Unrealistically Short Order Cycles Lead to Anarchy
By Jon Schreibfeder
The order cycle (also commonly known as a review cycle) is the length of time (usually expressed in days) between when you can issue target replenishment orders with the primary supplier of a product. The target order represents your vendor’s requirement that allows you to get the discounts or terms that allow you to competitively sell their products. Last month, we discussed the adverse effects of extended order cycles. This month we look at the problems associated with order cycles that are too short.
One of our clients had historically set all of their order cycles to seven days. “After all”, the vice president of procurement explained, we normally order from every vendor once a week. However, the client had a $10,000 target order requirement with the vendor of a popular product line. This distributor sold $5,000 worth of the vendor’s products each week. Based on this information the distributor should have planned to issue a target with the vendor once every 14 days.
Every seven days, a suggested purchase order was created for the vendor. The value of the material listed on the suggested purchase order was usually about $5,000 far short of the $10,000 target order requirement. The buyer had two options:
1. Wait another seven days until enough demand was generated to meet the target order requirement. This might seem to be a reasonable solution. But remember that the calculated reorder point is based on the formula:
Safety Stock + Anticipated Lead Time Usage + Anticipated Order Cycle Usage
By not ordering at the end of the designated order cycle, the company is consuming stock reserved for anticipated lead time usage and the safety stock before the replenishment order is issued. Keep in mind that safety stock is insurance against unexpected customer demand during the anticipated lead time or delays in receiving the replenishment shipment after a purchase order has been placed. Consuming safety stock before the replenishment order is placed eliminates this insurance inventory and increases the likelihood of a stock out. And, most computer systems are designed to base the recommended order quantity on anticipated order cycle usage. In this case a seven day supply. Ordering a seven day supply of a product every 14 days will probably result in stockouts and frustrated customers.
2. Increase the suggested reorder quantities to achieve the target order requirement. Many software packages have a “goal seeking” feature that will increase the suggested reorder quantities by the percentage necessary to achieve the target order requirement. In our example, it might seem logical to increase every quantity to order by 50%, but this could result in overstocking the products, unnecessarily increasing the company’s investment in stock inventory and decreasing inventory turnover.
Accurate order cycles are crucial to achieving effective inventory management. Your buyers should continually monitor if they can place a vendor target order based on the date the last target order was placed plus the order cycle.
- If they can usually place orders in fewer days decrease the order cycle.
- If suggested replenishment orders often do not achieve the target order requirement increase the order cycle.
- For those vendors that have no target order requirement, consider setting a minimum order cycle of three, four or seven days.
This process will allow you to meet your customers’ needs with the least amount of inventory.