Inventory Cycle for Manufacturers, Retailers and Distributors

A Look at Multiple Applications of Inventory Cycle in Business

Female small business owner taking inventory with digital tablet
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The Inventory Cycle

The term "inventory cycle" means different things to companies in different verticals. For those who source, assemble and create inventory, it refers to a time-based process which is basic to understanding how to maximize resources and cash flow. To businesses that buy, store and sell inventory it focuses on the process of understanding, planning and managing inventory levels, from purchasing through more-efficient auditing.

3 Phases of the Inventory Cycle for Manufacturers

The term inventory cycle for manufacturers refers to a three phase process:

  1. The ordering or administrative phase
  2. The production phase
  3. The finished goods and delivery phase.

The ordering phase is the amount of time it takes to order and receive raw materials. The production phase is the work in progress phase. The last phase is the finished goods that remain in stock and the delivery time to the customer. The inventory cycle is measured as a number of days.

Consider the following example: The inventory cycle for XYZ Company is 12 days for ordering, 35 days for work in progress, and 20 days for finished goods and delivery, which brings their total manufacturing inventory cycle to 67 days.

The Inventory Cycle for Retailers and Distributors

To a retailer or distributor, the inventory cycle is the process of understanding, planning and managing their inventory levels, which includes:

  • Accurate ordering of required inventory based upon demand and terms, by product
  • Reduced time to reorder products on a periodic basis
  • Accurate history of individual product sales and departmental sales
  • Increased customer satisfaction

Inventory cycle can be applied to any inventory system, manual or computerized.

The most important part of the inventory cycle process, also called cycle inventory, is to frequently and regularly perform inventory counts to understand the turnover or demand by a particular item.

A cycle count is an auditing procedure where a small subset of inventory, usually in a specific location, is counted at a specific day or time. The goal is to move through all inventory on a regular basis. Cycle counting yields more accurate inventory results.

Retailers may also look at cycle stock inventory, or on-hand inventory, which is the sum of what's on the shelves and what's in the warehouse or store room. The quantity of a cycle stock inventory is equal to the total on-hand inventory. If safety stock inventory is maintained, it does not count.   

The goal is prevent running out of stock, while managing cash flow, economizing as much as possible on shipping and storage.

Considerations

No matter what vertical we're in, there is a basic tenet that runs through all of these views, processes and equations: understand your business. The expression "god is in the details" has been attributed to several, but it is a truth for all small business owners.