Cycle Count | 12 mins read

How to Cycle Count Inventory - Increase Accuracy & Cut Costs

how to cycle count inventory increase accuracy cut costs
Chloe Henderson

By Chloe Henderson

Businesses rely on their inventory for consistent cash flow and customer satisfaction, which is why finding the most efficient counting process is of the utmost importance. Monitoring stock volumes through cycle counting can reassure companies that their inventory is being managed, stored, and tracked properly, without shrinkage or losses.

One of the core goals of a business is to identify consumer needs in regards to products or services and meet those demands accordingly. By increasing the accuracy of inventory counts, businesses can rest assured their warehouses or other storage spaces are properly stocked and ready for order fulfillment. Furthermore, by maintaining an optimal level of inventory in storage, businesses can reduce costs associated with under and over-stocking.

However, cycle counting involves far more than just simply counting the number of products or ingredients in a storage space. In this article, we'll examine the various best practices and techniques to consider when implementing a cycle counting procedure.

Cycle Counts vs. Physical Counts

When companies decide to implement systematic inventory counts, they should choose a method that caters to their unique business. Some businesses conduct annual physical counts while others find cycle counts to be a better fit based on their size, inventory levels, and labor budget.

Cycle Counts

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Cycle counting is a process that saves time and money invested in inventory management by only counting stock of select items at a time. This type of method eliminates the need to take stock counts of the entire warehouse at once, saving businesses funds on multiple workers for an extended time. Cycle counting also increases accuracy, prevents human error, and does not require warehouses to stop their operations to perform inventory checks.

Cycle count programs are prevalent in warehouse inventory management because they are quick, easy, and reliable. By taking a sample of certain items from around the warehouse, businesses can gain an estimated figure to determine the overall quantity in storage. Because conducting a cycle count does not require shutting down the warehouse it can also be practiced daily.

The accuracy of cycle counts can be increased by utilizing inventory tracking software, which alerts users when an error has occurred so it can be rectified immediately. For example, if a warehouse manager inputs data from the day's cycle count and it contradicts the quantity in the system, the software will notify the user. The manager can then see if they miscounted, mistyped, or the stock is genuinely missing.

Physical Counts

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Physical inventory counting calls for a much more work-intensive approach as each item in the store or warehouse(s) is counted by hand. This usually requires operations to halt, and needs multiple employees and days to complete, depending on the size of the business. However, this does not mean that outside services stop as well. Therefore, any simultaneously incoming or outgoing shipments would also need to be considered when totaling stock quantity levels.

Taking physical inventory is often riddled with human errors and can lead to stock discrepancies. Over 75% of retailers reported human errors in manual processes to be their most common cause of inventory issues.

Stock discrepancies from over or understocking goods can lower business profit margins and increase expenditures. Unfortunately, this event is not uncommon, as 30% of businesses have mistakenly sold items that were sold out, leaving unsatisfied customers and unfulfilled orders.

While stock discrepancies and inaccuracies are a business' nightmare, implementing proper inventory cycle counts can prevent them.

8 Simple Steps to Cycle Counting

After deciding which cycle count method best suits their situation, a business needs to implement the control processes properly. General steps to do so include-

1. Collect all previous information and data useful in pinpointing probable inventory discrepancies.
2. Create small portions of inventory to manage distribution.
3. Create a schedule and assign inventory responsibilities to employees.
4. Select experienced staff members for the auditing process.
5. Delay incoming and outgoing shipments when performing cycle counts.
6. Keep note of processes used and analyze records to identify inventory errors and discrepancies.
7. Generate detailed reports of all stock in their respective locations for future reference and analysis.
8. Conduct routine inspections of warehouses and storing locations to ensure proper maintenance.

Tips for Proper Inventory Counting

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Proper inventory management can increase profit margins for mom-and-pop shops, large corporations, and all businesses in between just by providing accurate inventory records.

Nike had lost almost $100 million from inventory mismanagement, resulting in overstocking low selling products while under-stocking products in high demand. Putting proper inventory control measures in place can help businesses avoid such events.

Some of the best inventory counting practices include-

  • Frequently count inventory - Ideally, a business should run at least four full-cycle counts a year, one for each quarter. A warehouse can also perform daily cycle counts by sectioning stock to avoid having to inventory the entire warehouse at once.
  • Count stock when operations are stopped - Counting inventory either before or after operations take place makes cycle counts much easier as workers do not need to incorporate incoming and outgoing orders. If cycle counts must be conducted during operational hours, warehouse management must take these things into account.
  • Have trained employees/managers handle inventory - It is vital to have trained employees count inventory as they follow an SOP. Assigning an untrained employee could result in significant stock discrepancies, as they may not be aware of the procedure or unit of measurement to use.
  • Implement management software - Using warehouse or inventory management software lowers the risk for stock errors by integrating with POS systems. This technology can also produce instant variance reports to highlight discrepancies while providing real-time inventory information.
  • Count stock by categories - By separating and counting inventory by groups, the total focus can be put on selected items, and scheduled cycle counts are able to proceed quickly. Operations outside of the chosen stock can continue without delay, ensuring timely shipments and orders.
  • Base stock categories by seasons - Counting items when they are about to enter into their peak seasons gives warehouse management adequate data to target and reconcile any inventory discrepancies before the expected surge in demand.

Benefits of Cycle Counts

Other types of inventory counting, such as manual spreadsheets, have shown to be less efficient than cycle counts due to the requirement of more time, money, and workers to physically take inventory.

Gardner, a large distributor in the lawn and garden industry, uses a cycle count program and has saved approximately $7,700 just on labor wages. While a physical inventory of their 45 warehouse locations would have required more than 30 workers for nearly three days, Gardner only used one person for two hours to guide auditors through all warehouses. In the end, the audit showed only three variances totaling under two dollars.

Besides reducing labor costs, this practice can also lower the risk of under and overstocking products, reducing inventory costs by nearly 10%. Capital saved on inventory costs can be put toward other operations to foster business growth and customer satisfaction.

Additional benefits of accurate cycle counting include-

1. Minimal process disruptions - Cycle counting runs on count schedules that focus on the inventory of few items at a specific location, allowing warehouse operations to continue without delay.

2. Faster corrective measures - Since this counting procedure can be performed daily, errors in warehouse management and inventory reporting become more visible.

3. Recommended stocking, production, and distribution decisions- The data from each inventory cycle lets warehouse management know where the business can save money. Counts could show a specific product is not selling and should be reduced to save on storage fees, or that a popular product is running low. Automated stock tracking software has a feature that alerts management when these things occur.

4. Improved customer service - Inventory control is catered to the needs of the customers, after all. By accurately monitoring the demand and stock of products, shipments will remain on time, cash flow will stay consistent, and consumer satisfaction will increase.

5. Increased stock turns - The longer a product sits in inventory, the more money a business spends on its warehousing fees. Cycle counting reduces the likelihood of overstocking and thereby increases the rate of stock turns.

Common Types of Cycle Counting

There are many different commonly practiced methods of cycle counting. Each subtype is a part of perpetual inventory management that keeps track of real-time inventory. Integrating point-of-sale (POS) systems with stock control software and barcode scanners provides perpetual inventory data through every shipment and transaction.

Cycle Counting by Consumption

Counting by consumption is one of the simplest forms of cycle counting because it exclusively takes inventory of the items used or sold most frequently. This technique requires warehouses to be arranged according to item popularity, with the most popular items receiving the highest priority.

The only downside to counting by consumption is that it neglects the raw materials that may be needed to produce an item. This also disregards the expenditures for the production process such as labor and operational costs; therefore, this method should only be used by small businesses with low, comprehensive inventory.

Objective Counting by Surface Area

For this method, warehouses are divided into smaller areas so each employee can be assigned a section that they are responsible for counting. At the end of each cycle, all employees share their inventory counts, creating a complete inventory record. Splitting up inventory tasks by designated sections holds each employee accountable and makes retrieving items and solving stock discrepancies clearer.

Control Group Cycle Counting

This subtype of cycle counting requires a group of items to use as a control group of standard. This control group has a known stock quantity and is used to test counting techniques by trained warehouse employees. The group is counted and recounted in various ways within a short time period, while employees take notes and compare.

By comparing notes on their different strategies, management can decide which counting method was most efficient and accurate. Once the best procedure is identified, a standard operating procedure (SOP) is developed so that future employees can replicate the process.

Random Sample Counting

Businesses with high levels of similar products often use random sample counting due to its convenience and its limited interference on warehouse operations. There are two main approaches to this technique-

  • Constant population counting - This method is ideal for businesses that hold like items with similar stock cost as it focuses on one group of items to perform counts inventory on. However, companies that have a variety of stock with different expenses would be better off with another strategy, as this technique completely negates the stock value.
  • Diminished population counting - In this technique, a stock group is counted before being excluded until all other items in the warehouse are inventoried. All excluded groups are then stored separately for easier auditing in the future. Utilizing this strategy decreases the group stock size counted over time with every routine cycle count. With diminished population counting, there are typically four full audits performed a year, following the company's selected criteria.

ABC (Pareto) Analysis

Vilfredo Pareto established the foundation of this method using the 80/20 rule, also known as Pareto's Principle. This rule states that 20% of a business's efforts cause 80% of results. These numbers are not fixed and can be shown as 70/30 or 85/15 depending on the business. The basis of the rule is identifying items that may not be high in quantity but heavily contributes to profit.

By using this rule, ABC analysis splits the inventory into three groups - A, B, and C.

  • Group A contains items that hold 10% of stock quantity and 70% of its value
  • Group B consists of items holding 20% of inventory quantity and 20% of the overall value
  • Group C represents items that contain 70% of all stock and only 10% of the total value. Separating inventory in this fashion allows businesses to target their company expenses to the stock producing the most profit.

Automating Cycle Counting with Software

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Cycle counts require a significant amount of time, effort, and funds when handled manually but can be simplified by implementing automated inventory management software.

Recent studies show that utilizing stock software can reduce labor costs by 30%. Integrating already established cycle count systems with automated software can be accomplished through data management, mobile scanners, and robot counters.

Data management
An inventory management system (IMS) imports data from routine cycle counts to generate real-time stock quantity, which is automatically updated with entered data from all stock locations. This perpetual inventory count optimizes stock management by reporting what items are depleting or overstocked while taking into account any simultaneously incoming or outgoing orders.

Mobile scanners
The pen and paper method is quickly going obsolete as it simply can't beat the mobile scanner's cycle count time and accuracy. With a portable scanner, workers can use their credentials to sign in and quickly scan item barcodes. This keeps employees who handle inventory accountable and minimizes human error by allowing the software processes to tally the stock automatically.

Robot counters
While it sounds futuristic, robot counters are being tested by major companies such as Walmart to decrease inventory time and errors. Stock data retrieved by these mobile warehouse robots via barcode scanning would automatically sync with the business' software, limiting the number of hands the stock records go through, therefore preventing human error.

For large companies, implementing robot counters to manage cycle counts could also reduce labor costs by up to 70%.

Cycle counting integrated with inventory tracking software and POS systems have shown to increase accuracy, lower discrepancy, and save a business time and capital by decreasing the risk of human errors. Instead, these funds saved on reconciling stock shrinkage and inventory mismanagement can be redirected to business expansion efforts.