What Inventory Cycle Counting Is and How to Apply Best Practices

What Inventory Cycle Counting Is and How to Apply Best Practices

what is cycle counting  

Inaccurate inventory counts are one of the key ways companies lose revenue and sales. It’s also a problem that’s easily solved.

When counts are off, it affects your ability to fulfill orders, provide excellent customer service, and it can lead to things like excess carrying costs on inventory you don’t need and aren’t likely to sell.

Because of this, maintaining accurate inventory counts should be the goal of every business. Accurate inventory is critical to sales forecasting, warehouse and returns management, and general logistics. It impacts nearly every aspect of your business, and the ripple effect of inaccurate counting can affect your business for years.

Today we’ll show you how to take control of your inventory utilizing the cycle count inventory method. You’ll learn what the cycle count is, how it can improve your inventory accuracy and the best practices for implementing it.

Inventory Cycle Count vs. Physical Count

 Inventory counts are one of the most important components of accurately tracking products and materials in your warehouse and stockroom. Physically counting and comparing items on hand to what your inventory software or spreadsheets say you have can help you spot product loss and theft issues..

The problem is that physical inventory counts can be a huge undertaking, even for a small business. It’s not always practical to take the time to close up and count everything regularly, which is why many companies only conduct physical inventories once per year.

There are multiple issues with this approach:

  • It’s a huge time sink in terms of workforce and effort
  • The potential for error is high

What if there was a better way to physically count your inventory where you could conduct the counts with greater frequency, do it without disrupting your operation, and complete it with a higher degree of accuracy?

Enter inventory cycle counts.

Inventory cycle counts are a viable alternative to conducting a massive physical inventory. Rather than count everything in your warehouse all at once, the inventory cycle count breaks the process down into manageable chunks.

For example, one period will be spent conducting a count in one area or counting one type of thing in your warehouse –the rest of your warehouse functions as normal.

In the next period, you choose another thing. You continually “cycle” through different inventory items until you get back to the beginning and start anew.

Cycle counts also often skip full physical counts in favor of “sampling.”

What is sampling? It’s basically counting a small number of items and using that data to extrapolate an average for the whole.

Think of it as an election poll. Pollsters predict who will win elections by calling people and asking them who they’ll vote for. They don’t have the time or resources to call every voter, so they gather a small group that serves as a sample.

They then take the sample figures and expand them to encompass the whole (with a small margin of error, of course). This same principle can be used in cycle counting. With good sample counting, it’s possible to get accurate inventory figures without counting every individual item or shutting down your warehouse operation.

One area where companies struggle is with setting up the cycle inventory system. A traditional physical inventory is straightforward: you simply assign sections and set people off to count, and then it’s over.

The cycle inventory has more moving parts. That being said, once it’s properly set up, it’s a much more manageable approach.

Ultimately, there’s no right or wrong choice here. Physical inventories are a viable option if you have the time and resources to complete them. However, cycle counting gives you more frequent counts with arguably better data and results.

Why Are Inventory Counts Important?

The key benefit of taking inventory of your stock is understanding what you physically have on hand versus what your stock count or inventory management software says you should have.

Human error, theft, and other issues can create discrepancies between your real-world inventory and the one you track on a spreadsheet or with software.

These discrepancies will compound over time and can eventually cost your business a significant amount of money. This is particularly true for eCommerce businesses.

If inventory counts don’t sync up with your available products on online marketplaces, you may be unable to fill orders. For multi-channel sellers without an integrated inventory management system, it can be easy to get off track with inventory counts when you are selling on multiple platforms with individual reporting systems.

These issues can lead to lost sales as you are under-stocked and can’t fulfill orders, or to you taking on extra inventory you don’t need, tying up funds you could use for other purposes.

In the physical realm, inventory counts are important for the same reasons. Carrying too much inventory translates to more money spent on warehousing, carrying costs, and extra employees.

More than 30% of businesses have encountered situations where they’ve sold out-of-stock items. This leads to frustrated customers and logistics nightmares.

The average retail operation in the United States has an accurate inventory count on just 63% of its stock, according to the GS1 US Apparel and General Merchandise Initiative, a consortium of retailers, distributors, and suppliers. That’s a lot of potentially lost revenue or misplaced stock.

Inventory counts are the key to eliminating a costly problem for most companies. Accurate inventory counts keep customers happy, improve margins, and reduce overhead and other costs.

Reducing the number of stock-outs and overstock inventory alone can lower your overall inventory costs by as much as 10%. That should highlight why tracking inventory is a worthwhile project.

What Are the Different Types of Cycle Counting?

When it comes to cycle counting, it’s important to realize that there’s no one singular way to run an inventory cycle count program. Instead, there are three different methods commonly used for cycle counting. Each has benefits, so it’s largely a matter of picking the one that works best for your company’s needs.

Let’s break them down.

  • Control Group Cycle Counting

As the name suggests, control group cycle counting relies on the concept of creating a control group and then using the data to expand to larger sets.

In this methodology, companies will count the same items many times over a short period. This is to spot errors in the counting techniques to fix them and refine the counting process before implementing it for a wider pool of items.

This approach can be beneficial for businesses new to cycle counts. It allows you to practice your cycle counting and refine it over time until it’s good enough to use on a large scale.

  • Random Sample Cycle Counting

Our second method is random sample cycle counting, and it’s great for companies with many similar items.

With this approach, you can select a random number of items to be counted during each cycle count.

The benefit here is that random sample cycle counting causes minimal disruptions to your warehouse and can be done during regular business hours.

There are two techniques used in random sample counting: constant population counting and diminished population counting.

Constant population counting is when the same number of items is counted every time the count is performed. In this setup, some items may be counted frequently and others not at all as the item selection process is random.

Diminished population counting is a different approach. Here, items are counted, then excluded from future counts until everything in the inventory has been counted. Then the process begins anew.

Both of the random sample options here are viable. It’s simply a matter of picking which one works best for your warehouse.

  • ABC Cycle Counting

If you’re not entirely sold on the random sampling method of cycle counting, you may feel more comfortable with ABC inventory management.

ABC cycle counting operates on the Pareto principle, which many people know as the “80/20 rule.”

In this principle, the belief is that 80% of your results come from 20% of your products. By breaking products down into A, B, and C categories, you can better focus on the products driving most of your results.

It’s important to place your items into categories for this method to work. Here’s how to determine what goes where:

  • Group A: High-value items (generally 70%), with small numbers (10%)
  • Group B: Moderate in value (20%) and numbers (20%)
  • Group C: Small value (10%), high numbers (70%)

Once all the items are classified by group, the cycle count can begin. To maximize effectiveness, high sales/high-value items should be counted more often than the lower sales lower value items.

The one potential problem with ABC cycle counts is that if you warehouse many unique items, you may be counting some items more often than necessary.

On the other hand, items in group C may not be counted often enough to ensure an accurate count.

If you’re aware of these issues, you can tailor your ABC cycle counts to avoid these issues.

How to Do Inventory Counts

Now that we’re familiar with the different types of cycle counts, let’s look at how to perform your inventory effectively.

Whether you conduct cycle counts, physical inventory counts, or a combination, the Association for Supply Chain Management recommends implementing a counting feedback loop:

Counting Feedback Loop

  • Assess the current state of inventory integrity and set the target accuracy levels
  • Conduct your count
  • Track variances and investigate root causes
  • Implement actions to improve the accuracy level
  • Compare current numbers and target the accuracy levels

It’s called a counting feedback loop because when you complete step 5 it’s time to return to step 1.

By following this simple outline, you’ll be able to manage your inventory process better, ensuring you have accurate records for tax and accounting purposes.

Best Practices for Cycle Count Inventory

If you’re ready to implement a cycle count inventory system at your business, these best practices will make starting, maintaining, and optimizing your process effective.

  • Schedule cycle counts as part of routine facility operations

Making inventory counts a regular part of your facility’s daily operations eliminates the need to shut down for counts.

  • Schedule counts regularly and frequently

The more often you conduct cycle counts, the more accurate your counts will be. This will help eliminate inventory write-offs and spot problems before they blossom into major headaches.

How often should you conduct counts? Many warehouses do it daily.

  • ABC cycle counts can help you focus on the products that matter most.

By breaking products down into A, B, and C groups, you’ll be better at planning what products to count when compared with the random sampling method. Just be sure to keep counting items in all three categories instead of just focusing on your best products.

  • Assign Cycle Count Teams

To get the best results with cycle counting, it’s good to create dedicated inventory teams. This allows you to train team members to be experts at the counts.

The size of your team depends on the size of your company. A large company will have squads of dedicated employees who make cycle counts their primary focus. Smaller companies, meanwhile, could benefit from training a small group of employees who handle inventory counts as just one part of their daily job duties.

  • Make a Plan

It’s important to plan out your product counts in the beginning. This way, you’ll ensure that all products are inventoried at least once per quarter.

  • Double Check Counts

For the best results, it’s good for at least two individuals to count an item separately. The results should be compared, and if discrepancies in counts are found, you’ll want to research why.

  • Closeout Everything Before the Count

Any time you’re starting a cycle count, be sure that all open shipping, receiving, and WIP transactions are closed for items that have been selected for the cycle count.

  • Investigate Errors

It should go without saying, but it’s time to investigate if you do come across a discrepancy in counts. Resolving the cause of inventory errors makes it easier to prevent them in the future.

  • Track Over Time

One good inventory is awesome, but cycle counting is a long game. It’s important to track your counts over time and spot trends. This allows you to understand what systems are working and which ones aren’t.

  • Start Cycle Counts Early

Ideally, you’ll begin your cycle counts early in a shift, before your warehouse operations have cycled up for the day or after things have slowed down at the end of the shift. This makes the counts easier as there’s less commotion and moving parts to contend.

  • Document the Process

Create an easy-to-understand document that explains how your cycle inventory works in detail. It should be simple enough that a new hire could read it and get the basic gist, but detailed enough so that employees know procedures for handling problems.

Physical Inventory Count Best Practices

If you’re still counting your inventory with regular physical counts, these best practices can make the process faster and more accurate.

  • Mock Counts

If this is your first physical inventory, a mock count can help you better understand how long the real inventory will take while also allowing you to spot potential problems in advance of the official count.

  • Inform Partners

If your physical count will impact your regular operations, it’s best to let suppliers and other partners know ahead of time.

  • Start Counting Early

Slow-moving items can be “pre-counted” before the actual inventory to save time on inventory day.

  • Eliminate Items When Possible

Dispose of all defective and obsolete items before the count to speed up the inventory process.

  • Create Counting Areas

Designating count areas for teams makes it easier to monitor inventory progress.

  • Prepare Equipment Beforehand

In the days or weeks leading up to inventory, ensure all equipment is working properly and that you have all supplies on hand.

  • Shut Down for Counts if Possible

In a perfect world, you will shut down operations for the count to minimize the potential for errors. If shutting down is not an option, create a plan for how you’ll conduct counts while your warehouse continues normal operations.

  • Separate Counting and Recording

To ensure the highest level of accuracy, keep the process of counting inventory and recording the results separately.

Common Questions About Inventory Counts

 Effective inventory management is a struggle for many companies. These are some of the most common questions we encounter.

  • How Often Should You Count Your Inventory?

The short answer is as often as possible. A full cycle count of all of your inventory should be done at least once a quarter. However, many warehouse operations do daily cycle counts for strategic sections to avoid counting large amounts at the end of the quarter. Physical counts should be done at least once per year.

  • When Should I Count My Inventory? 

Ideally, your inventory counts should occur when operations cease at the end of the day or before they start. If you must do your inventory while operations are continuing, you must have a system in place to account for newly arriving merchandising or items picked for shipping.

  • Can I Use Anyone To Count Inventory?

 You can, but it’s not advised. Most warehouse operations have count teams or individuals that have been trained on procedures and are monitored for accuracy. You should have a tracking mechanism in place to assure your teams are counting accurately. 

  • Do I Need A Warehouse Management System / Inventory Management System?

 You can do it all by hand and track it in Excel, but the risk of errors is significant. A warehouse management system (WMS) and inventory management system (IMS) will dramatically improve your accuracy and allow you to do robust reporting on demand. Also, an IMS will sync with online marketplaces and integrate with your ordering, sales, and shipping platforms for a seamless experience.

 How SkuVault Helps with Cycle Counting

 Managing your cycle counts is easier if you use inventory management software to help you schedule and understand your results. SkuVault can help you manage your cycle counts in the following ways.

  • Auditing

SkuVault’s auditing feature allows you to add or remove products from a location, as well as to bulk move products from one location to another, print all products in a location, and perform a complete recount of all products in a location, wherein you simply scan over the existing items, replacing them with the new SKUs.

After a recount, SkuVault generates an audit report, which shows the discrepancies between what you ought to have in stock versus what you actually have in stock. And, paired with our transactions reports and user tracking, it’s simple to see what went wrong and who’s responsible.

  • Cycle Count Reporting 

SkuVault’s Cycle Count reporting allows you to mark locations as “Counted.” This enables you to run the report to search for locations that have not been previously counted and allows you to be more efficient by not recounting locations multiple times.

Increased cycle counts mean fewer physical counts, which means fewer person-hours and more sales. Further, messy inventory is inaccurate inventory, and inaccurate inventory leads to: 

  • Oversells
  • Undersells
  • Stock lying around the warehouse not listed on your online channels
  • Deadstock

A well-executed cycle and physical counting program can lead to significant reductions in operational and inventory carrying costs. Increasing inventory accuracy can reduce safety stock levels. As a result, this reduces inventory carrying costs.

 Final Thoughts

 Better inventory control is one of the easiest ways to improve revenue, but many companies focus their attention elsewhere. This is a mistake. 

Conducting complete physical inventories can be a daunting undertaking, requiring time, staffing, and closing down your warehouse. It doesn’t have to be this way, though.

Cycle counts provide an alternative method of monitoring inventory that can be completed regularly, with a small team, and without suspending operations and losing money.

Beyond that, the various ways to conduct cycle counts provide flexibility for your company. Find the one that works for you and tweak it as needed. No matter which cycle count approach you choose, you’re going to get more frequent and accurate numbers regarding inventory.

Setting up a cycle count system can be a little challenging if you’re used to full-scale physical inventories. Still, by following the guidelines and best practices we’ve outlined in this article, the transition should be simple and painless.

If you have questions about how to get the most out of cycle counting, we’re here to help.

Want to learn more about cycle counting, best inventory practices, and how inventory management software can make your warehouse operations more efficient? Then be sure to subscribe to our blog so you don’t miss our latest posts!

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