Warehouses run like well-oiled machines when audits are conducted. Reconciling on-hand products with records is foundational to accurate data at all stages of the logistics pipeline. The most efficient inventory management plans lead to minimal transaction error rates and extremely high stock record accuracy without taking away from staff’s essential tasks. Regardless of whether a company uses periodic or perpetual inventory practices to track their inventory,
regular cycle counting is a necessary auditing process to manage inventory counts. Inventory counting system offsets the burden of traditional audits by rotating product counting in a cyclical schedule. Inventory cycle counting is ideal for large warehouses with lots of products or many different types of products
Inventory Cycle Counting
Cycle counting is a method of checks and balances by which companies confirm physical inventory counts match their inventory records. It is a more efficient way to keep track of inventory accuracy and helps to identify discrepancies sooner.
The process involves dividing inventory into smaller, manageable portions and counting each portion at set intervals, such as daily, weekly, or monthly. This allows for continuous monitoring and adjustment of inventory levels, leading to improved accuracy and cost savings in the long run.
Methods of conducting cycle counts
- This counting method prioritizes the highest-value products
- It is essential for warehouses with product types of varying value
- The idea is based on the Pareto Principle, otherwise known as the 80/20 rule which states that 20% of products are responsible for 80% of profits
- The highest-value products go in the A category while the mid-tier and low-value products go into the B and C categories respectively
- Warehouses then prioritize their inventory cycle counts to favor the high-value products in the A category
- For example, leaders may schedule cycle counts in the A category weekly, in the B category monthly, and the C category quarterly
- Any time an item exchanges hands – either via a manufacturer, distributor, or finally to the customer-it introduces potential inventory variance
- This counting method combats that by prioritizing the most frequently-accessed products
“Accessed” could mean processed into the warehouse, processed out of the warehouse, or physically touched in any way
- The hybrid counting method blends the Usage-based and ABC counting systems to prioritize the most-accessed high-value items
- This method is necessary when the ABC categories grow to an unwieldy level
- Managers can parse out their ABC categories even further, prioritizing the highest accessed A category products
- This method prioritizes counting products in a particular physical space
- Coupling this strategy with random counters in random intervals can help identify problematic areas, such as theft or obsolescence
Opportunity Based Counting
- This method prioritizes counting products at a particular stage in the logistics pipeline
- Examples of key events that trigger a count in this system are:
- Counting products at their reorder point
- Counting products when inventory levels dip below a certain level
- Counting products when they’re processed into your warehouse This method is one of the best for discovering inefficiencies in pipeline
- The fact that the same product is counted multiple times throughout its lifecycle means that errors can be isolated to their respective stages
This specificity allows stakeholders to discern problem areas or problem employees with greater confidence
Advantages of cycle counting
1. Inventory cycle counts do not interrupt warehouse operations
- When a business is small, shutting down warehouse operations for a day might be inconvenient as it may even cause a few orders to bottleneck and frustrate a few customers
- Physical audit requires a total shutdown of all warehousing operations to count the inventory and reconcile product data
- Employees can perform cycle counts during business hours because of the segmented nature of their assignments
2. Inventory cycle counts are more flexible than traditional audits
- A thorough physical audit requires majority of employees’ effort, and a full count of all products On the other hand, inventory cycle counting has many variations designed to accommodate specific business goals
- Warehouse managers can not only customize which items to count, but also how they are counted, when they’re counted, and who counts them
- These variations have a net result of higher accuracy, efficiency, and supporting critical day-to-day operations
3. Inventory cycle counts are more accurate than physical audits
- No audit is perfect and inaccurate counts and shrinkage are inevitable
- It is an unfortunate reality, but warehouse employees can even rig the physical counts to cover up product theft
- However, the more frequently counted the closer to get to a 100% confidence level
- Inventory cycle counts are not contingent upon an “all hands on deck” scenario of everyone in the warehouse counting together
- This flexibility makes them strong alternatives to traditional audits
- Organizations do not usually punt their physical audits altogether
- Traditional annual or bi-annual audits are supplemented by regular (monthly or even weekly) inventory cycle counts
4. Inventory cycle counts uncover problems that traditional audits miss
- Inventory cycle counts are excellent means of accurate accounting and diagnostic tools that reveal inefficiencies in warehouse operations
- For example, by randomly shuffling counters, “problem counters” who pathologically report inaccurate numbers can be identified and isolated
- Inventory cycle counts also help stakeholders identify common inventory problems (such as stock-outs) quickly
Best practices for Inventory cycle counting
1. Ensure your inventory data is up-to-date
- A best practice is to conduct at least one cycle count before implementing a new cycle counting system
- It is a chore, but it will set up with a baseline level of accuracy and eliminate many logistical issues
2. Randomly alternate between counting staff
- Warehouse theft is an increasing problem
- In a traditional audit, the majority of employees count all items
- This method opens up bad actors to plenty of opportunities to either tamper with the count or conspire to malicious ends
- Randomly alternating counting staff can help expose unethical (or even just incompetent) counters
3. Leverage technology to mitigate errors and count efficiently
- One of the best ways to mitigate human error is to outsource as much as possible to technology
- For instance, barcode scanning systems can not only speed up counts tenfold but also eliminate the potential mistakes of logging inventory by hand
- Digital inventory management software is also necessary for storing, analyzing, and reconciling inventory data
To calculate cycle count in inventory, you need to:
(i) Select the items to be counted. You can select items based on a variety of factors, such as their value, turnover rate, or risk of shrinkage.
(ii) Count the items. You can count the items manually or use a barcode scanner or RFID reader.
(iii) Compare the physical count to the inventory cycle count. If there is a discrepancy, investigate the cause and make the necessary adjustments to the inventory record.
Formula for cycle counts for inventory:
Cycle Count = Physical Count – Inventory Record
An inventory cycle count audit is a process of physically counting inventory items on a regular basis, typically on a rotating schedule. It is a way to verify the accuracy of inventory records and identify any discrepancies. Cycle counting in warehouse audits can be performed manually or electronically, depending on the size and complexity of the inventory.
To perform an inventory counting audit, the following steps are typically taken:
(i) A sample of inventory items is selected for counting. The selection can be based on a variety of factors, such as the value of the items, the frequency of movement, and the risk of shrinkage.
(ii) The selected items are counted physically, and the results are recorded.
(iii) The physical count results are compared to the inventory records to identify any discrepancies.
(iv) If discrepancies are found, the root cause is investigated, and corrective action is taken.
Audits of cycle counts for inventory should be performed on a regular basis to ensure that inventory records are accurate and up-to-date. The frequency of cycle counts will vary depending on the industry and the specific needs of the business.
To reduce inventory cycles, you can:
- Improve inventory forecasting: Accurate forecasting can help you to ensure that you have the right amount of inventory on hand to meet demand, without overstocking.
- Implement just-in-time inventory management (JIT): JIT is a system where inventory is delivered to the warehouse just in time to be used in production or shipped to customers. This can help to reduce inventory carrying costs.
- Reduce lead times: Lead times are the amount of time it takes to receive goods from suppliers. By reducing lead times, you can reduce the amount of inventory that you need to keep on hand.
- Centralize inventory: Centralizing inventory can help to improve inventory visibility and reduce the risk of stockouts.
- Automate inventory management processes: Automating inventory management processes can help to improve efficiency and reduce errors.