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Cycle Counting Best Practices. Here Are What You Need to Consider

Posted: May 21, 2008 by Ly Phan

Cycle Counting Best Practices. Here Are What You Need to Consider

Is inventory accuracy a possibility or an oxymoron? Can it be achieved through cycle counting best practices?


If you can't find the numbers of parts, finished goods or product your inventory system says you have, you're undoubtedly wasting time looking for them, holding excess "just in case" inventory (and thus raising your inventory carrying costs), delaying customer orders, wasting time in production and order fulfillment, or generating unnecessary return processing costs.


The main reasons for the difference between what your top inventory control software thinks is in your warehouse and what you discover are actually on-hand are unrecorded or inaccurately recorded inventory transactions. A box of inventory placed on the wrong shelf. Forty pounds of steel fittings sent to manufacturing that were actually recorded as four pounds. A size 4 skirt whose packaging is incorrectly labeled as size 6 generates a return because the customer discovered it to be too small. When the product is returned into inventory, the receiver might just scan the bar code, updating the system with a phantom size 6 item. (This assumes, of course, that the packaging has not been destroyed, which in this case would be beneficial, because it would most likely lead to the discovery of the incorrect labeling). The panacea for this is accurate real-time inventory data.


So do you want to know how to cycle count inventory? You can either do a periodic physical inventory count, which is usually an annual event, or you can implement a cycle count program.


Counting Once

On the surface, physical counts provide a measure of reassurance to your financial auditors. However, one-time annual physical counts are expensive and can shut down production or shipping functions for one or more days. There are some important downsides to physical counts, which include the temptation to cut corners. In many ways, a one-time annual count such as this often introduces new errors that may not be found for several months. This is particularly aggravated if you are counting on a day-off like a Saturday and no one wants to be there.


There is also the time-consuming task of planning the physical inventory. You've got to take many things into consideration -how many counting teams are required, how many man-hours it will take to get the job done, how much overtime you are willing to impose on your team on their day off, how many recounts are required, how much equipment is needed, whether you have enough gear or material, how much food you will need to buy - and if that isn't enough to keep you busy, have you planned out strategies for "no-shows" and do you have enough instructions for everyone to understand what to do?


Counting Many Times

In contrast, cycle counting, when properly implemented and managed, delivers more accurate inventory data. According to the American Production & Inventory Control Society Online Dictionary, cycle counting is:


"An inventory accuracy audit technique where inventory is counted on a cyclic schedule rather than once a year. A cycle inventory count is usually taken on a regular, defined basis (often more frequently for high-value or fast moving items and less frequently for low-value or slow-moving items). Most effective cycle counting systems require the counting of a certain number of items every work day with each item counted at a prescribed frequency. The key purpose of cycle counting is to identify items in error, thus triggering research, identification, and elimination of the cause of the errors".


The elimination of errors is one of the benefits of auditing inventory accuracy and choosing to reconcile errors on a cyclical schedule rather than annual. Organizations that implement cycle counting increase the probability of highly accurate real-time merchandise inventory. Who are some of these organizations? In December 2007, the Aberdeen Group surveyed 552 companies to determine which warehouse capabilities had the strongest correlation to improved performance in the warehouse. According to their research, companies considered to be Best-in-Class were 49% more likely than their peers to practice cycle counting over physical inventories.


Another way of looking at cycle counting is confirmation of on-hand quantity. Accurate inventory data is one of the key foundations to better cooperation and collaboration between warehouse and client (internal clients such as production, for example, as well as external clients such as a retailer). Merchandise promotion, merchandising, and replenishment programs run more efficiently when the inventory numbers are accurate. There are improved order cycle times, reduced freight cost and returns are handled better.


Here are some of the benefits of cycle counting:

  1. Reinforces the importance of accuracy in your organizational culture
  2. Generates focus on continuous improvement at the organizational level as well as within specific departments such as purchasing, warehousing, and manufacturing
  3. Greatly improves your ability to identify and fix inaccurate data, such as misplaced, mislabeled, or lost stock
  4. Improves your supply chain operations through more accurate inventory data
  5. Improves the accuracy of data analysis, whether initiated by the manufacturer, vendor, owner, or the accounting department
  6. Reduces out of stock SKUs through real-time inventory accuracy
  7. Helps identify and correct receiving, shelving, ordering, packaging, labeling, returns, and fulfillment errors
  8. Improves inventory turns because you can measure what's in stock and moving out the door
  9. Improves customer service through higher fill rates
  10. Raises productivity and efficiency through more accurate data - leading to reduced operational and inventory-carry costs


A Better Christmas for Everyone

Consider a Christmas shopping scenario when you might have visited a store to track down a gift. It was out-of-stock, but the clerk called the regional warehouse and ordered it for you. Is the item really in stock as the WMS shows? Will you be able to pick it up two days before Christmas?


Cycle counting needs to become part of your organizational DNA. Once you are up and running, you should be counting in a highly disciplined manner. You may end up counting three or four days per week. Sure, this may sound a lot but it beats the tedium of an annual count. Be aware, however, that if you only cycle count infrequently, you guarantee mediocre results. The only way to get the full benefit of any cycle count program is to count regularly, keep excellent and accurate records (particularly your data entry process to transfer the numbers into your WMS), and ruthlessly investigate errors.

How to Implement a Cycle Counting Program

Here are some areas where you need to make decisions before you start.

To do cycle count inventory effectively, business will need to consider several crucial key points.


How often are you going to count? First, you need to calculate how many counts per year you can perform and work backward, calculating the number of counts per day that you can do. You should consider the effects of cycle counting on customer service, production, shipping and receiving. One way to calculate your frequency is to time yourself. Count the number of items you are able to count in a single hour and you can quickly calculate how long it will take to count every item. While this is a rough estimate, it's a good starting point. Realistically, you should be counting your entire facility in cyclic quarters. As you progress through the first two quarters, you should be able to identify those items that need to be counted less frequently but no less than once or twice per year. If you cannot count your entire facility in one or two cyclic quarters, you may be understaffed.


Your Counting Strategy

Tip: Try not to over-complicate your strategy in the beginning. Pick three to five core methods and deviate only if you need to improve.

This should be fairly obvious: figure out how you're going to count well before you assign the counting. Are you going to count by location, item, expiration date, value, vendor, category, or another method? One popular way to keep cycle counting manageable is to rank your inventory, using the ABC method. This method uses classifications to determine count frequencies: you assign an "A," "B," or "C" classification to each of your items depending on how often that item enters or leaves your facility. Then, the most frequently used or shipped items are counted more often.


For example, you might count class A items bimonthly. Class B items are counted monthly and class C items are counted twice a year. You might count slow-moving items only once a year, this is class D. Inventory statistics generally show that the more often an item enters and leaves your inventory, the more often your data is incorrect. If the quantity is changing daily because it is a fast mover or popular item, it shouldn't be surprising that you are continually introducing the opportunity for errors. Cycle counting by classification is a good method to catch errors quickly, where they are most likely to occur: with fast moving items.

Tip: Cycle counting does not offer a "one size fits all" system. How, where and what you count are very dependent on your specific operation.


You might decide to count by a category or ABC classification. But you can also count by geography or physical location, which is arguably a version of annualized physical counting, albeit, reduced in scope so you can finish it in much less than one or two days. If you plan to count by location, divide your warehouse into physical areas, such as aisles, doors, sections, departments, shelves, or bins. Plan an orderly and consistent counting pattern that covers the entire area and ensures that all items are counted and entered into your WMS. Cycle counting by location is a good method to find misplaced or lost items hidden in corners or underneath shelving.

Tip: Until you are comfortable with the cycle counting process, it is recommended that you leave the quantities visible.


Are you going to provide counters with on-hand quantity visibility or are you going to conduct "blind counts"? In blind counts, your counters locate the appropriate item, count it and either write it down on a piece of paper or enter it in a real-time mobile device that sends the count directly to the WMS application. The opposite situation is where a counter knows the inventory and is essentially trying to confirm what is written down on paper or visible on a screen. The temptation, of course, is to cheat and confirm whatever the number is. Particularly if it is late in that person's workday or the pizza lunch ended more than four hours earlier.

Tip: Perform cycle counts when no other transactional activity is taking place. For example, schedule your cycle counts during downtime or when shipping and receiving are not taking place. Familiarize yourself with your warehouse management system (WMS) to ensure you know how to achieve your desired results.


Another important issue is timing your count. Scheduling your cycle counting depends entirely on your business and all of the other schedules that make your business unique. If you are counting items that are in the process of being received, moved or picked, you will need to make sure that your WMS keeps you informed of what is taking place or does automatic inbound/outbound validation for you. Make sure your written procedures include what the WMS handles or doesn't. If there is no validation, you will have to figure out a method of rationalizing inbound and outbound flow as well as the net. A WMS system is invaluable for this purpose. To do this, you need a comprehensive and global understanding of all of your organizational processes to figure out how to handle transactions.

Tip: Radio frequency enabled mobile devices can save time in recording cycle count information.


Whether you count with a spreadsheet in hand or through an automated software application, you should consider the most efficient method for your operation, for instance, whether the chosen method will support your unique process, including setup time, strategy, and frequency of counts. The most efficient methods include the use of a radio frequency enabled (RF) mobile device. You key in data and through radio frequency signals the mobile device sends your data back to the database automatically, saving you time from manual key-punch. Real-time gives you, the person in charge of counting, "control" to update inventory in a real-time live mode.


You benefit in many ways such as the elimination of double entries, reduced labor hours, just-in-time availability, collaboration, and accuracy. Other mobile devices allow you to enter your data on the device and then batch upload your data when the device is placed in a cradle and hooked directly up to a computer. If this method is chosen you will need to consider the pitfalls of losing your data if the device fails, is misplaced or if someone forgets to place the device in the cradle.


Who is in Charge (and Other Personnel Issues)

Who is going to take responsibility for ensuring that your cycle count program actually works as planned? You need to identify someone and give him/her responsibility and-more importantly-accountability for the accuracy of the inventory. You also might want to make this same person responsible for training staff on counting procedures and the value of inventory accuracy.

Tip: Include cycle counting and the importance of inventory accuracy in orientation programs for new employees.


Whoever is responsible for cycle counting needs to understand and accurately estimate the likely counting performance against the time available for counting. Ensure that sufficient staff is available and appropriately trained so that you can complete the count as planned. This means having the necessary supplies on-hand. If you're using bar code or RFID scanners, make sure the battery is charged and users are trained on how to operate the device and navigate through the WMS application.


A Toe in the Water

Start small. In fact, it starts really small. Gently introduce your organization and employees to the brave new world of cycle counting.

Tip: Start with limited cycle counting and work the kinks out in your processes before you spread it across the organization


Here is a sample program to get you started with cycle counting:

  1. Select 200 items/parts/products/finished goods from your inventory
  2. Divide them into counts of 50/day, that you will do Tuesday through Friday
  3. Accurately count and record all items
  4. Investigate variances each day
  5. Keep track of daily accuracy/variance percentages
  6. Investigate the causes and origins of errors
  7. Localize cause and correct inventory record
  8. Determine cause and delegate responsibility for fixing it
  9. Select another 200 parts/products/finished goods from your inventory for week two
  10. Keep checking until accuracy exceeds 97% for a minimum of two weeks

Tip: Select slow-moving items/parts/products/finished goods for your first cycle counting tests. You won't have to deal with or account for the transactional movement of stock (either in or out of inventory), which will be a future issue when you start counting more frequently moved items.


Once you have completed this two-week baptism, review the process and results. What worked well? What didn't work? What surprises/unexpected information did you gather? After a few tests, adjust your cycle counts in manageable chunks that allow you to completely inventory your entire facility in three months. This will reduce the error rate if/when you perform an annual inventory.


If the upside, that is, the lure of more accurate inventory data, is too appealing to ignore, consider gradually expanding your cycle counting program in your organization. There is always room to improve on a cycle count. You can set up different cycles, add more items or locations, group items together, separate complex items/locations. As you progress, find the methods that aide you in doubling or tripling your items or locations during a count. This will enable performance efficiencies during this process, and let's face it, it's nice to be the hero every now and then.


You should now be ready to expand cycle counting into the darkest reaches of your organization. Once you have reviewed your cycle counting system, and optimized procedures for investigating and resolving errors, you can expand your counting program to include all inventory items.


Garbage In. How to Reduce Errors

The best way to reduce errors in cycle count inventory is to learn from them

Errors are part of the cycle counting life. Mistakes are a good thing, though, if you learn from them. Think initially in terms of discovering errors, then reducing them, and then ultimately eliminating them. Not only are you going to uncover multiple errors in inventory count, but you're also probably going to experience errors in the counting. One of the great benefits of cycle counting is continuous improvement. Various warehouse industry experts point to an error reduction circle, in which continuous improvement is the goal. Here is how this cycle looks:

  1. Find the error
  2. Research it
  3. Identify its cause (misplaced items, miss-shipped items, incorrectly entered orders, etc.)
  4. Address and eliminate the cause (take corrective action based on what you learn)
  5. Continue cycle counting and implementing process improvements to raise inventory accuracy
  6. Repeat
  7. Repeat again


Consistency is king. Spend the time to unearth errors and eradicate them from your operations. As long as your inventory accuracy is improving, pat yourself on the back.

Tip: Focus on your consistency rather than industry benchmarks. (You probably have no idea what metrics this industry benchmarker is using anyway).


The Power to Move the Yardsticks: who gets to?

You're also going to need to implement a process to approve and adjust inventory levels for "lost", "found", or damaged items. The person responsible for doing this must understand the effects of adjusting inventory to account for "lost" and "found" items. A "lost" product noted in a Monday count might have generated a purchase order two days later because the forthcoming forecast requires it. What happens, then, if the product is located on Thursday? How do you reconcile all of these micro and macro effects on your inventory?


In this case, the carrying cost will go up because more product is purchased. You now have less space for other items. You've added an additional item to receive increasing inbound labor. And in some cases, the "Buyer" may appear to be at fault for ordering too much product. On the other side of the coin, if you over-count during a cycle count, or in essence over-state your inventory, the reverse applies and has a much worse effect because the product cannot be found. Your fill rate suffers, your customers might be agitated, you struggle to look for a "missing" inventory that never existed in the first place and the buyer doubles the order to make up for lost sales and now has the same effect as if the product were lost.

Tip: Cycle Count accuracy is an equally important criterion just as receiving, production, picking, and shipping. Assign responsibility appropriately.


If your cycle counting program is successful, there is little benefit to conducting an annual physical inventory. Some of the people in your organization might be reluctant to forego the annual physical count. If you can prove the accuracy of your inventory (that has been developed using cycle counting), you should be able to persuasively argue against the annual count. You'll save on pizza money and employees will be really happy you didn't ask them to come in on a snowy Saturday in January.

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