Order Cycle in Inventory Management: What is it + Tips to Improve

What is Order Cycle?

Order Cycle is the number of days from when you get an order in from a customer until you pass it off to a shipping carrier. It does not include shipping time.

Order Cycle and Inventory Management

When it comes to inventory management, the order cycle is referred to as the review cycle. It is the amount of time(in days), it takes for you to sell or use enough of a supplier’s products to meet the target order requirement. The target order is the vendor’s purchase requirements or a certain number of products that allow you to get the necessary discounts to competitively sell those products.

For this, you need to know the order point formula-

Order Cycle Formula

Order Point = Anticipated Lead Time * Demand/Day + Safety Stock

Firstly before setting a reorder with your vendor, you need to have enough inventory to successfully complete your orders before running out of products during the anticipated lead time. You should also have some safety stock, in case you sell more than the forecasted demand or due to other complications. If you fail to set a reorder request from your supplier on time, you are bound to face a stockout situation. Remember this will be based on the reorder point formula-

Reorder Point= Average daily usage rate x Lead time + Safety stock

Order Cycle Example

Many companies follow the same order cycle for years without altering it according to changing circumstances. Let’s take an example. A company has been following an order cycle of 20 days for a primary supplier.

However, what if they realize they can fulfil the vendor’s target order requirement in 10 days instead of 20.

A 20-day order cycle will cause them to overstock products since they were ordering a 20-day supply of each item from the vendor even if the economic order quantity for any particular product showed a 10 day supply. If they only order every 10 days, then they can avoid overstocking products since maintaining the economic order quantity will maximize profitability.

In this case, the 20 day order cycle will also have a negative impact on their customer service and delivery. Ordering a 10 day supply of products every 20 days will result in a greater number of stock-out situations. Customers could order an out-of-stock product, or demand for a particular product could rise suddenly. If the company re-orders after stock-outs then it could take several days to weeks for the new stock to arrive resulting in dissatisfied customers since they will have to wait longer for delivery.

How to Improve Order Cycle

In the fast-paced world of business, optimizing your order cycle is essential for enhancing customer satisfaction, reducing operational costs, and staying competitive. Here are our tips and best practices to help you streamline and improve your order cycle.

Review and adjust order cycles regularly

As your business evolves, order cycles will change. Make sure to continually analyze sales velocity, lead times, and other factors monthly or quarterly to optimize cycles. When possible, make sure to shorten cycles to reduce stockouts.

Implement inventory management software

Automated systems, like those offered by Cin7, can calculate ideal order points and quantities based on real-time data. This eliminates guesswork and manual errors that lead to poor order cycles.

Improve demand forecasting

Leverage historical sales data and predictive analytics to forecast demand more accurately. When you can better predict needs, you can optimize order timing and size.

Streamline communication with suppliers

Collaborate closely with vendors on lead times, minimums, and delivery logistics. This coordination helps align order cycles to supplier capabilities, minimizing delays.

Add safety stock buffers

Carry extra safety stock to avoid stock-outs in case of unexpected demand spikes or shipping delays. The costs of safety stocks are far less than costs of missing sales.

Optimizing order cycles requires cross-functional coordination and continuous improvement. With the right focus, you can achieve cycles that enhance customer satisfaction and inventory turns. Reevaluate often and implement changes to keep cycles aligned with business needs.

Summing up

It is essential to calculate and maintain order cycles for different suppliers and vendors. Accurate order cycles are important for smooth inventory management since it will give you a precise idea about when and how much product to stock in a given period of time.

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