What is Cycle Counting

 

Cycle counting is the systematic counting of a small portion of the total inventory on a periodic basis; generally defined as daily or weekly.  Cycle counters are typically experienced personnel who are familiar with both the products on-hand and the facility layout, and conduct the counts as a part of their daily routine.  A consistently high level of inventory accuracy can be realized by the continual counting of the inventory, thoroughly investigating and analyzing the root cause of any inventory errors identified by the cycle count results and then taking immediate corrective action to eliminate the cause.

 

The Benefits of conducting cycle counting are as follows:

 

1.     Improved inventory accuracy & integrity is maintained at a higher level due to continuous counting.

 

2.     Elimination of lost sales due to stock outs and/or shorts resulting from misplaced product or zero on-hand when the inventory system says product is available.

 

3.     Elimination of the cost and business interruption associated with the annual/semi-annual physical inventory process.

 

4.     Reduction in inventory errors due to discrepancies being identified and corrective action taken sooner than once or twice a year leading to improved inventory accuracy.

 

5.     Overall reduction of safety stock levels and associated carrying costs through improved inventory accuracy.  

 

 

What & When:

 

There are a number of cycle counting methodologies commonly in use today that can be considered when you are determining what should be counted and when.   Accountants generally prefer the dollar valuation method since the results are more easily tied to their book value of inventory while materials managers would likely prefer the unit volume method so that the manufacturing requirements planning systems get the most accurate inventory information to avoid stock out conditions that would interrupt manufacturing and/or sales.  

 

Dollar Valuation – This method emphasizes that items that make up the top 20% of the annual sales should be counted more frequently.  This is typically accomplished by using the ABC method of cycle counting that is based on the “Pareto Principle”.  20% of your annual dollar volume items generally represent 80% of your total annual dollars shipped.  The ABC method uses a classification system to determine count frequencies.  The items that represent the top 20% of your sales are assigned a classification of “A”, while the items that represent the next 15% of your sales are classified as “B” items, with the last 5% of your sales representing the items being assigned a classification of “C”.  A further classification of “D” is sometimes assigned to items that have $0 sold over the previous year. 

 

The basis for determining the count frequency should be to count the “A” items more frequently than the “B” items with the “C” items counted the least frequently.   All items should be counted at least once per year.   Generally we have found that “A” items are assigned to be counted 6-8 times per year, “B” items 3-4 times per year, “C” items 1-2 times per year and “D” items counted once per year. 

 

Unit Volume – This method is based on the concept of 20% of the items account for 80% of the total usage without regard for their value.  The ABC method of cycle counting can be used to determine what should be counted and when by using the classification system as it applies to item usage rather than dollar value.  This approach is particularly beneficial to materials managers that want to insure that the materials planning systems are getting the most accurate inventory data possible to prevent interruptions to manufacturing as a result of stock outs.

 

Location – is a very simple method of beginning at one end of the warehouse and working your way to the other end in sequential location order.  This method is usually effective if your items are in single fixed locations.

 

 

How:

 

Clean & organize storage areas

 

Identify all products by insuring that each item is clearly labeled

 

Develop a storage location method and mark each location with a unique identity by area, aisle, row, and bin.

 

Produce a cycle count report that contains the items to be counted with a description, and expected location(s).

 

Initiate control cut-off rules that permit sufficient time to complete the count with minimal impact on operations.

 

 

Implementation of the process:

 

It is generally best to start the cycle counting process by beginning with a small number of items that can be effectively monitored for results.  The counting process should be done frequently to accustom your staff with the process.  When discrepancies are encountered the root cause should be identified and corrective action taken to rectify the problem promptly.  Once the employees have become familiar with the process and the inventory accuracy improves it should be much easier to expand the number of items counted until the entire inventory is included.