The inventory cycle count keeps accurate your inventory

The inventory cycle count keeps accurate your inventory

One of the key goals of any warehouse operation is to ensure the accuracy of the inventory information. Errors in any process related to inventory movement can alter the veracity of the inventory. That is why the inventory cycle count is a standard practice of any warehouse.

We have already discussed inventory cycle count and the benefits of doing it on our YouTube Channel. Today, besides reminding you what cycle counting is, I will focus on the reasons why you must do it, the different methodologies, the cycle count process, and best practices.

Why do inventory cycle count?

A cycle count is a perpetual inventory auditing procedure, where you follow a regularly repeated sequence of checks on a subset of inventory. There are two ways to count inventory: counting all items or making a cycle count.

Physical counts of inventory and cycle counts aim to achieve the same outcome: accurate inventory data. However, the time and effort required to conduct each method differ significantly as well as the use case of each. 

A physical count requires every single item in a company’s inventory to be counted. Although this may provide an accurate snapshot of what’s in stock and where it’s located, it’s not always a viable option since it requires halting the operation during the counting.  Besides, physical counts do not identify where problems may be occurring.    

The alternative is conducting regular cycle counts. This method is very similar to physical counts but differs in approach. Instead of counting the whole inventory, you select small portions of inventory according to a schedule. Cycle counts require less downtime and help identify minor problems and inaccuracies before they become a major issue. Because cycle counts are conducted regularly, you can spend less time doing physical counts and track inventory more accurately. This leads to greater productivity and a vastly improved stock management and re-ordering process.

What might cause inventory discrepancies?

A proper inventory cycle count process can help you pinpoint the reasons for inventory discrepancies. Five common events might alter the inventory.

1. Inaccurate order receiving

 Supplier deliveries can be a significant cause of stock issues if they are not checked and booked into the system accurately. You should check every delivery against a purchase order and the only items that should be added to stock are the ones that have been successfully delivered.

2. Human errors

It is a fact that human errors might occur during product check-in or storage or even when counting. Errors can be caused by the same SKU stored in multiple locations, similar items being counted as one product, and simply miscounting items on the shelf.

3. Pick and Pack Errors

Sending duplicate items, missing items off an order, and sending the wrong product are all simple, but avoidable causes of inaccurate inventory figures.

4. Returns and damaged items

A flawed returns process quickly leads to inaccurate inventory data. If you don’t know when and how returned items are put back in stock, they can be lost, thrown away, or added back in stock without being accounted for. Most businesses have a tolerance for defective and broken products, but not all companies have a process for logging and updating stock when breakages occur. 

5. Shrinking

It is not uncommon that an employee might slide products either from the warehouse, the trucks, or the returns. If your WMS is weak the chances of this happening are greater.

Types of Cycle Count

Depending on the structure of your operation, the number of different categories you have in inventory, and the frequency with which you want to count, you may follow different Cycle Count methods. The most common are:

• ABC inventory analysis. One of the most commonly used methods is the ABC inventory analysis approach. This strategy ranks SKUs based on the highest to lowest annual sales volume at cost. It uses the 80/20 rule, which says 80 percent of the volume in the warehouse comes from only 20 percent of the SKUs. Under this method, every item is assigned a character. For example, if letters are used, “A” items account for the top 80% of sales, “B” items account for the next 15% and “C” items represent the final 5% of sales. Generally speaking, more than half of your SKUs will be “C” items.
• Control group cycle counting. This method focuses on a small group of items that are counted a number of times across a very short period. Over time, this repetitive counting uncovers any errors in the count technique. After you correct the errors, the process can be applied across multiple product categories. This method is typically used when you want to find process errors.
• Random sample method. This approach to cycle counting entails the periodic selection of random items. This method is most commonly used in warehouses that contain a large number of similar items.

How to do Cycle Counting

An inventory cycle count has a planning phase and an execution phase.

Cycle Count planning

This activity is usually done once and might be reviewed from time to time depending on the results. It defines the basic input for counting:

• Cycle Counting Approach:
  Is it going to be ABC, a control group, or random?

• Number of SKUs:
  Determine the categories and quantity of product SKUs you want to count at a time. Base what you choose to count on your overall number of SKUs, the number of high-value products, and what is reasonable to count in intervals.

• Available Counting Resources:
  This resource is dependent on the number of available employees and how much time they can dedicate to counting stock. For example, some companies suggest that their employees use the time before shift end to count SKUs in the assigned areas. This time interval takes advantage of the natural lull in employee productivity with relatively easy work. These employees should not have a stake in the accuracy of the numbers.

• Counting Frequency:
  How often you count inventory depends on how many SKUs you want to cycle count in the year. For example, if you wish to count 1,000 SKUs per year, count ~83 per month, ~21 per week, and ~3 per day, assuming you are only counting each SKU once annually. You may want to count high-value items more often. Either way, you must determine how long counters will take to record their SKUs daily.

• Set targets for inventory accuracy and remember to track the metrics from time to time.
• Investigate the sources of errors when they occur and take appropriate action to prevent them from recurring. In the event that errors are occurring because of certain employees, provide them with training to prevent future inventory mistakes.

Cycle Count Execution

The figure below illustrates the steps associated with the execution of the counting.

Inventory cycle count best practices

• Make cycle counting a part of the normal operations of your business
• Close all transactions for inventory items selected before the cycle count.
• Dedicate specific personnel to counting teams.
• Count all products for all SKUs listed.
• Use the inventory accuracy (IRA) formula to see changes over time.

(Number of Completely Accurate Inventory Items ÷ Total Number of Inventory Items)

• Identify the fastest-moving items in the warehouse. Mark them as the fastest to the slowest to figure out how to classify them for future counts.
• Use zero counts: when a bin is emptied due to picking or any warehouse movement, count that bin in order to verify that it is actually empty.
• Initially, you may want to do counts twice to ensure that numbers are correct. A supervisor can check the counts against the inventory in the system.
• Count one category of products or one area of the store/warehouse at a time. This allows you to count efficiently even during business hours without any worry about a complete operational downtime. It also allows you to go through your entire inventory periodically.
• Change up your count schedule. Inventory shrinkage often happens because of staff theft. So, varying your cycle counting schedule every now and then will keep employees from “gaming” the system.

I hope this article has been helpful. I will continue to publish information related to Warehouse Management, distribution practices and trends, and the general economy. If you are interested in this article or want to learn more about Laceup Solutions, register to keep you updated on future articles.

You can also watch a recent video on the subject