Inventory Cycle Count

What Is Inventory Cycle Count?

By Team TranZact | Published on Feb 27, 2023

Detailed awareness of what is inventory cycle count helps to avoid inaccurate inventory counts while enhancing service, productivity, and profitability. Without effective inventory management, businesses may overorder inventory or discover they don't have enough stock to fulfill their demands since it makes it difficult for them to foresee effectively.

Since inventory data affects everything from customer fulfillment to business finance, accurate inventory data is essential. Let's dive into the details of what is inventory cycle count, its importance, its types, and how it differs from physical inventory count.

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What Is Inventory Cycle Count?

Inventory cycle count is the process of verifying and reconciling inventory records by counting a small portion of the inventory regularly rather than conducting a full, physical inventory count. This essential inventory management process helps businesses ensure inventory accuracy and timely replenishment.

A physical inventory count and an inventory cycle count are essentially the same things, although they take different approaches. When you conduct a physical inventory count, all your stock is counted at once. Many warehouses must suspend other operations to stay up, and it may take many weeks of focused attention.

Instead, you can assign discrete pieces of your inventory to personnel according to a specified timetable rather than performing physical counts. This reduces the likelihood of errors by allowing you to focus on reviewing each stock piece by piece. Inventory cycle count is typically conducted weekly or monthly, depending on the company's size and turnover rate.

Why Is Inventory Cycle Counting Important?

Cycle counting in inventory management is important because it helps businesses identify discrepancies between the actual inventory count and the inventory records. The purpose of cycle counting is to help companies quickly identify and address inventory errors, reducing the risk of stockouts and overstocking. Furthermore, inventory cycle counting helps companies maintain an accurate inventory count, essential for forecasting, planning, and decision-making. Companies that wait until the end of the year to take inventory, often have to close down for a day or more so that staff can count inventory, leaving business and money on the table until the job is done. This method is not only frequently demanding and exhausting, but it also necessitates the use of additional resources, such as bringing in personnel from other departments who must work overtime.

With inventory cycle counting, there is no need to ever close your business to count your inventory, because cycle counting is only done by warehouse workers skilled in this frequently repeated activity.

Advantages of Inventory Cycle Count

Inventory cycle counting enables businesses to maintain accurate inventory records, cut down on labor costs, and enhance business continuity. Let's understand the detailed advantages of inventory cycle counting as below:

Inventory cycle counts do not interfere with warehouse activities

It is inconvenient for a small business to stop warehouse operations even for a day, and it might lead to congestion in orders and dissatisfaction of clients. Here, the obvious issue with conventional physical audits lies. To count the inventory and reconcile the product data, all warehouse operations must be halted.

Cycle counts appeal to larger warehouses because of the segmented structure of their tasks, and workers can do cycle counts during business hours. Because of this convenience, employees don't have to work as hard at inventory cycle counts.

Increased flexibility than conventional audits

A complete physical audit can be hectic within industrial settings where every second matters. However, more than a dozen varieties of inventory cycle counting are made to meet particular business objectives.

The products that are counted, as well as the method, timing, and personnel used to count them, can all be customized by warehouse managers. As a result of these differences, vital daily processes are supported while also being more accurate and efficient.

More precise than physical audits

There is no flawless audit, and there is always the possibility of minor inaccurate counts and shrinking. In some unfortunate scenarios, warehouse workers can even falsify the counts to hide merchandise theft.

But as you count more often, your degree of confidence grows. Inventory cycle counts do not require an 'all hands on deck' situation in which everyone in the warehouse counts simultaneously. They are excellent substitutes for conventional audits because of their flexibility.

However, most organizations don't abandon their physical audits entirely. Regular (monthly or even weekly) inventory cycle counts are added to the traditional annual or biannual audits.

More accurate than conventional audits

Cycle counting in inventory management is a great way to accurately account for inventory and serve as a diagnostic tool pointing out warehouse operations' inefficiencies. You can recognize and isolate "problem counters" who report erroneous numbers, for instance, using randomly shuffled counters.

Then, you can explore the specifics of why that is the case. Maybe they need more training or better equipment or are maliciously motivated.

Inventory cycle counts also assist stakeholders in swiftly identifying recurring inventory issues (like stockouts). Before the error negatively impacts the customer experience, warehouse managers can react by placing new product orders.

Difference Between Physical Count and Inventory Count

The overview of differences between physical count and inventory count is given in the table below:

ParameterCycle CountPhysical Count
OccuranceContinually (often every day)Occasionally (often annually)
Level of disruptionLowHigh
Information ReceivedProvides regular overview with exact counts of select items and stock-keeping units (SKUs).Authoritative and comprehensive information annually
ResponsibilityMaybe the responsibility of a dedicated team of employees and incorporated into other employees' responsibilitiesMay demand high involvement and attention of several staff members and some temporary workers.
FlexibilityCycle counting in inventory offers substantial flexibility in terms of quantity, seasonality, item category, counts by value, and other characteristics.Minimal
Types of companiesBusinesses with complex inventories where physical counting can be challenging.Businesses with simple inventory workflows where physical counting is relatively less problematic. Certain companies like public companies and some compliance-oriented businesses may require physical counts for reporting purposes.

3 Types of Inventory Cycle Count Procedures

There are three inventory cycle count procedures: ABC analysis, cycle counting, and random sampling.

ABC Cycle Counting

ABC analysis is conceivably the most used approach, and in many instances, it is also the most difficult method. The Pareto Principle that holds 20% of causes account for 80% of all effects, is the foundation for ABC analysis. ABC analysis is a tool for inventory management that places a specific value on each item when counting inventory.

A class structure underlies ABC analysis cycle counting. To distinguish between Class A, Class B, and Class C items, the inventory manager or inventory control system performs a statistical analysis based on several different criteria. Class A items are counted more frequently than the B items, which are counted more frequently than the C items.

As a result, objects with greater values are counted more frequently than those with lower values. There are several techniques to determine value. Each item class is typically given a value based on its monetary value, demand, or turnover rate. This 80-20 rule affects how often each item is counted.

80% of the time, 20% of the products are counted, and so on. This approach can be useful since it concentrates counting efforts on just the things or regions that matter most for the company's success.

Note: However, there is a chance that this approach could overcount some locations that have been given priority, which could make the sample inaccurate. In some circumstances, allowing warehouse staff to reassign or change the value of specific regions based on predetermined criteria and observations might help to decrease risk. Concentrating on the goods that actually require the most improvement can help the process become more efficient over time.

Cycle Counting for the Control Group

This kind of counting approach recommends counting a small group of things repeatedly over a brief period to check for any inaccuracies. This will also highlight any problems with the counting process that might lead to errors. Until all problems with counting have been overcome, this process is repeated.

Random Sample Cycle Counting

Random sample cycle counting is the method used when a sample of the things to be counted is selected at random. The number of identical things in a company's warehouse can be counted by randomly choosing a certain number of items. The count can be done every day or workday to promptly count a significant portion of the warehouse's inventory.

Two methods can be used in a random sample cycle count: reduced population counting and continuous population counting. Continuous population counting entails counting the same quantity of objects each time.

As the choice of the items to be tallied is random, this could imply that some items are counted frequently while others are not. A diminished population counting technique involves counting a sample of warehouse goods before excluding them from further counting until all the items in the warehouse have been counted. Each count chooses items from a smaller and smaller pool of eligible goods.

Inventory Cycle Counting Best Practices

Do you want to use inventory cycle counting? Here, we have outlined how you can position yourself for success with inventory cycle counting:

Verify that your inventory data is functioning

Conducting an inventory data assessment before putting a new cycle counting system into place is a best practice. While laborious, it will give you basic accuracy and remove many logistical annoyances.

Plan periodic cycle counts

Cycle counts are not, by definition, a one-and-done proposition. These must be carried out regularly. While some operations perform daily counts for particular SKUs, the absolute minimum you should be aiming for is a quarterly cycle count (depending on the magnitude of the count).

It will be easier to integrate the practice into your company's standard operating procedures if you put it on the calendar and stick to it no matter what.

Emphasize cycle counts rather than eliminating them

Lacking the resources necessary to carry out your cycle count as planned? Prioritize, don't get rid of a planned count. Using an ABC analysis method will make this very easy as you already have the data and built hierarchy. Alternatively, decide which areas are most important or problematic and concentrate your efforts there.

Alternate the counting of personnel at random

The fact that warehouse theft is on the rise is a frustrating reality. Most staff count each item in a conventional audit. With this strategy, undesirable actors have many opportunities to manipulate the count or band together for conspiracies.

Note: Alternating your counting crew at random can assist in exposing dishonest counters.

Use technology to effectively count and reduce errors

Using technology as much as possible to replace human labor is one of the best strategies to reduce human error. For instance, barcode scanning solutions can prevent inventory reporting errors while speeding up your counts tenfold.

Note: Data on inventory must be stored, analyzed, and reconciled using digital inventory management software.

In conclusion, inventory cycle counting is an essential process for businesses that want to maintain accurate inventory records and minimize inventory errors. By conducting regular cycle counting and following best practices, businesses can optimize inventory levels, reduce carrying costs, and improve decision-making.

FAQs on Inventory Cycle Count

1. When should I count my inventory?

It is vital to occasionally perform a full inventory count in a business. This is typically carried out to coincide with the conclusion of a reporting period at the end of each month, quarter, or year.

2. How often should I count my inventory?

A full count of the inventory must be performed regularly in a company, typically done at the end of a month, quarter, or year. When you stock a lot of identical things, count things after every ten transactions of a certain item or at other critical stages in the inventory management process.

3. What is the difference between cycle count and physical inventory?

Annual physical counting is often a major undertaking with limited room for flexibility and severe short-term company impact. Cycle counting, on the other hand, is ongoing.

Cycle counting is more closely connected with the needs of many firms for increased flexibility, agility, and up-to-date information that guides decision-making. Physical counts offer clarity regarding inventory at the start of a new financial year.

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TranZact is a team of IIT & IIM graduates who have developed a GST compliant, cloud-based, inventory management software for SME manufacturers. It digitizes your entire business operations, right from customer inquiry to dispatch. This also streamlines your Inventory, Purchase, Sales & Quotation management processes in a hassle-free user-friendly manner. The software is free to signup and gets implemented within a week.