What is Cycle Counting? 3 Methods and Best Practices

What Is Cycle Counting December 23, 2020

Chloe Henderson

Writer

Businesses that carry large volumes of inventory have the added responsibility of regularly ordering, storing, and counting products. Without an efficient management procedure, companies must interrupt daily operations in order to manually calculate stock, dedicating additional time, labor, and resources.

However, cycle counting enables organizations to measure stock levels on a smaller scale over a more extended period, significantly reducing the need for manual labor.

What is Cycle Counting?

Cycle counting is a tallying method that enables companies to quantify stock without having to count the entire inventory in one timeframe. Instead, businesses can intermittently sample various units of stock to estimate total inventory levels for the entire warehouse. This technique saves time, labor costs, and eliminates the need to stop operations to manually count all units.

After conducting a cycle count, inventory managers make two primary inferences-

The accuracy of the cycle count directly impacts the estimates of other stock quantities.

An error found in a cycle count means there is an error in proceeding stock calculations.

Based on these inferences, organizations must be vigilant when performing cycle counts to prevent inventory discrepancies.

There are several types of cycle counting approaches that businesses can use depending on their inventory.

1. Control Group Cycle Counting

Control group cycle counts use one set of inventories to test and ensure their technique generates the most accurate results. This method typically uses a small group of products that are counted and recounted by different employees in a short timeframe.

The repetition of this process makes errors more apparent, enabling managers to correct and improve their techniques to yield consistent results. Control group cycle counting is repeated until the company is satisfied with the output.

2. Random Cycle Counting

Random cycle counting chooses a random group of items to count regularly, such as daily or weekly. By randomizing counts on a consistent schedule, businesses can count their whole stock within a reasonable time. This is often used by warehouses that have an extensive range of similar products or variances.

There are two subcategories of random cycle counting-

Constant Population Counting uses the same group of items for each cycle. This means that some products are counted frequently, while others may not be counted at all.

Diminished Population Counting excludes a group of products once they have been counted. This ensures all inventory is tallied before managers begin recounts.

3. ABC Cycle Counting

The ABC cycle count method uses the Pareto principle to group inventory into three categories - A, B, and C. The Pareto rule states that approximately 80% of the effects are stemmed from 20% of the causes. This means that nearly 20% of inventory translates to 80% of the sales, known as group A.

Therefore, group B would consist of products where 30% of the inventory accounts for 15% of the sales. Lastly, group C would hold 50% of the items in the warehouse that only generate 5% of the sales.

Once the stock is assigned to the three categories, group A is counted the most frequently as they have the highest sales value. Therefore, group B would be counted less than group A but more than group C.

Cycle Counting Best Practices

While cycle counting sounds convenient initially, there are some things that businesses must keep in mind to preserve data accuracy-

Keep Inventory Updated

Whenever receiving new orders, businesses must enter the quantities into their inventory management systems to ensure they are included in the next cycle count. By implementing inventory software, companies can automate data entries with barcodes and scanners to improve accuracy.

Perform an Annual Inventory Count

Contrary to popular belief, cycle counts do not eliminate the need for taking physical inventory. In order to begin cycle counting, companies must first perform a careful manual count to create a starting point in the inventory system.

Although some businesses seek to eventually rely solely on cycle counts, they must maintain inventory accuracy above 95%. Otherwise, they may run into frequent stock discrepancies, which can require significant capital to resolve.

Schedule Regular Cycle Counts

Cycle counts are not a one-time task. They must be performed routinely to generate accurate stock levels. Depending on the type of inventory, businesses can conduct daily, weekly, or even quarterly counts for different products. However, the average cycle count runs on a weekly schedule.

Management needs to establish a set day every week that aligns with employees' schedules to ensure cycle counts can proceed without delay. Companies should publish the counting schedule in the employee manual and standard operating procedures (SOP) to prevent confusion.

Prioritize Cycle Counts

There may be some circumstances where businesses cannot perform their cycle counts as planned. Instead of erasing it off the calendar, companies should prioritize stock that must be tallied.

For example, organizations that use the ABC method can postpone counting groups B and C to focus on the stock that generates the most sales.

Alternate Counting Staff

By alternating the inventory counting staff, businesses can reduce the risk of internal theft and inaccurate data from employees cutting corners.

However, the rotated staff should be adequately trained on counting stock and entering data into the inventory system. Otherwise, introducing new employees to cycle counting procedures can lead to increased errors and discrepancies.