Once upon a time, it was common for many types of businesses, from manufacturers to distributors to retailers, to conduct complete physical inventory counting every year. For many businesses, this meant shutting down their operations for a few arduous days of counting everything in the warehouse.
This approach to inventory management has some problems:
- With operations shut down, there is no productivity and no revenue during the counting exercise.
- When you count the entire inventory only once per year, you will have discrepancies in your counts, even if you have solid inventory control practices. These discrepancies must be reconciled, which takes even more time and effort.
Some businesses continue to use this time-consuming, labor-intensive inventory counting practice, but there’s a better way: cycle count.
Cycle Count in Inventory Management
In inventory management, cycle count is an approach to inventory counting based on one of several sampling techniques. Instead of performing a complete physical count once or twice a year, a few items are counted on a much more frequent basis; some businesses perform a count each day. Many warehouse cycle count techniques are in use across different industries, the most common examples are described below.
Control Group Counting
The control group count process is less of a cycle counting process in itself, and more of an evaluation process for companies planning a transition to cycle counting. This method uses control groups—small subsets of your SKUs—on which you can try different types of cycle counting to determine which one works best for your business. This evaluation continues until the business settles on the process and has enough experience with it to ensure good inventory accuracy.
Random Sample Counting
For a business whose inventory includes a large number of SKUs that are similar and have roughly the same value of sales volume, random sample counting can be a solid, robust cycle count choice. It works like this: Each day, a short list of SKUs to be counted is chosen at random (usually by a software system). Over the course of a year, every SKU should be counted at least once. This technique is known as “constant population counting.”
However, randomness doesn’t always work out the way you expect, and under truly random sampling, some items might be counted several times, while others aren’t counted at all. For that reason, some businesses choose a modified version of random sample counting called “diminished population counting,” in which items that are counted are removed from the “pool” of counting-eligible SKUs until all the other SKUs have been counted.
ABC counting is a more complex inventory management cycle count technique. The technique is loosely based on the Pareto principle, or the 80-20 rule, which states that 80% of the effects are the result of 20% of the causes. For warehouse management, this translates to 20% of the SKUs representing 80% of sales (or value).
In the ABC approach, all inventory items are classified as “A” items, “B” items, or “C” items. The metric used to classify the items varies from one company to another; most use either value (often when there are raw materials or semi-finished goods in the inventory) or unit sales volume (when the inventory is mostly finished goods).
The A items are those with the highest value or sales volume, and are counted most frequently (usually four or six times per year). B items are counted less frequently, perhaps twice per year, and C items are counted only once per year. Some companies also maintain a “D item” classification, for non-valued items that aren’t counted at all.
A computer program is used to keep track of the classification of each SKU and the date that each SKU was last counted in order to set the counting schedule for each day.
An important preparation step for this type of cycle counting is called ABC analysis. In ABC analysis, every inventory is classified as an A, B, or C item. This process should be repeated every year or two to keep the ABC classifications in balance as valuations or sales volumes change or as SKUs are added or retired.
Cycle Count Software
The cycle count process in warehouse management isn’t something that can be done effectively with spreadsheets—you need special-purpose software. Most ERP suites that include inventory management systems support one or more forms of cycle counting.
These cycle count systems automate your inventory record keeping and can provide valuable data about your inventory control process. For example, if you find that discrepancies crop up regularly for certain items, you might see a pattern that would give you clues as to why, so that corrections or re-training can be conducted.
Getting Started with Cycle Counting
What is cycle count in warehouse management? It’s more than simply a new way to count inventory. It’s an important step in increasing the accuracy of your inventory picture, and it reflects your growing maturity as an organization. It’s not always an easy transition; it requires planning, analysis, attention to detail, and organizational discipline.
Cycle counting also takes some practice, and if you are transitioning from an annual physical count to cycle counting, you may be required by your financial auditors to do both for a period of time until you can demonstrate a high level of accuracy in your cycle counts. Once you make the change, however, and implement it with reliable cycle count software, you will find that your inventory cycle is much easier to manage.
If you find that keeping track of your inventory is becoming a serious drain on your resources and productivity, it’s time to make the jump to cycle counting.