SkuBrain 101

Order Cycle

The order cycle is the amount of time that you generally wait between placing orders with a particular supplier or group of suppliers. If you place orders every week then you have an order cycle of 7 days.

This has a significant impact on the amount of stock that you need to carry. If you order stock from a supplier once every six months, then you’ll need to order enough stock to keep you going for another six months from the delivery date. On the other hand, if you order stock once a week, you only need to order one week’s worth of stock.

To put this into practice, imagine an order cycle of 2 months (order_cycle = 2 months). We now have the following:

To step back and think about the big picture a bit once again, when placing our order, what we’re trying to achieve is to have enough stock on hand, when the order arrives, to cover the expected demand from the delivery date up until the date at which our next top-up arrives (so from the delivery date until the delivery date plus the order cycle).

With a lead time of 1 month then and an order cycle of 2 months, we’re basically planning for the period starting one month after we place the order and ending 3 months after we place the order. For the sake of simplicity, let’s call the sum of demand during that period our cycle demand.

The calculation for the amount of stock that we need to order is now therefore:

left_over = Max(0, stock_on_hand - lead_time_demand)
          = 5 units - 4 units
          = 1 units

cycle_demand = forecast[Month 2: Month 3]
             = 5 units + 7 units 
             = 12 units

Requirement = cycle_demand - left_over 
            = 12 units - 1 units
            = 11 units

Again, there’s nothing too complicated going on here… this is just a small variation of what we’ve been doing previously. However there is one more thing that skuBrain factors in when planning inventory, which is your replenishment policy.