Inventory Cycle Count- Why It's Important and How to Do It

Inventory Cycle Count July 27, 2020

Jin Hyun

Writer

The business' inventory levels can reveal a lot about the company's operations - overstocking would indicate excessive spending and waste while understocking would indicate inadequate forecasting results. This is why proper inventory management is crucial to a company's health, success, and financial momentum.

However, solely relying on manually conducted stocktakes can increase the margin for error as these annual checks may not be able to detect major issues in time to reverse or prevent damage.

To combat this, businesses can implement inventory cycle count procedures to regularly track their inventory records on a smaller scale at more frequent intervals - thus reducing the risk of profit-damaging errors before it's too late.

Benefits of Regular Inventory Cycle Counting

From cost savings and increased efficiency to identifying inconsistencies before they can morph into large-scale problems - there are plenty of advantages to regular inventory cycle counting.
Some of the top benefits include-

More realistic assessment of stock levels - Relying on annual or even bi-annual stocktakes can leave a business blind in between those key dates. Carrying out regular cycle counts not only gives a company the chance to ensure stock levels match the computerized data but provides them with more accurate information on the actual value of that physical inventory currently in stock.

Reduced chances of over-ordering products - External influences can greatly affect stock levels (new trends, merchandise falling out of fashion, or general shortages in the market). Taking the time to count the stock in-between stocktakes can reduce over or under ordering of items by increasing the business' knowledge of what is most in demand during that given period.

Boosting the overall health of the inventory management system - Glaring errors in the annual stocktake reports can create all kinds of problems for business' inventory-related costs. Cycle counts provide increased accuracy for inventory management procedures, which in turn can save on operating costs, reduce wastage, and create more revenue.

Track misplaced inventory - By selecting stock items and keeping track of them throughout the financial year means it's easier to track down misplaced stock and potentially salvage it. Waiting until the end of the year to do so could drastically reduce a company's chances of retrieving their missing inventory.

Methods to Consider

Generally speaking, inventory cycle counting usually involves selecting a particular stock item and counting each of them during an inventory cycle, confirming the actual shelf number matches the documented records on file.

In practice, there are several tried and tested methods to accomplish this task-

1. The ABCs
Arguably the most popular and widely implemented method, the ABC tactic involves dividing stock into three groups A, B, or C.

Products in the first group are the most valuable inventory and while their sales volumes may not be as high as more affordable products, they hold a lot of financial sway in the company. For this reason, A products should be counted frequently as discrepancies in these stock levels can have big impacts.

Items in group B essentially lie somewhere between the first and third stock divisions with both a medium value and average sales volume. They don't need to be counted quite as frequently as inventory in section A - however, these levels should be monitored several times during a counting cycle.

Finally, products in section C typically have higher turnover rates and are more affordable. They can also be low priority items that have very minimal financial business impacts. These items can be counted bi-annually or annually.

2. Random Sample
This approach is just as the name implies a system that randomly selects a portion of the company's product on any given day to count and crosscheck against the logged inventory number.

Once each section of the stock has been randomly selected and counted, the process starts from the beginning again. The random sample can be implemented daily or weekly depending on the level of stock and the size of the company and is considered an effective and less strenuous method of product level tracking that doesn't put unreasonable strain on businesses.

3. Control Group
Less widely used and slightly different compared to the first two options is the control group strategy for regular cycle counting. Similar to the random sample, this method involves pulling out a small product group for counting.

Unlike option two, however, this strategy involves counting the same group of items repetitively for the purpose of testing the cycle counting system and how well it functions. This gives companies an opportunity to finely tune the process as well as unearth any problems before adopting either the random sample or the ABC method.

Top Tips to Increase Cycle Counting Success

The implementation of these methods can significantly reduce error margins while saving big dollars on inventory discrepancies. No matter the chosen strategy, there are a few key tips to keep in mind-

1. Cycle counts shouldn't be a one-person show
When it comes to keeping track of a company's moneymaking assets (the stock) don't leave it up to just one team member. Dividing up each product cycle count and relegating it to a different employee can reduce a margin of error. Better yet, task two team members with one count to reduce inconsistencies.

2. Keep track of all stock, not just the high-value items
When employing the ABC cycle count method, it's easy to prioritize items belonging to section A. While these high-ticket items typically hold the biggest financial sway for a company, regular cycle counting is about more than just the obvious bottom dollar. Ensuring items from groups B and C are tracked likewise on a frequent basis allows a company to pounce on any discrepancies as they crop up.

3. Stop all activity on the selected items being counted
The cycle count of a select product can be jeopardized if the inventory in question is being actively sold during the process. For this reason, it's best to conduct all counts either before or after business hours; this way, business operations aren't impacted and the product numbers are stable.