Cycle Counting vs. Physical Inventory to improve Inventory % Accuracy

Full physical inventory counts usually require a complete shutdown of the warehouse or distribution center operations while the count is completed. This usually costs the company a lot of money in lost productivity and hours paid to the counting teams, who have typically been pulled away from other tasks. If this is the only method for recording inventory, facilities tend to have counts less frequently to save money and time. However, an infrequent count can cause serious levels of inaccuracy.?

Cycle counts work by sampling a group of items and taking inventory of only that section. Like a research poll on public opinion, the accuracy of the sample section is then used to estimate the accuracy of all other areas in the warehouse. This helps ensure better statistical accuracy and eliminates systematic problems with keeping track of stock.?

As with any statistical procedure, there is also a margin of error. To mitigate this error, it is important that a cycle count becomes part of a facility’s established inventory management process. It is also important to choose a preferred method and remain consistent in practice.?

Methods for Cycle Counting

There are 4 common methods to conducting cycle counts in your warehouse. Research suggests both benefits and risks associated with each one, so it’s important to decide what works best for your organization's goals. In some cases, combining aspects of each method can help lower the potential for error and create a more profitable outcome.?

ABC Analysis

The most used method is ABC analysis. It is also the most complex method in many cases. ABC analysis is based on the Pareto principle which suggests that 80% of all outcomes directly stem from 20% of causes. Applied to inventory management, ABC analysis assigns a particular value to each product in counting inventory. This means that items with higher a value get counted more frequently than items with a lower value.?

In practice, it looks something like this:?

Class A?- Highest Dollar Value or Highest Demand, Lowest Quantity / Space Requirements (About 10%) & counted every month.

Class B?- Average-to-High Dollar Value or Demand, Medium/Small Space Requirements (About 20%) & Counted Every Quarter

Class C -?Lowest Dollar Amount or Demand, Highest Quantity / Space Requirements (About 70%) & Counted 1-2 times per year

This method can be beneficial because it focuses counting efforts on only the items or areas that have the most impact on the success of the business. However, this method does pose risk for over-counting certain prioritized areas which can lead to inaccuracy of the sample.?

Opportunity-Based?- Oriented around transactions. Counts are conducted when an item undergoes change or has movement.

Process-Based?- Works by allowing managers to?choose?which items or areas to count during each period. This may seem like an ineffective method because it would allow employees to simply choose the easiest shelves to count for the day. However, it tends to work well when in use. While there is the risk of bias, research shows that this bias is toward items with the highest likelihood for discrepancies.?

Location-Based - It does not account for the value of the items. However, the sample is usually decided by an inventory management software. Items are counted based only on their physical location within the warehouse with the repeated goal of counting all shelves over a period. This ensures a truly random sample that can prove to be more accurate. Even in other methods, taking the location of the product into account can reduce the chance for error.

Best Practices for Cycle Counts and Inventory Management

No matter what method your company chooses for cycle counting, or if you choose a hybrid of multiple methods, certain practices are essential in all cases. In theory, these methods seem simple, but putting a cycle count into motion can be complicated. To make sure your process is the most efficient and profitable for your organization, it’s best to integrate your cycle count process into your regular inventory management procedures.?

Keep Regular Physical Counts - Keep in mind that implementing a cycle count process does not eliminate the need for full inventory counts. It simply reduces the need to have them as frequently. In many cases, it’s best to have a full inventory count at least once every year.?

How Often Should You Run a Cycle Count??- Believe that the required frequency of your cycle count depends on the complexity of your warehouse operation. In many cases, it’s best to do a weekly cycle count, however in cases where this is not possible, a monthly or quarterly frequency is sufficient.

Once you create a schedule, it’s also important to stick to it. Deviating from a scheduled cycle count can affect its accuracy in determining the state of inventory overall. It’s best to prioritize the cycle count even if something on the calendar threatens to interfere. If time or resources simply do not allow for the full scope of the scheduled count, the ABC analysis method can help prioritize certain areas and allow teams to focus efforts on a smaller portion.

Make A Solid Process

Especially when onboarding new employees, it’s best to have your cycle count process well documented and integrated into your warehouse management software platform. That said, it is also best to only use well-trained employees to perform your cycle counts. Those who are familiar with your process will not make as many mistakes when carrying it out. If you have the resources for it, alternating between 2 or more trained counting teams on a regular basis can reduce the risk of error as well.?

Other Tips

Before running a cycle count, make sure to close or finish all open transactions for the items being counted. This will prevent inaccuracy and the need to interfere with production.?

How to Automate the Process

The goal of a cycle count is to reduce the time it takes to run full inventory. Computer technology makes the process even more efficient by automating certain aspects of the workflow. While some technology may be out of reach due to cost, certain common solutions are already available for businesses of any size.?

Using an ERP

To avoid the need for paper tallies and the additional cost of filing physical counts,?Enterprise Resource Planning software (ERP)?and Inventory Management Systems (IMS) can keep track of this on a computer network.?

By combining inventory information, warehouse processes, business goals, and other strategies, these programs help teams to understand and make use of important company resources instantly. They also allow for employees and other stakeholders to access this from many devices, often in real-time.?

Product Scanners

While product scanners have been used by warehouses for quite a while now, they are still essential to everyday operations. Typically, each item will be tagged with a barcode that makes counting an item equivalent to a single scan. Often the information is automatically loaded into the inventory management system or ERP, and that data can be analyzed for cycle counts automatically.?Although they are often more expensive RFID scanners can be more efficient.

Implementing a New Cycle Count Procedure - If you have not already been using a cycle count process in your regular warehouse operations, it can be difficult to develop one at first. However, patience and diligence will reward your facility with better accuracy over time.?