This month we will begin to examine the last of the parameters used to determine when to reorder a product, the order cycle (also known as the review cycle). The order cycle is the normal time between issuing replenishment orders with a supplier that meet that vendor’s target order requirement. The target order requirement is the supplier’s requirement that allow you to get the terms or discounts which allow you to competitively sell its products. The target order requirement is usually expressed as:

• A number or pieces or cartons
• A monetary amount
• Weight or cubic volume (common when you have to order a full truckload or container)

Here are the basic steps for calculating a supplier’s order cycle:

1. Take the total purchases for stock and non-stock items from the vendor over the past 12 months. For example, suppose you purchased $250,000 worth of material from a vendor in the past year.
2. Divide the total purchases by the vendor’s target order requirement to determine approximately how many orders you can place each year. Suppose this supplier requires you to place a $10,000 order to receive pre-paid or “free” freight and you need this concession in order to competitively sell the vendor’s products. This means that you probably can place about 25 orders per year ($250,000 ÷ $10,000 = 25 orders/year).
3. Dividing 365 days in a year by the 25 annual orders results in the approximate frequency of issuing replenishment orders or the order cycle: 365 days ÷ 25 annual orders ≈ 15 day order cycle.

As we previously discussed, you must reorder a product when its net stock position (On Hand Quantity – Quantity Committed on Outgoing Orders + Quantity Currently On Replenishment Order) is equal or less than a quantity equal to the quantity you will sell or use during the anticipated lead time plus the safety stock quantity. This quantity is commonly known as the “Order Point”. But, if you have a 15 day order cycle, you must include on a vendor target order issued today not only any item that has a net stock position below its order point but any item whose net stock position will fall below its order before you plan to issue the next target order. That is, those items that currently have a net stock position equal to the Order Point plus anticipated demand during the upcoming order cycle. The sum of the Order Point plus anticipated demand during the upcoming order cycle is often called the Line Point. This name refers to the practice of ordering all items in a vendor “line” of products that currently need to be included on a replenishment order. Some systems refer to the Line Point as a “Reorder Point”.

To avoid stockouts and maintain a high level of customer service, you must reorder products when you have enough stock left on the shelf to cover your needs during the time required to replenish inventory. But, because you often have to meet a vendor’s target order requirement, you must include on a replenishment order issued today any item that will fall into a “dangerous” stock position before you can place the next target order. This is why we need to know how often you are able to place target orders with the primary source of supply (i.e., the order cycle). It is easy to see why accurate order cycles are critical in your goal of achieving effective inventory management.

Next month we will examine the problems that commonly occur when order cycles are too long or too short.