The order cycle (also commonly known as a review cycle) is the length of time (usually expressed in days) between the issuance of target replenishment orders to the primary supplier of a product. The target order represents your vendor’s purchase requirement that allows you to get the discounts or terms that allow you to competitively sell their products. Last month, we discussed the detrimental effects of an arbitrarily long order cycle. This month, we will look at the problems that can be caused by 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 replenishment order with the vendor once every 14 days.

So, every seven days, a suggested purchase order was created for this 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. At first look, the buyer has two options:

Option #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 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.

Option #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.

Both of the above options have undesirable outcomes.

A third best practice option would be to calculate order cycles and adjust ordering so as to achieve the most accurate order cycle. Accurate order cycles are crucial to achieving effective inventory management. How?
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.

  1. If buyers can usually place orders in fewer days, decrease the order cycle.
  2. If suggested replenishment orders often do not achieve the target order requirement, then increase the order cycle.

This process will allow you to meet your customers’ needs with the least amount of inventory.