Inventory Cycle for Manufacturers, Retailers and Distributors
A Look at Multiple Applications of Inventory Cycle in Business
The term inventory cycle means different things to different companies in different verticals. For companies that 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 the point of purchase through more-efficient auditing.
3 Phases of the Inventory Cycle for Manufacturers
The term inventory cycle refers to a three-phase process:
- The ordering or administrative phase
- The production phase
- The finished goods and delivery phase.
The first 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 entails the finished goods (i.e. products produced by the manufacturer) that remain in stock and includes the delivery time for products to reach the customer. The inventory cycle is measured by the number of days it takes from the beginning of phase one, through delivery.
Consider the following example: The inventory cycle for XYZ Company takes 12 days to go through the ordering phase, 35 days for the work in progress to be completed, and 20 days for the finished goods to be delivered. Therefore, the company's total manufacturing inventory cycle to 67 days.
The Inventory Cycle for Retailers and Distributors
- Accurate ordering of required inventory based on demand and terms, by product
- Reduced time to reorder products on a periodic basis
- Accurate history of individual product sales and department sales
- Increased customer satisfaction
Inventory cycle can be applied to any inventory system, whether it's manual or computerized.
The Importance of Inventory Control
The most important part of the inventory cycle process (also called cycle inventory) is to frequently and regularly perform inventory counts in order to understand the turnover rate or demand for a particular item.
A cycle count is an auditing procedure whereby 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 is on the shelves and what is in the warehouse or storeroom. 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 to prevent running out of stock, while managing cash flow, and to economize as much as possible on shipping and storage.
No matter what vertical you're in, there is a basic tenet that runs through all the inventory views, processes, and equations.
In order to understand your business, the adage, "God is in the details" is a universal truth for all small business owners.