Effects of the pandemic on cycle stock

The stock has 5 basic functions, which are important for us to know in order to arrive at its best sizing. in the post The five functions of inventory I explain the variables that impact each of these functions. In the following illustration, you can see a summary of this:

Figure 1: Inventory functions. Source: ILOS

In this post, I would like to focus on the cycle stock function, which is the most basic of functions and has been greatly affected by the pandemic in some sectors.

Cycle stock is that required to meet expected demand during the time elapsed between successive replenishments. The amount of this inventory is highly dependent on production lot sizes, economic quantity shipments, storage space limitations, replenishment lead times, and cycle demand.

In summary, the cycle stock serves to meet the demand between two stock replenishments, that is, it can be scaled based on the demand forecast during each replenishment cycle, presenting the theoretical behavior illustrated in the following graph:

Figure 2: Illustrative model of cycle stock. Source: ILOS

As COVID-19 greatly affected the demand behavior of several sectors, the cycle stock was automatically affected as well. Demand forecasts made two months ago are no longer valid, as the consumption pattern of most items has completely changed. Some sectors suffered a significant drop in demand, such as fashion, fuel, cars, accommodation and airline tickets. Others noticed a significant increase in food, cleaning and hygiene. The graphs in figure 3 illustrate the effects of the arrival of the new coronavirus on the demand of some segments. It is essential to understand the most recent changes in consumption behavior in order to adjust the baseline and redo forecasts. To learn more about the impacts of the pandemic on sales forecasting, I recommend watching the recording of live Demand Planning for a New Reality or read the post How to make adjustments to demand planning in the post-pandemic.

Figure 3: Illustration of the effect of the new coronavirus on demand. Source: ILOS

In cases where demand showed a significant increase with the arrival of the pandemic, the cycle stock suffered a sharp reduction, as the stock was not initially sized considering this behavior. This led to a major break in the availability of hand sanitizer, masks and cleaning products, for example. Now, if the level of consumption has changed, that is, the increase was not just a momentary initial impact, the sizing of the cycle inventory must follow this new level, increasing inventory levels.

In other cases, demand suffered the opposite effect, showing a drop in consumption. In order to avoid excess inventory, waste and costs, it is necessary to reduce inventories and gain efficiency.

Cycle stock requirement is also affected by replenishment frequency. Some sectors were impacted by the reduction in the level of service provided by their suppliers, for a number of reasons: reduction in staff, difficulty in importing, machine downtime, etc. In these cases, the need for cycle stock has increased, as it now needs to meet the demand for longer cycles and those who took time to realize this, suffered from the stockout.

The effects of the pandemic, both on the behavior of demand and supply, bring new challenges for stock planners, who need to adjust their cycle stock sizing parameters to the new quarantine reality in Brazil and the world. And these adjustments should be more and more frequent, not only during the pandemic, but also after, when new demand behaviors and a new supply market will be established. Other stock functions such as security, transit, speculation and buffer were also and will be greatly affected, but by other effects that I will describe in the next posts.

References:

The five functions of inventory

Live Demand Planning for a new reality

How to make adjustments to demand planning in the post-pandemic