Inventory Cycle Count 101: Best Practices for Your Business
Do you want to adapt your business operations to rise above the changes in the supply chain and consumer demand? Looking into inventory cycle count might be your best decision yet.
An inventory cycle count is a great way to manage inventory while confirming system accuracy and tackling issues immediately. Improved inventory visibility allows you to deliver a better customer experience and helps you make more well-informed decisions.
This guide covers the basics of an inventory cycle count, teaches you how to implement it for your business, and outlines best practices.
What Is an Inventory Cycle Count?
An inventory cycle count is a method of taking stock of items in a warehouse. It involves selecting a small batch of items periodically and counting them. This method significantly reduces the downtime from counting the entire physical inventory at once.
Unlike a traditional physical inventory count, an inventory cycle count only takes stock of one subset of categories or storage areas at once. This means you don’t need to shut down any of your operations.
Different Methods to Conduct Inventory Cycle Counts
There are different methods to run an inventory cycle count depending on business goals, operations, and the items being counted.
1. ABC Cycle Counting
Based on the Pareto Principle, ABC cycle counting involves taking stock of higher-value items more often than lower-value items. This is the best option if 20% of the inventory makes up for 80% of profits.
The items with the highest value are the A group, those with medium value are the B group, and the lowest value comprises the C group. By applying the Pareto Principle, group A items are counted monthly while those in group B are counted less frequently, perhaps once every quarter. Those in group C are typically counted only once or twice a year.
2. Random Cycle Counting
Randomly selecting several items for counting is practiced using two techniques. The first is constant population counting, which has the risk of duplications. The second technique, diminished population counting, excludes previously counted items until everything in the warehouse is counted.
Random sample counting is usually done every workday to ensure all items will be accounted for within a set period.
3. Control Group Cycle Counting
This method of inventory cycle counting involves taking stock of a control group of items multiple times over a short period.
This helps businesses spot and fix errors in their procedures before counting the entire inventory. It is the preferred method for companies that are new to cycle counting.
4. Opportunity-Based Cycle Counting
This method involves taking stock of products at key events or stages in your supply chain. These can be:
- At the reorder point
- When items are processed into the warehouse
- When inventory levels hit a certain mark
This opportunity-based method is commonly used by businesses trying to identify problem areas in their operations. Multiple counts are done at such points to determine the problematic stages and solve emerging issues. It can also help businesses analyze which processes work well and what can be improved.
5. Geographic Cycle Counting
This type of counting refers to choosing a specific geographic area and taking stock of the items there. It is ideal for dealing with issues of theft or inventory obsolescence.
6. Usage-Based Cycle Counting
This involves taking stock of items each time they exchange hands. In this method, the items ordered more, move faster through the warehouse, and are sold more are counted most often. Whereas slow-moving products are counted less often.
7. Hybrid Cycle Counting
Hybrid cycle counting combines different techniques to form a completely unique method. These are used by businesses with large inventories and extensive operations.
How To Do an Inventory Cycle Count?
The basic process of an inventory cycle count can be summed up in the following steps:
- Complete data entry on all inventory transactions
- Set target accuracy levels
- Print a cycle counting report for assigned teams
- Compare the report against the actual inventory
- Investigate and resolve errors
- Implement actions to prevent such errors in the future
- Update all records
- Calculate the accuracy percentage and compare it with the target percentage
It is vital to prepare a schedule before you conduct a cycle count. It will help you plan your time and resources to ensure all items are calculated within a set period.
Preparing a Cycle Count Schedule
A cycle count schedule can be prepared in two easy steps.
Calculate Cycle Count Frequency
Figure out the total number of stock-keeping units (SKUs) or items you need to count to cover the whole inventory.
For example, you have 1000 items, and you want to cycle count the entire inventory four times in one year. Your operation runs 300 days a year. So, multiply the number of items (1000) by the frequency of counting (4) and then divide it by the total days of operation (300).
1000 * 4 / 300 = 13
This means you need to cycle count 13 items every day.
Calculate Available Counting Resources
Your counting resources include the number of employees doing the inventory cycle count and the time they can dedicate to the task each day. Depending on your inventory size and the counts required, you can assign as many people as you need.
Best Practices for Cycle Counting
An inventory cycle count is great for businesses of any size. But simply deploying the methods isn’t enough; you should also note the best practices to ensure successful implementation:
1. Get Up-To-Date Inventory Statistics
To begin with, you want to complete a traditional audit to gather statistical data on your inventory. This will help you plan your cycle counts, choose the best method, and compare the accuracy of data.
2. Plan Your Cycle Counts
Plan what you’re counting and when you’re doing it. This will ensure the process doesn’t disturb your operations, and all products will be counted at least once each quarter.
3. Make Counts a Part of Routine Operations
Cycle counts are meant to be a regular routine to minimize inventory write-offs. You can easily identify errors early on and mitigate them on time.
4. Appoint Dedicated Inventory Counting Teams
A dedicated team should be assigned to do the counting, especially if you have an extensive inventory.
For smaller enterprises, you can assign a few employees to undertake the task during office hours.
5. Crosscheck With Double Counts
Counting items twice or checking numbers against the system can ensure data accuracy. Assign different personnel to do these counts for counterchecking and to minimize errors.
6. Alternate Between Counting Staff
Minimize the risk of unethical practices that may cause shrinkage or other such errors by randomly alternating between staff members.
7. Categorize Products by Priority
It’s best to focus your resources on counting items with the highest return on investment (ROI). For this, you must categorize products by their value, how fast or slow they move through the warehouse, and their location in your storage facility.
8. Implement Digital Inventory Management Solutions
Implementing digital inventory management solutions like Nest Egg can help speed up the overall process and reduce human error during counting.
9. Close Operations Processes for Products being Counted
To ensure smooth counting, shut down all activities for the items being counted. This includes WIP transactions, open shipping, receiving processes, etc. This ensures a quicker and more accurate process.
10. Schedule Counts at the Beginning/End of Warehouse Operations
An inventory cycle count should be scheduled before operations at your facility begin for the day or after they close to ensure minimum disturbance.
11. Track Counts Over a Period
Keep track of inventory key performance indicators (KPI) to evaluate the system in the long run. One of the best ways to do this is by using the inventory record accuracy formula (IRA) to calculate the accuracy percentage.
Note: You can use the number of units in the IRA formula or the valuation of your units.
IRA = [Items counted / Items on record] * 100
Items counted refer to the units you have in stock for a particular SKU, which you will determine during the cycle counts. Items on record refer to the stock count of the same SKU you’ve already recorded in the system.
For example, you have recorded 1000 T-shirts in your stock count, and your counting shows you 900 T-shirts.
IRA = 900 / 1000 * 100
IRA = 90%
The ideal IRA is 100%, though, of course, this isn’t always possible.
12. Investigate and Resolve Errors
Make sure to investigate the cause of an error as soon as it crops up in your data. Also, resolve it right away once the cause is identified.
13. Document Everything
Documenting every part of your counting process—from the procedures used to changes and results—is essential. It will help you reference past data when making decisions for future inventory management.
Make sure your records are easy to understand and contain all critical details.
Upgrade Your Inventory Management With Nest Egg
Whether you’re struggling to manage a large inventory or a small one, a sophisticated inventory management solution like Nest Egg can help tremendously. From quickly scanning dozens of SKUs to simplifying organization and tracking, our solutions support you in areas where your business needs it the most.
Contact us to learn about all our features and discuss all of your queries.
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