What are cycle counts and how can you use them to manage inventory?

For any business that sells physical products, inventory is a critical asset, and how it’s managed plays a big role in business profitability. Businesses must have an inventory management system that gives them a clear picture of the number of items available at each location in real-time to fill orders efficiently and cost-effectively. Without accurate inventory records, a business is likely to experience poor order fill rates, shipping delays, bloated inventory costs, and even permanent business loss.

Businesses have traditionally conducted a physical count—a large undertaking to count the entire inventory of a warehouse location. Many companies consider it good practice to conduct a physical inventory count annually or bi-annually. A physical count is also required under certain tax and accounting regulations. But this method is time-consuming and complex, and usually requires the suspension of some operations.

To accurately track inventory levels in-between physical counts, businesses can benefit from conducting regular cycle counts—a targeted inventory counting technique to quickly measure stock levels without suspending business operations.

What is cycle counting?

Cycle counting is an inventory sampling technique that enables a company to check the accuracy of their inventory records without counting every item in the warehouse.

Under this method, a select portion of product SKUs are counted quickly without shutting down other warehouse operations. The result of the cycle count is then extrapolated to infer the total number of items within the same product category at that location.

There are three primary goals to this warehouse management technique:

1. To get a more up-to-date measure of the inventory on-hand.
2. To identify discrepancies between inventory records and cycle counts.
3. To identify the operational errors that result in such discrepancies and rectify them.

While a physical inventory count requires time and the absence of human error, the utility of a cycle count depends on using the most appropriate methodology for the operational need.

How does cycle counting work?

Cycle counts should be conducted at predetermined intervals or initiated after trigger events. There are numerous types of cycle counting methods that can be customized to fit unique business needs. Some of the most widely applied measures are:

• Control group method
• Random sample
• Opportunity cycle count
• ABC analysis

Here is a breakdown of each method and how you can apply them to your business.

Control group cycle count

The control group method focuses on auditing a small number of items repeatedly over a short period of time. This method is best used when a company is ready to launch a new cycle count program. By repeatedly counting a small group of representative items, managers can identify and correct errors in the counting technique. Once the technique is perfected and no errors are returned, the method can be applied to other product groups.

Random sample cycle count

For a warehouse with a large number of similar items but unique SKUs, the random sample method is highly effective. In this case, a random grouping of items is selected to be included in the count. A random cycle count can follow the constant population technique or the diminishing population technique. Under the constant population measure, the same number of items are counted each time. This means that, by chance, some items may be counted more often and others less often. Under the diminishing population technique, items already counted will be excluded from the next count until all items in the warehouse have been counted.

Opportunity cycle count

Under the opportunity-based method, managers initiate cycle counts after trigger events at specific supply chain management points. This is based on the idea that errors are most likely to occur during movement. Hence, cycle count trigger events can be when an item is ordered, when a shipment arrives, after a shipment is stocked, or when the stock drops below a certain threshold.

ABC analysis

The ABC analysis cycle count is one of the most flexible and popular cycle count methods. ABC stands for Always Better Control and is based on the 80/20 Pareto principle— the idea that 80% of the output comes from only 20% of the input. Accordingly, under this method, a company prioritizes its inventory in A, B, and C groups. The A group should be composed of the top 20% most high-value items, the B group 30% of middle-value items, and C is the lower 50% of the least valuable items. The A items, being of the highest importance, are counted most frequently. C items are of the least importance and are counted least frequently.

Each company may prioritize their A group differently. A retailer, for example, will put high price tag, high-volume items in their A group. On the other hand, a manufacturer may need to prioritize certain components or subassemblies that are vital for production. Designated A items may also vary by season to account for shifts in sales volume during different times of the year. In each case, the purpose is to ensure A group items never stockout and have the highest degree of inventory accuracy.

What are the benefits of cycle counting?

Inventory management is the central function that balances supply and demand and enables companies to serve their customers profitably. To that end, regular cycle counting brings a number of benefits to overall business operations.

Avoid downtime

Under a traditional physical inventory count, some or all warehouse operations need to be suspended to complete the exercise. By using cycle counts to take inventory of targeted product categories and SKUs, companies can incrementally measure the entire warehouse stock without disrupting operations.

Improve accuracy

By measuring item stock on an ongoing basis, errors can be caught and rectified on a monthly or weekly basis as opposed to a quarterly or annual basis. To further enhance accuracy, companies can supplement cycle count programs with barcode scanners and inventory management software to reduce human error.

Reduce waste

With closer tabs on what’s in-stock, inventory managers are empowered to more closely align stock levels with projected demand. This helps to avoid stockout and lost sales, as well as reduce excess carrying costs and overstock situations.

What are the drawbacks of using cycle counts?

While the benefits of cycle counting methods are compelling, a successful program requires careful consideration and an understanding of the tradeoffs.

Shrinkage

Because cycle counts only count a portion of the items at any given time, the method cannot give a full and true report of inventory shrinkage. That’s why it’s key to refine your cycle counting method for speed and accuracy and prioritize your most valuable items.

Prioritization

Prioritization is a double-edged sword. When some items are prioritized, others are naturally deprioritized. When using the ABC analysis method, for example, organizations must accept a greater tolerance of risk for group C items. Businesses that do not want to accept this risk can choose the random sample method so that all product categories receive equal attention to accuracy but at a lower intensity.

Committed processes

A cycle count program must be performed on an ongoing basis using high efficacy processes to be successful. For organizations just introducing a cycle count program, this may entail retraining employees, hiring new employees, or investing in new technology.

What are best practices for cycle counts?

Each organization needs to trial and iterate a cycle count program according to their unique operations—but it helps to start building from industry-standard best practices.

Establish a discrepancy tolerance threshold

To improve the cycle counting process and close the gap between inventory records and actual inventory, set a discrepancy tolerance threshold to trigger an investigation of inaccurate stock levels. Distributors, manufacturers, and retailers often set a tolerance discrepancy between 2% – 5% depending on the inventory value of the item.

Count one category at a time

By focusing on one category at a time, you can quickly get a clear picture of the inventory levels for the specified item and avoid disrupting inventory processes in multiple categories concurrently.

Leverage interleaving

Instead of creating separate time-consuming processes for your cycle counts, weave them into existing workflows to maximize efficiency. For example, when the last case is picked from a bin location, a cycle count can be triggered to check for any discrepancy. With the existing stock already picked, the cycle count can be completed quickly and replenishment can be activated.

Automate processes

Automate cycle count processes with inventory management software to create a centralized hub for inventory metrics and eliminate the need for manual data input. Inventory management software equipped with cycle count functionality can automatically push cycle count notification to warehouse staff, collect and upload stock data from mobile devices, identify actual stock versus record discrepancies, and generate customized inventory reports.

Cycle counting for business success

To build a successful program, each organization needs to choose a cycle count method that most closely aligns with their business needs. A new cycle counting program needs to be trialed, iterated, perfected, and applied consistently.

To maintain more accurate inventory records, cut inventory carrying costs, improve order fill rates, and win more long-term business, start building cycle counts into your inventory management practices today.