When your inventory cycle counts and inventory physical counts aren’t accurate, it’s a problem. Too much inventory ties up excess capital that could be used to fund other areas of the business or pay down debt. Too little inventory can mean more out-of-stocks and hurt sales.
Accurate inventory is key to forecasting, warehouse management, logistics, and returns management. It affects nearly every aspect of your operation from warehouse operations and costs to your ability to fulfill orders correctly and on time. Mistakes can have a ripple effect that might last for years.
What Is an Inventory Cycle Count and a Physical Inventory Count?
Depending on your inventory count procedures, you may conduct physical inventory counts, periodic cycle counts, or both.
Cycle counting is one of the most popular inventory count procedures. Instead of counting the entire inventory at one time, businesses count a number of items in the warehouse. Cycling counting is a statistical sampling technique. The counting of certain items is used as a reference for the rest of the warehouse.
It’s similar to the way polling companies work. They take a representative sample of people’s opinions about topics as a way to measure attitudes in a broader context. Cycling counts take a snapshot of specified locations. Using this information, businesses can determine whether inventory is accurate in the surveyed locations and use that as a guide for other areas.
If your inventory is off in the cycle counts, you will likely find the same inaccuracies in other areas. Likewise, if the cycle counts show your inventory is accurate, you are more likely to have accurate counts throughout the warehouse.
Cycle counts can be done as part of the daily workflow without shutting down the entire warehouse. Over time, you can cycle through each inventory area. To maximize the value of the audit and minimize the pain of the physical count, we recommend performing at least four full cycle counts per year.
Physical Inventory Counts
Physical inventory counts are done by counting each item in the entire inventory. This count is used to match up with inventory records to eliminate any inaccuracies. It is a time consuming and labor-intensive process.
Taking a physical count of inventory can also be difficult to do accurately without shutting down your entire operation. As counts are performed, new inventory may arrive or some of the current stock may be shipped out.
Why Are Inventory Counts Important?
Inventory count procedures are to account for discrepancies between the quantities you should have and the quantities that are physically present in your warehouse. This is especially important for eCommerce sellers.
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 very easy to get off track with inventory counts when you are selling on multiple platforms which have individual reporting system.
Most Businesses Have Inventory Count Problems
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.
Inaccurate inventory leads to oversells and out of stocks. More than 30% of businesses have experienced situations where they sell items they showed as in-stock but were not able to be located within the inventory. These can cause logistical nightmares for sellers and leave customers frustrated.
Accurate Inventory Improves Margins
Just managing your inventory accurately will improve your profitability. Reducing the number of stock-outs and overstocks can lower overall inventory costs by 10%.
How to Do Inventory Counts
Most retail operations are required by either their accounting rules or tax rules to conduct inventory counts. This may mean taking a physical count of inventory to provide accurate records for taxing authorities or to make sure accounting business books reflect current inventory value.
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.
Here are some of the best practices for inventory count procedures to conduct physical inventory counts and inventory cycle counts.
Best Practices for Inventory Cycle Counting
Following these best practices for Inventory Cycle Counting can make the process more effective:
- Your facility should schedule cycle counting to be a part of the normal operations of the facility.
- Schedule cycle counting frequently. The higher the frequency of cycle counting, the higher will be the accuracy of inventory and lower will be the inventory write-offs. Many warehouse operations do cycle counts daily counting in different areas of the warehouse each day.
- Rather than doing random counts, the most effective way to do cycle counts is classifying items into A, B, and C groups. It makes sense to spend the most time doing cycle counts with the inventory that represents the highest value.
- Group A compromises inventory that makes up 70-80% of your overall inventory value
- Group B accounts for the next 10-15% of inventory value
- Group C represents the bottom 10-5% of inventory value
- If you have to make quick adjustments to your inventory accuracy, focus your attention on the A’s. Typically, the A’s will account for approximately 20-25% of your total SKUs but provide the highest return. Also, if you can identify deficiencies in these groups, it’s likely you can identify the root cause of discrepancies that can be applied to all groups.
- The assignment of dedicated cycle count teams allows the company to train several individuals to perform these tasks. The size of the team will be dependent on the size and complexity of a company’s inventory. A large organization could have a cycle count team of several full-time employees. However, a smaller organization could have as few as two employees that perform cycle counts for a small part of their workday.
- Cycle counts should move methodically throughout the warehouse so that all products get counted at least once every quarter.
- Two separate individuals should count the products when possible. A blind comparison of their counts should be made before adjustments are recorded. Any discrepancies should be reviewed.
- Before cycle counting is performed, all open transactions such as receiving, shipping, WIP, should be closed out for the items that are selected for cycle counting.
- You can prevent errors by investigating sources of error. It is crucial to identify and fix any processes or training issues that cause inventory errors.
- You should track inventory accuracy metrics over time. Also, you can set targets for inventory accuracy. Knowing your numbers and tracking improvements (or declines) can help identify where systems are working (or failing).
- Cycle counting should be done at the start of the day before the operations of the facility have begun in full-swing or at the end of the day after operations have closed out.
- The cycle counting process should be well-defined and documented.
- Separate the process of cycle counting and inventory recording to assure accuracy.
Let us do the cycle counting for you.
SkuVault’s automated inventory management features are designed to increase cycle count accuracy.
Best Practices for Physical Inventory Counting
Best practices in Physical Counting or Physical Inventory can improve the effectiveness of physical counting:
- You should carry out a mock count during the planning stage of the physical counting to accurately estimate the time and resources required.
- Inform suppliers, customers and production should about the physical counting schedule so that any adjustments to supply can be made in advance.
- Conduct physical counting of slow-moving SKUs a few days before the actual counting takes place to minimize the amount of time the facility has to be shut down for the physical inventory.
- Before undertaking the physical counting, dispose of all defective and obsolete inventories so that the time spent on this process is reduced.
- Do not display the economic values of SKU quantities during counting. Since you are counting all inventory, it is irrelevant to the physical count.
- Designated counting areas are the basis for count team assignments and for monitoring the progress of the inventory.
- Make sure you have the proper equipment, as well as any specialized devices, available for your counting teams.
- Make sure to train your staff in physical counting activities to ensure the smooth progress of the counting.
- Ideally, operations should cease completely for the count. At least, the movement of the materials should be minimized and well documented to ensure the items are not double-counted or conversely, omitted altogether.
- If you are unable to stop operations for a physical count, make sure you have a well-defined system for how you will handle changes to inventory after the physical count has been made.
- Systems staff should be available for support if system issues are encountered during physical counting activities.
- Separate the process of physical inventory counting and inventory recording to assure accuracy.
Real World Examples of The Importance of Inventory Counts
There is a record number of parts and products sitting in warehouses right now. The Federal Reserve Bank tracks private inventories and estimates there are more than $674 billion of seasonally-adjusted goods sitting in warehouses and stores. When inventory isn’t being sold, it can lead to inventory pileup, tying up capital that could be used for other things.
When inventory counts aren’t accurate, all sorts of things can go wrong. Walmart acknowledges it lost $3 billion in sales for one year. At the same time, its inventory grew at a faster rate than sales. Poor tracking led to overstocks and out-of-stocks.
Nike lost more nearly $100 million because of inventory mismanagement. Best Buy was unable to deliver orders from November and December before Christmas one year when their inventory in stock got out of whack with its online marketplace counts. Ralph Lauren saw its profits drop 50% and stock value decrease by $16 billion because of inventory management failures.
Inaccurate inventory is more than just frustrating. It’s expensive.
Common Questions about Inventory Counts
Here are some of the most common questions that organizations have about inventory counts:
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, although many warehouse operations do daily cycle counts for strategic sections to avoid having to count 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
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 man hours and more sales. Further, messy inventory is inaccurate inventory, and inaccurate inventory leads to:
- Stock lying around the warehouse not listed on your online channels
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.
Following best practices for inventory count procedures can improve your accuracy. Cycle counts and physical inventory counts can help keep your inventory on hand in sync with what’s in your store whether it’s online on your website, online at multiple marketplaces, or in your physical store.