Cycle counting is an efficient and cost-effective way to ensure ongoing accuracy of your inventory counts and valuation. Usually, staff will perform cycle counts on a predetermined schedule, often weekly or monthly, and count a subset of the entire inventory in a specific area of the warehouse. Once these partial counts have covered the entire inventory, the cycle-counting process starts over.
Fix The Problem Before it Escalates
If any discrepancies are uncovered between the actual counts and what is reported in your ERP system (assuming you’re using one), the errors can be traced, corrected and updated in the system. It can be assumed that if a high error rate occurs during a cycle count, that problem will be significantly magnified during a count of your entire inventory. In this case, it would be wise to uncover the source of the problem and take corrective action before it escalates any further.
Which Approach to Use?
One approach to cycle counting that has proven highly successful is to assign a system, often referred to as ABC (or ABCD), which sets a priority on inventory counts of goods, materials and/or parts according to their value and frequency of use. In this system, items assigned an A are counted most often, perhaps weekly, while C (or D) items are counted less often, perhaps only semiannually.
The ABC method of cycle counting often breaks down roughly into the following percentages: Group A items account for 70-80% of inventory value, Group B 15-30% and Group C 5-15%. These percentages are industry averages and may differ widely from company to company. Frequency of use may also be factored into these categories.
If you are using an ERP system that provides robust inventory management capabilities, you can automate your counts (including alerts to maintain a schedule) and save lots of time and money vs. cumbersome, manual processes to do this work.
Other approaches to cycle counting are also employed with some regularity. One is to use control groups, which involve counting small groups of items repeatedly over a short period of time to determine if the counts are accurate or if any errors are present. If errors do show up in a particular control group, it should not take long to identify the source of the problem and to find a remedy. If you discover that errors are appearing frequently in multiple control groups, there are likely more widespread issues that will need to be addressed, which may take more time to correct.
Another approach is to employ a random sample counting method, which may be used when a company has large quantities of items that are similar. These counts may be performed on a more frequent basis, even daily, enabling staff to get around to the entire inventory in a reasonable time period.
5 Reasons Why You Should Be Cycle Counting
1. Accurate Inventory Counts Year-Round
Why wait until the end of the year to find out if your inventory counts are accurate when you can maintain precise inventory counts and valuations with frequent periodic cycle counts? Keep in mind, the longer you wait, the more errors you’re likely to find and the longer it will take to resolve those errors. Also note that waiting until the end of the year may complicate end-of-year procedures involving financial reports, taxes and cash flow. Frequent cycle counts ensure that your entire inventory is counted throughout the year, leading to greater accuracy and more reliable reporting year-round.
2. You’re Always Open for Business
Businesses that wait until the end of the year to take inventory often have to close up shop for one or more days so that staff (and possibly costly outside personnel) can redirect their attention to the count, leaving business and dollars on the table until the job is done. Not only is this approach often stressful and exhausting, additional resources have to be utilized to get the job done, including pulling in people from other departments who have to work overtime and those costs add up. Conversely, cycle-counting is performed exclusively by warehouse staff, who are well-versed in this oft-repeated procedure and it’s all done during regular business hours, so there’s no need to ever close up shop to count your inventory.
3. Every Department Is on the Same Page
Keeping your inventory counts accurate and current doesn’t just matter to the folks in the warehouse; it affects most of the departments in your company. For example, Accounting has correct valuation numbers for inventory and can quickly generate accurate financial reports at any time. Warehouse staff can effectively maintain optimal inventory levels so that they never have to face stock-outs. Plus, they can successfully plan for reorders, shipping, receiving and storage. The Sales team always knows what’s on hand at any given time when taking orders, so they never promise delivery of an item that is actually out of stock.
4. No More Stock-outs
Stock-outs are to be avoided at all costs. We all know the dreaded scenario when an order is taken and the warehouse staff goes to pick the item and it’s not there. Uh oh. What to do? Well, you can contact your supplier and pay extra for a rush delivery to your warehouse, because you don’t want to lose that customer. And then you’ll probably have to absorb the cost of the rush delivery to your customer. Or … you can rely on your ERP and Inventory Management system to orchestrate your cycle counts so that you never have to endure these situations ever again.
5. Save Time, Money and Frustration!
As it should be abundantly clear, regularly scheduled cycle counts will save you time, money and frustration vs. waiting for annual physical inventory counts. Every department across your enterprise will benefit and your customer service and satisfaction levels will be far greater. And if you haven’t done so already, we suggest that you explore implementation of a top-flight ERP system that offers comprehensive inventory management capabilities so that you can automate your cycle counts and keep to a regular schedule.
If you want to learn more about Inventory Management Best Practices, watch our on-demand webinar on Implementing Inventory Management Best Practices.