In manufacturing operations, production scheduling, and inventory control, inventory cycle times are important. Cycle times relate to the speed at which the goods or services delivered by your organization reach the market.
What is the inventory cycle time?
Depending on who is asking the question, “What is inventory cycle time?” can have a few different answers. “The amount of time (typically measured in days) required to create and deliver an order to the client,” according to the general definition of inventory cycle time. This phrase’s “client” could be a distributor, retailer, or a consumer.
Inventory cycle time means different things to different businesses. For a manufacturer, for example, cycle time measures the pace of production of products from raw materials. For retailers or distributors, though, inventory cycle time is more likely to be a measurement of how quickly inventory is sold (or turned over) after being received from a supplier.
Understanding how to measure inventory cycle time in your own business is important for a number of reasons. Most important among them is that the speed of order turnover and delivery – whether to a buyer within the supply chain or a customer at the end of the chain – is critical to customer satisfaction. And optimizing inventory cycle time can bring about efficiencies elsewhere, too, including by reducing the cost of inventory carrying cost – a critical element of any strong inventory management strategy.
Factors that impact cycle inventory
Cycle inventory is affected by a variety of factors, including availability, replenishment, and organization. Among these factors are:
Demand for a company’s products can have a big impact on cycle inventory management, since more demand can lead to more frequent cycling and better inventory management. During times of low demand, the company may keep less stocks on hand and cut costs.
- Costs associated with orders
The cost of purchasing cycle inventory has an impact on the availability and quantity of inventory held in storage, in addition to the availability and amount of goods stored in storage. The cost of importing goods into the country, as well as tracking and warehousing them, is included in the order price. Increasing shipping expenses, such as fuel prices and driver compensation, can lead to an increase in the cycle inventory price for a corporation.
- 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.
- Costs of holding
The lead time is the amount of time that passes between when a business places an order and when the product is delivered. Due to lengthier lead times, the organization must plan ahead more regularly in order to meet its basic requirements. Reduced lead times help the company to avoid higher expedited delivery fees and give them more time between orders.
- The price of the product
As a result of the price of the end product, price changes and demand may necessitate the use of other materials or a greater degree of manufacturing. Companies frequently raise their product pricing as a result of increased market demand or rising raw material and production expenses.
- Offers of discounts
When a company’s supplier or vendor gives a discount in exchange for purchasing a large number of things from them, it’s a good idea to take advantage of it. As a result, the company’s cycle inventory costs and, as a result, the expenses of creating the final product are reduced. Companies may find it advantageous to have more cycle inventories if discounts are available, as they may prefer to purchase raw materials at reduced costs for as long as they are available.
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
Cycle inventory management is important to ensure the correct products are being tracked and that no time or energy is wasted.
Here are the best ways to ensure you’re doing it correctly:
- 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.
Consider the many ways in which digital tools can help you optimize your inventory cycle times/order cycle times:
- Cloud-based data management, process automation, and analytics supported by artificial intelligence make it easy to monitor and tweak every workflow in the inventory cycle time/order fulfillment cycle time metrics.
- Continuous improvement becomes standard operating procedure as monitored workflows and processes are refined for even greater efficiency and accuracy over time.
- Full data transparency helps you pinpoint and correct costly errors, delays, and process inefficiencies such as incomplete purchase order information, excessive lead times on essential materials, or bottlenecks in replenishment workflows.
- Inventory control is seamlessly connected to your Procure-to-Pay (P2P) process, enabling sustained process refinement across all business units.
- Analytics mine centralized, shared data for actionable insights into potential opportunities for improvement, expansion, and innovation on both ends of your supply chain.
- Real-time tracking and data analysis provide support for best-in-classinventory management techniques like just-in-time ordering to reduce stock outs and maintain cost-effective levels of safety stock. More customers receive their orders in less time without sacrificing accuracy or completeness, improving customer satisfaction.
- Transparency and process improvements shorten order to cash cycle time as well, bringing more cash into your coffers more quickly while providing accurate data for optimal cash flow, reporting, and financial planning.
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 is just as important for your company’s success as your suppliers’ ability to be a reliable and responsive partner in your customers’ supply chains. If you do this, you will be able to cut order fulfillment time, increase efficiency, and improve accuracy at every level of the process.