Order Cycle is the number of days required for a seller to use up a vendor’s supply to meet the supplier’s target order requirement. It also tells the seller how much stock is used and needed before placing a replenishment request. It is the entire process
The order cycle takes into consideration the order, reorder and economic order quantity so that sellers have a clear idea about how much inventory they should stock for products and when they should restock.
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 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
Understanding with an 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.
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.