Cycle stock

Cycle stock (inventory), which can be also known as "working stock", "lot-size stock" or "base stock", owes its name to its periodic nature. Cycle stock is the amount of inventory needed to meet normal demand during a given period. It is the portion of inventory determined by batch activity, meaning its purpose is to specifically satisfy regular sales orders based on demand forecasts, so it doesn't include the amount of "safety stock", nor it predicts an excess stock to arise.

Average Cycle Stock Under Conditions of Constant Demand

In order to determine average cycle stock, information on how frequently order and in what quantity is needed, because we need to determine the lot size (Q) which must equal given period's demand.

The interval starts with the cycle stock being at its maximum, which assures inventory (lot size) is big enough to meet customers’ needs for entire period - [Q]. At the end of the interval, after we have met the demand, cycle stock reaches its minimum - [0]. The averages of these two extremes is what is called average cycle stock:

(Q+0)/2 = Q/2

Inventory Reduction Tactics for Cycle Stock

The primary method to reduce cycle stock is just to reduce the lot size in the supply chain. However, such cutback could be disastrous if no additional changes are made as, for instance, ordering costs can escalate. In such case, there are two strategies proposed to be used as a solution:

1. Reducing ordering and setup costs by streamlining the methods for placing orders and making setups:
   By doing that we can allow the lot size (Q) to be reduced. This could be done also by redesigning information flow's infrastructure or by improving manufacturing processes that can lead to reducing costs of the above.
2. Increased repeatability:
   The practice of doing the same work again, whether it is in the supply chain or in the manufacturing process, can lead to reducing or even eliminating the need for changeovers. Increased repeatability can result in reducing transportation costs, granting quantity discounts from suppliers or establishing new setup methods. Increased repeatability can be achieved on account of:
   • high product demand,
   • group technology,
   • one worker - multiple machines method (OWMM),
   • the devotion of resources solely to a product.

Finding Economic Order Quantity (EOQ) for Cycle Stock

One of the way to determine the best cycle stock level is to find Economic Order Quantity (Economic batch size) - EOQ. To find the optimal EOQ the following conditions must be met:

1. The demand rate remains constant.
2. There's no limit to the size of each batch (e.g. truck capacity, materials handling limitations).
3. There are only two significant costs - the inventory holding cost and the ordering or setup fixed cost.
4. Decisions can be made separately for each item.
5. The lead time remains constant and the amount received arrives as ordered in one batch.

Such ideal situations are very rare and it is important to remember that EOQ was never intended to be an optimizing tool. Nevertheless, the EOQ still can be quite helpful in finding a reasonable approximation when not all of the above apply.

These are the guidelines for using or modifying the EOQ:

• Use the EOQ:
  • If there's a quite stable demand for an item and the "make-to-stock" strategy is applied,
  • If the inventory holding cost and the ordering or setup cost are relatively stable and certain.
• Do not use the EOQ:
  • If the customer specifically asks for the entire order to be delivered in one shipment and the "make-to-order" strategy is applied,
  • If the size of the order is limited, for example by capacity limitations or the number of delivery trucks.
• Modify the EOQ:
  • If ordering larger batches benefits in significant quantity discounts,
  • If the replenishment of the inventory is not immediate, which can occur when items must be sold or used once they are finished without waiting for the entire batch to be completed.

Examples of Cycle stock

• Electronics: Electronic components such as resistors, capacitors and integrated circuits are necessary parts for electronic devices are usually kept in cycle stock, since the demand for these parts is usually steady and predictable.
• Pharmaceuticals: Pharmaceutical companies keep a regular stock of drugs and medication in their warehouses, in order to guarantee that they will have enough supply to meet the regular demand.
• Industrial: Industrial parts such as bolts, screws and washers are often kept in cycle stock, since they are regularly used in production processes.
• Retail: Retail stores keep a regular stock of products to meet the regular customer demand. This includes items such as clothing, groceries and cleaning supplies.

Advantages of Cycle stock

Cycle stock has several advantages, including:

• Reduced Costs: By maintaining a certain amount of inventory, businesses are able to reduce costs associated with purchasing and storing additional inventory. This leads to more efficient use of resources, and less money and time wasted on excess inventory.
• Improved Cash Flow: By keeping inventory levels consistent, businesses are able to better manage their cash flow. This is beneficial for businesses that have tight budgets, as they are able to better manage their money and avoid having to purchase inventory too frequently.
• Increased Efficiency: With cycle stock, businesses are able to maintain a consistent inventory level, which allows them to better meet customer demand and avoid stock-outs. This helps to ensure that customers are always able to purchase the products they need when they need them, thereby leading to increased efficiency and customer satisfaction.
• Reduced Risk: Cycle stock helps to reduce the risk of overstocking, as businesses are able to keep inventory levels at a manageable level. This helps to ensure that businesses are able to better manage their inventory and avoid any unnecessary losses or risks.

Limitations of Cycle stock

Cycle stock is an important part of inventory management, but it has its limitations. These include:

• Not accounting for unexpected events: Cycle stock does not consider sudden changes in the demand, such as an unexpected increase in demand due to a promotion or new product launch. As such, it is important to have an amount of safety stock to cover these events.
• Not considering other factors: Cycle stock does not take into account other factors such as supplier lead time, transportation lead time, or any other delays that could affect the availability of the inventory.
• Limited accuracy: Cycle stock relies heavily on accurate demand forecasts, which are not always possible to achieve. Because of this, cycle stock could lead to overstocking or understocking.

Other approaches related to Cycle stock

The following are other approaches commonly used to manage inventory and stock replenishment.

• Economic Order Quantity (EOQ): The Economic Order Quantity (EOQ) model is used to determine the optimal order size that minimizes the cost of ordering and holding inventory. This approach is based on the assumption of a fixed-cost for ordering and a variable cost for holding inventory, and is used for managing inventory replenishment in a cost-effective manner.
• Reorder Point: Reorder point is the level of inventory at which an order should be placed to replenish the stock. This approach helps to maintain a minimum level of inventory, avoiding stock-outs and overstocking.
• Just-in-Time (JIT): Just-in-Time (JIT) is a production and inventory control system that reduces inventory levels and increases efficiency. This approach helps to reduce costs associated with storage and handling of inventory, and improves customer service by ensuring timely delivery of products.
• Kanban: Kanban is a supply chain management system that uses visual signals to indicate when and how much inventory needs to be replenished. This approach helps to reduce inventory levels, improve production efficiency, and ensure timely delivery of goods.

In summary, there are various approaches related to Cycle stock including Economic Order Quantity (EOQ), Reorder Point, Just-in-Time (JIT), and Kanban, which all focus on managing inventory replenishment in a cost-effective manner.

Footnotes

Cycle stock — recommended articles

Order point — Optimum size of the order — Safety stock — Reorder level — Maximum stock level — Merchandise inventory — Economic batch size — Buffer inventory — Inventory record

References

• Anupindi R., Chopra S., Deshmukh S.D., Van Mieghem A., Zemel E., (2011) Managing Business Process Flows: Principles of Operations Management 3rd Edition, Pearson, p. 126-131
• DeMarais R.A., Larson P.D., (1990) Physic Stock: An Independent Variable Category of Inventory, "International Journal of Physical Distribution & Logistics Management", Vol. 20 Issue: 7, p. 28-29
• Krajewski L.J., Ritzman L.P., Malhotra M.K., (2012) Operations Management: Processes and Supply Chains 10th Edition, Pearson, p. 311-315

Author: Monika Ptasińska