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Cycle Counting (Part 1): What Every Inventory Manager Should Know About It

Published on by Adam Bluemner

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There’s gotta be a better way.

No matter how hard you try, there always seems to be some variance between your records and your actual stock counts. Inventory items gets misplaced, misrecorded, or maybe even stolen. A certain degree of variation between records and physical counts is inevitable. But if you’re the person responsible for making sure that degree is as small as possible, it’s a big deal.

The end-of-the-year physical inventory count exists to bring your records into alignment with your actual stock counts. But it leaves a lot to be desired from a management perspective, doesn’t it?

A full end-of-the-year stock count means putting other business activities on hold. It might even require overpaying employees who’d rather be elsewhere for weekend work. And, it definitely means relying on hastily trained individuals to stay focused for hours and hours of eyeballing stacks of stuff. Not ideal.

Enter: cycle counting.

Cycle counting basics

Cycle counting is an improved approach for inventory stock verification. In brief, cycle counting provides a method of splitting the inventory verification task out over time in order to create greater process efficiency and inventory records accuracy.

With the right software and a bit of knowledge, the opportunities offered by cycle counting are available to any inventory based business.

Cycle counting isn’t particularly difficult to understand. It has two fundamental characteristics:

  1. Stock verification happens continuously over the year, rather than all at once.
  2. High value inventory items get additional attention.

That’s it. Pretty simple.

But some hefty benefits come about as a result of departing from the end-of-the-year model:

  • Continuous inventory checks allow more timely correction of underlying problems leading to inventory miscounts.
  • Disruption is minimized because each individual cycle count is shorter in duration.
  • The stock verification process becomes more accurate and efficient as it is optimized through regular improvement.

What’s the net effect of adopting cycle counting? Well, as with any business initiative, it will vary from one organization to the next. But it’s not uncommon to see industry experts attribute bin location accuracy rates of 95% (University of Arkansas) or even 99% (DistributionStrategies.net) and overall efficiency gains of 5 to 10% (Tompkins Associates) to the implementation of a cycle counting program. In a 2009 study of warehouse management success factors, the Aberdeen Group identified that the adoption of cycle counting was one of 5 characteristics correlated most strongly with “best-in-class” performance.

Determining cycle count frequency

In order to decide which items are counted when and how often, cycle counting uses a group assignment model based on item “value.” An item’s value is determined not by unit supply cost or number of inventory turns, but rather by the combination of the two factors—which represents the total investment in that item over a particular period of time.

A 3-tier, A-B-C model is the standard. Taking inspiration from the 80/20 Pareto Principle, items within the top 20% of total supply cost will be mapped to the A group. The B group will contain the next 60%, while the C group will include the bottom 20%.

ABC grouping of items in cycle counting

Item count group Item value Item supply cost rank
A High Top 20%
B Mid Next 60%
C Low Bottom 20%
The 20%-60%-20% assignments act as guidelines. Depending on how top heavy your portfolio is in terms of item value distribution, you can make adjustments to the division points.

These A-B-C group divisions are not made as an academic exercise. The group assignments determine how often the items will be physically counted and reconciled with the inventory system records.

A typical model of cycle count frequency might be something like this: 6 yearly checks for group A, 2 for group B, and 1 for group A. As inventory accuracy increases over time, the frequency of the checks can be decreased, while maintaining the proportional emphasis on higher value items.

Frequency of item counts by group in cycle counting

Item count group Count frequency % of overall cycle counts
A 6× yearly 46%
B 2× yearly 46%
C 1× yearly 8%
Again, adjustments to the frequency of each groups’ checks can be made as warranted by your internal resources and effectiveness with maintaining accurate records.

Weighting the frequency of item groups according to value fixes a fundamental flaw of end-of-the-year stock counts. In the end-of-the-year model, an inexpensive item with four of five total inventory turns gets the same attention as a top-selling, high supply cost part or product. It’s a model that inherently overlooks mapping the real value of each item. Cycle counting corrects this misalignment by putting attention where your investment is.

A look at cycle counting in action

Let’s consider a hypothetical company who has given up the end-of-the-year approach and opted for cycle counting. To illustrate the model, let’s give our sample company a fairly top heavy 10 item inventory portfolio where their top couple items represent a majority of their inventory investment.

Here’s what the cycle count group assignments would look like for each of their items based on the item’s value, as determined by its total supply cost:

Sample: Cycle count group assignments by item

Item count groupItemVolumeCost/unitTotal supply cost
AXYZ3,000$40$120,000
AWXY2,000$50$100,000
BVWX1,500$40$60,000
BUVW1,000$40$40,000
BTUV2,000$10$20,000
BSTU500$20$10,000
BRST400$20$8,000
BQRS2,000$4$8,000
CPQR15$50$750
COPQ5$10$50

Clearly, items XYZ and WXY deserve some additional attention, as they represent well over half of our company’s total inventory investment. Using the cycle counting method, our A group items receive this extra attention and will receive more counts than items in the B and C groups.

Taking a look at a 6 month sample, determined by our 6x/2x/1x yearly cycle weighting method shows, offers an example of a typical distribution of cycle count scheduling by item:

Count dateItem/group to count
January 6thXYZ (A)
January 20thVWX (B)
February 3rdUVW (B)
February 17thXYZ (A)
March 3rdWXY (A)
March 17thTUV (B)
March 31stSTU (B)
April 14th WXY (A)
April 28thPQR (C)
May 12thRST (B)
May 26thWXY (A)
June 9thQRS (B)
June 23rdXYZ (A)

Adopting a cycle count approach

The cycle count approach offers some clear advantages versus the traditional end-of-the-year stock verification method. The advantages only intensify as your organization’s investment in inventory increases.

Cycle counting also represents an inventory management improvement initiative that doesn’t require a major investment in equipment, outside services, or human resources.

Companies considering a switch to a cycle count approach should bear in mind, though, that it will require:

  • A shift in the allocation of resources for stock verification from a singular year-end event to a regular process.
  • The appointment of a process leader and training of employees to execute the tactic.
  • Careful planning to establish protocols for scheduling, accuracy tracking, adjustment process, and management reporting.
  • A capable inventory or warehouse management system designed to support the cycle counting approach.

In part 2 of our cycle counting series, we’ll focus in specifically on how to identify the right software to support a successful cycle counting initiative.

Adam Bluemner

is a Managing Editor at Find Accounting Software. He's been helping software buyers make informed investments in business software since 2004.

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