10 Best Practices for Inventory Cycle Counts
If you’re a wholesaler and distributor of physical products, you’re probably familiar with physical stock takes by now. They’re disruptive I know but they’re an essential part of maintaining inventory accuracy. And they also sniff out potential fraud and theft. Here, we’ll introduce inventory cycle counting and show you how it can complement your annual stock take exercise.
Firstly, we’ll cover exactly what is meant by an inventory cycle count or cycle counting. Then we’ll move on to see why it matters in your business. Next up is how to perform cycle counting itself. This includes the nitty-gritty details like who does the actual cycle count and how often should it be done. At the end of it all, you should appreciate why cycle counting is important for everyday accurate inventory records.
1. What is an Inventory Cycle Count?
As the name suggests, an inventory cycle count is a method of stock counting where you count a part of your inventory in a continuous cycle. The count can be done daily, weekly or monthly as there is no disruption to your business. How often you do cycle counts depend on the number of SKUs that you deal with in the business.
On the other hand, a traditional physical stock take involves manually counting all of your inventory in the warehouse. At the end of your audit, you make the necessary adjustments to your inventory records. For this to happen, however, you need to stop production or close the business while the stock take is underway.
2. Why Does Cycle Counting Matter?
Any stock take, whether cycle counting or physical counts, aims to explain discrepancies between the actual stock that you have (we call this in-stock quantity at EMERGE App) and the stock available for sale. So the more often you conduct stock counts, the more accurate your inventory records are. And thus your inventory will be fairly valued, too.
For example, let’s say that you deal in the wholesale distribution of organic nut butters. Your inventory management system tells you that you have almond butter in stock. In reality, however, your stock has been run down at the warehouse. There’s no stock left for sale and orders certainly cannot be fulfilled. Your customers will not be happy.
Conversely, your inventory management system says that you’re out of stock for brazil nut butter. So you order more stock from the organic nut factory to replenish your stock. In fact, your warehouse is filled to the brim with rapidly expiring brazil nut butter containers. You’ve just ordered stock that you don’t need and you’ve tied up money in it.
Also, your inventory management system may tell you that the cashew nut butter is in the Portland warehouse at rack location C2. Actually, as your warehouse staff knows, it’s really at rack location P7 for some reason. So sales orders may go unfulfilled because the stock cannot be located. And, again, you might even order more cashew nut butter.
So, you see, having accurate inventory records means that you avoid these situations where goods are out of stock, customer orders cannot be fulfilled, sales are lost, and customers are unhappy. It can also prevent an overstocked situation where you purchase more stock than needed, capital is tied up in stock, and the risk of write-offs or deadstock is increased.
3. What Goods Does Cycle Counting Work Best For?
The beauty of inventory cycle counts is that it can be done anytime without shutting down the business. In fact, some businesses cannot afford to halt operations because of their time-sensitive nature or perishable goods. Just think of prime frozen tuna for example. Raw tuna specimens need to be shipped on time, every time, at peak freshness. Anything less is not acceptable for discerning buyers.
Also, remember the ABC Analysis that you last conducted on your stock? Your “A”-team goods follow the 80/20 rule. Thus your “A” goods might make up just 20% of your SKU but they represent 80% of your inventory value. You should do cycle counts for your “A” list goods regularly. And count the rest of your “B” and “C” products during your annual physical stock take.
Pro Tip: Remember to focus on the inventory value to identify your “A”-list goods. Let’s assume that $100,000 is 80% of your inventory’s value. Hence, a low cost $1.00 item that numbers 100,000 SKUs is an “A” item. Likewise, a high-value luxury item that costs $1,000 each and has a quantity of 100 is also an “A” item.
4. How Often Should Cycle Counting Be Done?
We recommend that you conduct cycle counts on at least a quarterly basis. Why? Some small and medium-sized businesses prepare quarterly financial reports for pretty much the same reason — to gauge the performance of the business at regular intervals. Remember, you can just do cycle counts for your “A” goods if time, labor or cost is an issue.
Raising the number of cycle counts in a year will also dramatically improve the insights that you get into your inventory. And it may help you to understand where you should be going as well. Thus, a quarterly cycle count is probably the sweet spot for most businesses. Too seldom, and your inventory records aren’t up-to-date enough.
However, we also encourage you to perform cycle counts on a more intensive basis. Like daily, weekly or monthly even. “But how is this possible?” you ask. Remember that you’re counting just a sample of your inventory at any one time and that there’s no interruption to your business. We’ll illustrate how this is possible with the following examples.
5. Inventory Cycle Count Scenarios
“How often should I cycle count my inventory?” is a common question that we faced when we ran our custom t-shirt printing business in the past. And it’s a recurring question that we hear from customers as well. This one can be answered by looking at how many SKUs you plan to cycle count in a year.
Example: Motorcycle Parts
Let’s say that you deal in motorcycle parts. You have 2,400 SKUs because, well, motorbikes just have too many parts. For 2,400 SKUs you’re looking at 200 a month, 50 a week, or 10 a day. How long will it take you to cycle count 10 SKU a day? Not long right? Here you can afford the time and effort to do a continuous cycle count over a period of a year.
Example: Products Sold by Weight or Volume
Another example. Let’s think for a moment that you deal in rare and exotic saffron. As you know, saffron is the dried stigmas of a certain flower. You sell them in 1kg, 10kg, and 100kg bulk amounts. Here, it’s impossible to count every dried stigma by hand using tweezers. For cycle counting, you’ll simply weigh them. And being high-value goods, you’ll probably want to do daily or weekly cycle counts as well!
Example: High SKU Quantity
And yet another example. Perhaps you’re a manufacturer of clean and green automobiles. Except, they don’t look like cars anymore. Their electric motors run on batteries, and they’re made entirely of lightweight composite plastics. Also, they’re selling like hot cakes around the world. Hence, your inventory levels approach that of a toy manufacturer, easily numbering 12,000 SKUs at any one time.
This works out to be 1,000 SKUs a month, 250 a week, or about 36 a day because you’re running a 7-day production schedule. How long will it take your staff to count 36 electric cars a day? You can certainly implement cycle counting here and, in fact, it should be a part of your daily business routine. With this, you can certainly be assured of perfect inventory data for making sales and purchasing decisions!
6. Who Does the Actual Cycle Counting?
Similar to accounting internal controls, the staff who do your cycle counting should not be involved with recording the inventory. This means you need to segregate duties involving cycle counts and inventory records. The more segregation, the better as more staff will perform checks and balances on each other (unless they are all colluding!).
For example, let’s say that you assigned your warehouse clerk to do the cycle count. You want to save money and avoid hiring expensive external auditors. Unfortunately, the warehouse clerk also happens to maintain the inventory records in your system as well. The risk of fraud and theft is much higher.
Hence, you should ideally appoint a cycle counting team that has no interest or stake in the inventory quantity recorded. Back to the example, the warehouse clerk could be assigned to do the actual cycle count. But the verification, recording, and documentation of the count should be done by the accounts or finance clerk.
7. How Should Cycle Counting Be Done?
Generally speaking, cycle counting can be implemented on a daily basis. It should be part and parcel of daily operations if possible. And much of this can be helped by using an inventory management system that allows data entry in the cloud and supports multiple warehouse locations.
A Typical Cycle Count Workflow
Here’s a typical workflow for inventory cycle counting:
- Update your inventory records first. Enter all outstanding inventory transactions.
- Print a cycle counting report. This tells you which goods are to be counted and their warehouse locations.
- Compare the locations, descriptions, and quantities in the report with the actual warehouse stock. Take note of multiple warehouse locations for the same stock.
- Highlight any differences between the report and warehouse count. Escalate these if the quantities involved are large or if entire product lines are missing.
- Review any means or solutions to prevent the discrepancy from happening again. Is the difference due to theft, fraud, loss or damage?
- Adjust the inventory records to compensate for the difference found by the cycle count. Only do this step if the errors are not due to human mistakes or outdated inventory records.
Some Caveats for Cycle Counting
It is important to update the inventory records first. If not, the cycle count will reveal an error and the inventory records will be adjusted to reflect it. Thus, when the actual transaction is entered into the system, you would have over or under-compensated for the quantity. This means inaccurate inventory records.
Multiple warehouse locations can also lead to confusion in cycle counting records. This is especially so for the same goods stored in different locations. Cycle counters may be counting the physical goods in the wrong location. Or they may enter the physical quantity in the wrong warehouse location of the report.
8. Summary of Best Practices for Cycle Counting
To summarise, here are our top 10 best practices to conduct an inventory cycle count:
- Update and refresh your inventory records before a cycle count
- Do at least one cycle count every quarter at a minimum
- Move to continuous cycle counts, and away from annual stock takes
- Use cycle counts to prevent stock-out or over-stocked inventory
- Perform cycle counts on your “A”-list goods first
- Try daily cycle counts if your SKU quantity allows it
- Weigh goods if they cannot be physically counted or handled
- Separate the cycle counting and inventory recording roles
- Review discrepancies between the cycle count and warehouses
- Adjust the inventory records only if errors are not due to human mistakes
You’ve seen how inventory cycle counts play a part in maintaining accurate inventory records. In fact, they should be an everyday part of business operations. They are less disruptive and inconvenient than annual stock takes. And they can be equally applied to goods sold by weight or volume. Hence, there’s simply no excuse not to have an inventory cycle count system in place.