakery's raw sugar cost by 15%. Thus, a company may be able to cover its expenses while still generating profits from its final product.
- Offers of discounts
There are instances when a company's supplier or vendor offers a discount in return for purchasing a large number of items from them. Consequently, the company reduces its cycle inventory costs and, as a consequence, the costs associated with producing the final product. Companies might find it practical to hold more cycle inventories in the event that discounts are available since they may wish to purchase raw materials at discounted prices as long as they will last.
What is the average flow time for cycle inventory?
A specific formula is used to determine the amount of inventory to be kept during the average cycle time. As part of maintaining production and cost efficiency, a certain amount will have to be ordered at a given time. In the company's calculations, the following numbers can be calculated before using this formula:
- Sales or demand on an annual basis
- Costs associated with reordering
- The cost per unit
- Costs associated with storage
Using this formula, you can determine the number of units to order at once you have calculated these items:
Cycle inventory = √[(2 x D x S) / (C x I)]
In this formula:
D = annual demand for the product
S = fixed cost per unit
C = unit cost
I = storage cost per unit
The total inventory cycle time is a combination of the ordering phase of inventory, production phase, and delivery phase.
Cycle inventory management tips
Managing your cycle inventory is simple if you follow these tips:
- Record keeping should be done well. Maintaining proper inventory records helps you determine your company's inventory needs and to account for inventory. Accurate records are essential to ensuring that excess inventory is accurately reported.
- Make use of inventory software. Inventory management software reduces the amount of manual labor that needs to be done in order to maintain inventory. If you want to make inventory management much more efficient, consider implementing inventory management software.
- Calculations should be made frequently. Markets, demand, and the scarcity of supplies may affect the rate of prices and vendor rates. Calculations should be carried out regularly to determine the most cost-efficient methods for ordering inventory.
- Ensure that vendors are kept informed of your progress. By frequently communicating with your vendors, you are able to gain more insight into your supply chain. Be aware of price or material changes, and learn more about your suppliers. By doing this, you will be able to deal with changing supply chains much more effectively and efficiently.
Optimizing Inventory Cycle Time
As a business, keeping your customers waiting and not meeting their expectations is a definite risk. Companies such as Amazon define a standard, and customers become dissatisfied when they have to wait. It is not uncommon for a company to experience back orders, mishaps in the manufacturing process, and errors in customer orders. Likewise, failures to replenish essential goods are also perceived problems that can harm customer satisfaction, company reputation, and bottom lines.
Because of this, it is imperative for any organization hoping to compete effectively to measure and streamline inventory cycle times and order cycle times. A good inventory management solution can make it easy for any company to gain control over this important metric.
Here are some ways you can boost inventory cycle time/order cycle time with digital tools:
- With cloud-based analytics, process automation, and data management, you can take advantage of artificial intelligence. The metrics for inventory cycle time and order fulfillment cycle time make it easy to monitor and tune up all of the different workflows within these metrics.
- As workflows and processes are monitored and refined over time, continuous improvement becomes standard operating procedure.
- You can pinpoint and fix costly errors, delays, and sluggish processes with 100% data transparency. They happen when purchase orders are incomplete or when materials take too long to get.
- Procure-to-Pay (P2P) processes are seamlessly integrated with inventory control, providing sustained process refinement across multiple business lines.
- By mining centralized, shared data, analytics provide solutions for improving, expanding, and innovating your supply chain on both ends.
- Real-time tracking and data analysis contribute to reducing stock-outs and keeping cost-effective safety inventory levels by supporting the best inventory management techniques. Increases in customer satisfaction as more orders are delivered in less time without compromising accuracy or completeness.
- Increasing transparency and streamlining processes will also result in shortened order-to-cash cycles. This will increase cash flow within your organization as well as provide accurate financial reporting and planning information.
As important for your company's success as the capability of your suppliers to be a reliable and responsive partner in your customer's supply chains is the role that your company plays as a reliable, responsive partner utilizing digital tools to measure and optimize inventory cycle times as a key performance indicator. If you do this, it will allow you to reduce the time required for order fulfillment, improve efficiency, and enhance accuracy at every stage of the process.
It is our goal that you have gained a better understanding of what cycle inventory and inventory cycle time are by reading this article. How to cycle inventory is essential for your business, and what are best practices to manage your inventory cycle.