Auditing inventory is an undervalued aspect of the inventory management process and one of the most crucial. For warehouses to run efficiently, companies must regularly ensure that physical stock matches inventory records, which is easier said than done — especially if your inventory needs fluctuate due to demand shifts and business growth.
Inventory cycle counting is an inventory tracking method that companies use to verify that physical stock matches inventory records. Unlike periodic and perpetual inventory methods, cycle counting refers to a cyclical process that companies employ to avoid traditional audits and ensure inventory always gets accounted for.
Companies tend to prefer inventory cycle counting over traditional stocktaking processes. Full physical inventory counts, while necessary, are often time-consuming, profit-shrinking, and headache-inducing. Yet, most small businesses only use full physical inventory audits to take stock.
Below, we’ll show you what cycle counting is, how it can benefit your business, and reveal cycle counting best practices so you can manage your inventory efficiently.
Key Takeaways:
Cycle counting is an alternative stocktaking process that involves regularly counting a small portion of your inventory over time instead of counting your entire inventory in one sitting.
While most businesses have to shut down or work overtime to perform full physical inventory audits, cycle counting allows businesses to update their inventory records without shutting down during business hours or after closing time, allowing you to keep processes in flow and maintain inventory control.
The cycle counting process itself is relatively simple:
Later, we’ll explore the specifics of performing your cycle count.
Depending on your business, warehouse management system, and products you sell, certain inventory cycle count methods may work better than others. Here are a few different inventory cycle count methods and examples of each.
Control group cycle counting is especially helpful for businesses using cycle counting for the first time because it allows you to test the process and uncover errors in your method before implementing it across your entire inventory.
With this method, you will choose a small group of items that will get counted many times over a short period. Once you can perform the cycle count without any errors and feel confident in your process, you can apply it to the rest of your inventory.
Example: A shoe retailer tests control group testing on shoe soles, an area the company is confident they have an accurate inventory. Once the process works well for soles, they apply control group cycle counting to the entire warehouse.
ABC analysis is a cycle counting method that involves sorting inventory into three categories based on how well they sell and how much they cost to hold. The categories include:
The item’s category dictates how frequently it gets counted during the process.
Example: A hoodie company is categorizing their hoodies for their fall demand season. Category A hoodies are the most popular and will be in high demand when fall begins. Category B hoodies are less popular but still integral to the company. Category C hoodies are low-value, and effort doesn’t need to be put into selling them.
In warehouses with many similar items, you can randomly select items to be counted. Random sample cycle counting consists of two different approaches.
The method you select will largely depend on the frequency you count your items. If you do cycle counts often, constant population counting likely makes the most sense since duplications won’t matter much in the long run.
Example: A makeup company counts stock weekly using the constant population counting method. Since the staff counts certain items every seven days, it doesn’t make a difference that they’re returning items to the general population.
This is one of the simplest forms of cycle count as it relies on counting frequently used items. In this method:
Cycle counting by usage overlooks the impact of any miscalculation on the production process or financial losses. As a result, this method only makes sense for low-value, comprehensive inventory-carrying companies.
Example: A chip company sells its barbeque flavor well but struggles to see its salt and vinegar flavor. As a result, staff counts the barbeque flavor daily but only counts the salt and vinegar flavor monthly.
Hybrid methods are formed by combining ABC analysis with other methods. This includes focusing on vital parts, production line vulnerability, reorder costs, economic order quantity (EOQ), sales, hazards, and other relevant factors.
This approach varies from company to company and is usually a tailored procedure. In most cases, companies will implement the hybrid method because they have a specific product that doesn’t fit nicely into one of the categories within the ABC structure.
Example: The same hoodie company from above introduces a new sustainably-made hoodie that doesn’t sell as well as category A hoodies but is costlier to produce and hold. As a result, you use cycle counting by usage for the new model but continue using ABC analysis for all the other hoodies.
6 Inventory cycle count best practices
While the method you select will guide the inventory cycle count process, it’s important to follow a few universal best practices when conducting your count. Some of these include:
Before jumping into a cycle counting routine, you should detail:
You could make cycle counting a part of your daily routine, or choose one day every week to do it. Whatever your plan is, write it down and stick to it.
You have to be on the frontlines implementing cycle counting, but you don’t have to do the cycle counting yourself.
Instead, you should assemble a team to perform the actual counting. Your team can consist of one other person or a group of employees.
Regardless, make sure they understand their job responsibilities, the layout of your warehouse, and how to use the tools for counting your inventory.
When you have staff physically counting inventory, it leaves the door open for human error. Double-checking the count is a good way to get the most accurate number. While it may feel wasteful to dedicate this much time to a QA process, inaccurate counts can lead to more significant business interruptions if not identified quickly.
You can check in a couple of different ways. For example, if the morning staff does the initial count, you can also ask the afternoon staff to do a count to verify the numbers. You can also have supervisors do a second count after the staff completes theirs.
Keeping your inventory records current is equally as important as keeping a pulse on your physical inventory.
Before you begin your cycle count, verify your inventory records are up-to-date, so you cross-check physical inventory against the most current inventory information.
If you notice that physical inventory does not match your inventory records, dig into the issue and find where the problem lies. Investigating errors in your cycle count may reveal other issues related to your inventory management process.
Some common errors include:
Inventory management software automates data entry and updates automatically, making you less likely to experience errors during cycle counting.
Automated inventory management gives you the capability to increase the accuracy of your counts by:
Leveraging automation in your cycle counts can speed up the process down the road, as errors are far less likely to occur with comprehensive software keeping tracking of your inventory data.
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Having accurate inventory information is necessary for the health and growth of a small business. However, doing regular cycle counts has some lesser-known benefits. Some of these include:
The main difference between inventory cycle counts and physical counts is the count frequency and the items getting counted.
Physical counts:
Inventory cycle counts:
Still have questions before launching into your cycle count? Here are some of the most common questions (and answers) about implementing cycle count in inventory management.
The 80-20 rule is a principle that claims 20% of warehouse parts are responsible for 80% of sales.
In cycle counting, the 80-20 rule justifies that certain items should get counted more regularly, as some are far more significant to a business’s bottom line than others.
You should conduct a full cycle count at least once a quarter, but you may want to perform counts of high-priority items as often as every day.
More regular counts can also help you avoid doing time-consuming full counts at the end of each month or quarter.
Say, for example, you have 1,000 stock-keeping units (SKUs) that you need to count monthly.
An example of an inventory cycle count could be the process of counting the items in 3 to 4 of each SKU daily.
A good cycle count accuracy is between 95%-98%. Anything less than 95% would likely require you to do a full physical inventory count.
For companies carrying high volumes of inventory, it’s normal to come in slightly south of 100%, such as 97% or 98%. Miniscule differences like this don’t require you to conduct a full physical inventory count.
Inventory cycle counts are a vital part of achieving inventory efficiency and Connected Inventory Performance, but they’re only one piece of the puzzle.
With comprehensive inventory management software, you can ensure more accurate inventory counts and make informed decisions through your cycle counts. Coupled with a robust tool, your inventory cycle counts can go from monotonous tasks to strategies that bolster business growth.
Product companies have to innovate quickly in the coronavirus era. With increases in online shopping and demand for click-and-collect, retailers and wholesalers are doing everything from shifting their sales-channel focus to fundamentally changing how they do business.
Lost, obsolete or overstocked inventory drives up costs and destroys margins. Without inventory visibility, you won’t know your business is suffering until it’s too late.
