What Is Cycle Stock Inventory and Why It Matters for Business

One thing that keeps your business running and your cash flow healthy is your balanced and well-maintained inventory. And if not maintained well, you can see cash flow disruptions, revenue drop, and poor customer retention. Many businesses in the US lose on average $1.6 trillion annually due to inventory distortion, including stockouts and overstock. 

Stockouts then come with many other problems, like customer dissatisfaction due to late orders or cancellations at the last moment. 35% of businesses ship orders late because they sell products that are not actually in stock. 

To prevent such a scenario, a business must maintain its cycle stock. Cycle stock is the backbone of any business’s daily operations to keep shelves stocked without tying up excess capital. When a business successfully manages its cycle stock, it can easily meet customer demand while optimizing cash flow.

In this blog, you will learn:

• What is cycle stock inventory? 
• Difference from safety stock 
• What are the calculation methods
• Benefits of cycle stock

What is Cycle Stock Inventory?

Cycle stock, also known as working stock or operating stock, is inventory that is available as an asset of the business to meet the typical customer demand during a given period. It’s a planned portion of stocks that satisfies regular customer demand. It’s not like a safety stock kept for any natural disaster or a sudden supply cut off. 

Cycle stock makes up the majority of your inventory. Depending on your industry, product type, and business model, it comprises an average of 80-90% of your inventory because it’s the majority of stocks that meet your day-to-day demand.

Source 

In a nutshell, cycle stocks,

• They are used and replenished regularly based on forecasts
• It is not a safety stock or a buffer inventory
• Follows predictable patterns between order cycles
• Companies use data from previous years to predict the cycle stock inventory 

For  example:

Take a grocery store that sells 100 liters of milk weekly with weekly deliveries. 

Here, the cycle stock of this grocery store = 100 liters.

Cycle Stock vs Safety Stock vs Buffer Stock

Cycle stock, safety stock, and buffer stock are concepts that businesses sometimes intermix or misconceptualize, leading to poor inventory management and cash flow. 

In the simplest way, cycle stock is something that businesses must plan to meet predictable demand, while safety stock covers surprises like sudden supplier disputes or supply blockages. 

Meanwhile, buffer inventory is like a cushion to prevent a hard hit due to unexpected stock shortage, demand variation or fluctuation. 

Without knowing the key difference between the three, one can overstock or understock the goods, which can lead to poor cash flow, holding costs, and customer dissatisfaction. 

How to Calculate Cycle Stock 

With the right amount of cycle stock in your inventory, you can prevent losing customers and generate a steady revenue. There are different formulas available that help you determine the best number and show how much stock you will need as cycle stock. Most of the time, cycle stock is predicted based on data from previous years. You can identify the seasonal peaks, hot sellers, and slow-moving articles, and then predict your demand for the upcoming season. 

Primary Formula:

Remember!

Cycle stock is not a Safety stock. Therefore, when determining your cycle stock, exclude the safety stock to determine the exact amount you have right now. 

Safety stock is for rainy days. If your demand burns through your safety stock every month or year, then your prediction is not up to the mark, and you need to re-evaluate your calculating methods. 

Here are the frequently used formulas.

Cycle Stock = Average Inventory – Safety Stock

 Cycle Stock = (Average Daily Demand × Lead Time) ÷ 2

EOQ Method (Most Common):

EOQ, or economic order quantity method, is one of the most commonly used formulas for calculating the predictable order size for the cycle stock while minimizing the cost per order. 

EOQ = √(2DS/H) 

D= annual demand, S= ordering cost, H= holding cost

Cycle Stock = EOQ ÷ 2

For example:

• The company sells 3,000 chairs annually
• Ordering cost: $100 per order
• Holding cost: $10 per unit annually
• EOQ = √(2×3000×100/10) = 245 units
• Cycle Stock = 245 ÷ 2 = 122.5 units

Factors That Impact Cycle Stock Levels

Internal Factors:

• Customer demand patterns

Customer demand doesn’t remain the same throughout the year. There are peak seasons, holiday hype, and slow-moving days. Therefore, predicting customer demand right can help you figure out your order size for cycle stock. With the right amount, you can prevent overstocking, which could tie up your stock and cash in holding inventory.

In short, customer demand is one of the most critical factors that impact your cycle stock inventory. Calculate it correctly, follow the patterns, and meet the demands. 

• Production lead times and quantities

Another factor impacting the cycle stock is the lead time and the order quantity. Based on your product type, you must determine how long it takes for the raw material/finished goods to arrive after you place the order and how much you should manage to source before the cycle stock runs out. 

Keeping track of lead time and order quantity helps you manage your inventory efficiently. For example, if you sell bathing suits with a daily sale rate of 20 suits and a lead time of 6 days, your reorder point is 120 suits. To keep stock levels balanced, order 200 suits every 10 days. This keeps your average cycle stock at 100 suits and ensures new stock arrives on time without delaying order fulfillment.

• Order frequency and batch sizes

As we discussed above, your order frequency, how often you place the order, and batch size, how many units per order, directly and internally impact your cycle count. You can find out your cycle stock quantity by doing the math right. 

If your daily demand is 20 units, batch size is 100 SKUs, and your order frequency is once a week, then based on customer demand, you can determine how often you should order and how big or small your batch size should be.

Let’s take the above example;

If your daily demand is 20 bathing suits, and you want to place an order once a week, your batch size should be 140 suits to cover a full week’s sales. This makes your average cycle stock 70 suits. By adjusting your batch size and order frequency to match demand, you can keep your stock levels steady and avoid running out.

• Storage capacity and costs

Do you have a warehouse?

How big is your warehouse?

How much stock can it take in?

And how much will the holding cost be?

By answering these questions, you can also determine how much cycle stock you will need for the upcoming quarter or year. 

If you have limited storage space, then holding so much cycle stock might not be a good idea. Plus, you have to see if you can bear the holding cost for the goods sitting in the warehouse. Are these fast-moving units? Are we meeting customer demand? 

You can determine how much stock you need to meet the demand while not burdening the holding cost or taking up all the storage space.

External Factors:

• Supplier reliability and lead times

Counting external factors is equally important, as they also impact your cycle stock inventory. Your supplier relationship and lead times determine when and how often you should place your order, and if you place any last-minute orders, whether your supplier will be able to fulfill them in the meantime. Taking these factors into account helps you plan your cycle stocks. 

• Seasonal demand variations

While planning your cycle stock, you must take seasonal hikes, demand, and variations into account. Based on previous season sales and competitor research, you can determine how much you should plan beforehand for the upcoming season or holiday.

• Market volatility and economic conditions 

Market volatility and economic conditions significantly impact cycle stock inventory by influencing demand predictability and supply chain reliability, leading to potential stockouts, excess inventory, and increased costs. 

• Supply chain disruptions

Supply chain disruption is a commonly occurring issue. It could be a sudden supplier shutting down its operations, a broken relationship, or production damage/failure. A single disruption in the supply chain can slow down your fulfillment process. 33% of US small businesses still experience supply chain delays. Therefore, while planning your cycle stock, you must keep the supply chain disruption in mind and plan your inventory accordingly.

Benefits of Proper Cycle Stock Management 

Financial Benefits:

The average business holds $142,000 worth of excess inventory above required levels. And the carrying/holding costs comprise 15-30% of inventory value annually. If a business fails to forecast customer needs properly, these excessive costs can drain the business or cut profit margins thin like a blade. Therefore, by doing cycle stock forecasting right, you can minimize the carrying costs and improve your cash flow by freeing capital for growth opportunities.

Operational Benefits:

Cycle stocks have multiple operational benefits. 

They prevent stockouts that could lead to lost sales and a damaged reputation. 

Businesses can get bulk purchasing discounts and build better supplier relationships. 

They also help with warehouse operations, like how much stock to carry to prevent over- and under-stocking, which ultimately reduces labor costs.

Customer Satisfaction:

Customer satisfaction increases when customers are treated right and their demands are fulfilled on time without disruption and delays, such as product availability during regular demand periods.

Conclusion

Cycle stock represents 80-90% of total inventory and drives daily operations. Proper calculation can prevent costly mistakes. However, 39% of businesses still do manual tracking or use spreadsheets to do all the math, leaving them questioning their whole process. To cut costs on manual labour and prevent manual error, invest in software and tools that automate your whole fulfillment process while automating your reorder points and notifying you once you reach the threshold for replenishment. 

Now it’s your turn:

• Audit your current inventory categorization
• Implement EOQ calculations for top-selling items
• Consider an inventory management software upgrade
• Establish regular review cycles for optimization
  

FAQs

Q1- What are the common cycle stock management mistakes?

A: Lack of a centralized product catalog with key inventory data. 

People rely on gut feelings instead of data-based forecasting. 

They do not distinguish between cycle stock and safety stock. 

Instead of using automated software/tools, they rely on manual tracking, which leads to 39% inventory errors.

Q2- Is the cycle stock the same as safety stock?

A: No, cycle stock ensures that regular customer demands are fulfilled on time, while safety stock is for rainy days. It ensures that the business doesn’t fall short of supply if there is a natural disaster or supply chain disruption.

Q3- How to calculate cycle stock inventory?

A: You can calculate cycle stock inventory using any of the following formulas;

1- Cycle Stock = Average Inventory – Safety Stock

2-  Cycle Stock = (Average Daily Demand × Lead Time) ÷ 2

3- EOQ = √(2DS/H) 

D= annual demand, S= ordering cost, H= holding cost
Cycle Stock = EOQ ÷ 2