What is an Inventory Cycle Count and Why is it Important?

An inventory cycle count is a process that requires you to count a small amount of your inventory at a specific time, usually on a set day, without handling your entire stock in one go. It’s a type of inventory auditing method that ensures your inventory is accurate and up to date at all times. The purpose of cycle counting is to apply statistical analysis to understand your inventory. You’ll use statistical sampling to choose which items to count, helping you estimate how accurate your inventory records are without having to tally every item all at once. For example, if the SKUs you counted this month all come in at roughly 15% below the count in your records, you can assume the rest of your inventory probably also experienced 15% shrinkage.

In essence, an inventory cycle count is pretty similar to the physical inventory counts you’ve done, except it does so with a different approach. When you take a physical inventory count, you count 100% of your inventory at once. It may take several weeks of undivided attention, and many warehouses have to halt other operations to keep up. Instead of doing physical counts, you can delegate small portions of your inventory to certain employees on a predetermined schedule. This allows you to go over all of your stock a little at a time in a focused manner, lowering the risk for inaccuracies.

Generally, a cycle count can take anywhere from a day or week to several months, depending on the size of your inventory. You can schedule them on an ongoing basis so your inventory is always well accounted for. Though it can be a lengthy process, performing inventory cycle counts instead of one large physical audit can actually save you a lot of time, benefiting your business. So how can you get started with your inventory cycle count? Certain practices can make this simple method even easier.

What is an Inventory Cycle Count?

Cycle count is, by far, the most effective procedure to take stock of what’s currently in a given warehouse. Simply put, cycle counting is a time-saving effort. Instead of counting the whole physical inventory in a given factory and halting the whole supply chain, a small set of items is picked periodically and counted. The result of the count is considered as reference and is compared with the count in your system to determine if it matches or not. This is done with subsets of different categories or storage areas according to a given schedule.

Why In Inventory Cycle Counting Important?

Cycle counting is a way to verify the inventory you have in stock and reset any inaccuracies. For the most part, you may be going by your sales and reorder point records to track what’s in your warehouse. If you use inventory management software, your quantities update in real time as sales, reorders and shipments occur. However, over time, manual and automated tracking can both lose inventory accuracy. This is because you can’t always account for shrinkage and the occasional typo in data entry. If any of the numbers in your system are incorrect, your cycle count is a chance to recalibrate.

In your warehouse, some inventory may become damaged, lost or stolen. Your inventory tracking system will probably count these items as in-stock, even though you cannot sell them. Besides updating your system to reflect missing inventory, cycle counting gives you a chance to inspect and remove any merchandise unfit to sell. Regular cycle counts can also help you notice which products or areas are most susceptible to shrinkage. With this data, you can get to the bottom of employee theft or facility issues that may cause product damage.

What is the Difference Between a Physical Count and Cycle Count

Physical Inventory Count

Physical inventory counts are when you physically count all the products in your store and/or warehouse and compare it to what’s recorded in your inventory software, such as eFactory, DCL’s proprietary inventory management software or spreadsheets. While it is recommended to do a full physical inventory count once or twice a year, it is extremely time consuming and leaves more room for human error.

Cycle Count

Cycle counts make sure the cost and count of your inventory in your books matches what is in your warehouse and on your shelves. However, cycle counting is completed in manageable pieces on a regular basis throughout the year, focusing only on a limited number of products at a time.

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3 Types of Inventory Cycle Count Procedures

Mainly there are three types of cycle counts. You can use them individually or build a strategy to use them simultaneously.

1. ABC Cycle Counting

Perhaps the most commonly used method is ABC analysis. It is also the most complex method in many cases. ABC analysis is based on the Pareto Principle which suggests that 80% of all outcomes directly stem from 20% of causes. Applied to inventory management, ABC analysis assigns a particular value to each product in counting inventory. This means that items with higher value get counted more frequently than items with a lower value.  Value can be determined in a number of ways. Most often value is assigned to each class of item by dollar amount, demand, or turnover rate. The count frequency of each class of item is proportional to this 80-20 rule. 20% of the products get counted 80% of the time and so on down the line. 

In practice, it looks like this: 

Class A – Top Tier

  • Highest Dollar Value or Highest Demand 
  • Lowest Quantity / Space Requirements (About 10%)
  • Counted every month

Class B – Mid Tier

  • Average-to-High Dollar Value or Demand
  • Medium/Small Space Requirements (About 20%)
  • Counted Every Quarter

Class C – Low Tier

  • Lowest Dollar Amount or Demand
  • Highest Quantity / Space Requirements (About 70%)
  • Counted 1-2 times per year

This method can be beneficial because it focuses counting efforts on only the items or areas that have the most impact on the success of the business. However, this method does pose risk for over-counting certain prioritized areas which can lead to inaccuracy of the sample. In some cases, you can reduce the risk by allowing warehouse employees to reassign or adjust the value of certain areas based on defined criteria and observations. This can help refine the process over time by focusing on products that truly need the most attention.

2. Random Sample Cycle Counting

When a number of items to be counted are chosen at random, this process is known as random sample cycle counting. When a company’s warehouse has a large number of similar items, they can randomly select a certain number of items to be counted. The count can be performed each day or workday so that a large percentage of the items in the warehouse are counted in a reasonable period.

Two techniques can be used in random sample cycle counting; constant population counting and diminished population counting. Constant population counting is where the same number of items are counted each time a count is performed. This can mean that certain items are counted frequently and some items are not counted, as the selection of items to be counted is random. Diminished population counting is a technique where a number of warehouse items are counted and then excluded from being counted again until all of the items in the warehouse are counted. Each count selects items from an ever-decreasing number of eligible items to be counted.

3. Control Group Cycle Counting

According to this type of counting strategy, you should count a small set of items repeatedly over a short period to find if there are any errors. This will also reveal any issues in the counting technique that might be causing errors. This process is repeated until all issues in counting are resolved.

10 Inventory Cycle Counting Best Practices

To get the best results, there are a few things you might want to include a few things in your inventory management strategy. These cycle counting best practices include:

  1. Make cycle counting a regular procedure for your fulfillment center instead of a one-time thing. Frequent and regularly scheduled cycle counts can help you in identifying any latent issues at an early stage. It also means low inventory write-offs. Large warehouses have a daily cycle count of different sections and categories to cover the complete inventory.
  2. When compared, ABC cycle counting is more effective than random cycle counting. Regular counting of high-value items makes more sense and is more accurate than taking a random group of items to be representative of the whole.
  3. You should pay the most attention to the A category of your inventory. Although it comprises 20-25% of your inventory, it gives the highest return on investment. Frequent counts can help you with finding any discrepancies — and it can be applied to other groups as well.
  4. A dedicated trained team to perform inventory cycle counts should be assigned for the task. If you have a large inventory, then a large team can do the cycle counts regularly. If your inventory is small, then a few employees can be assigned the task to be completed daily during office hours.
  5. Two different teams should review the items before updating any official counts in order to find discrepancies for reviewing.
  6. Make sure all the transactional activity is temporarily closed once a set of items are selected to be cycle count.
  7. Aim for inventory accuracy by keeping track of the inventory metrics. This will tell you where the system is improving or failing over time.
  8. The ideal time to perform cycle count is either the start of the day before the operations begin in the storage facility or at the end of the day when the operations are closed.
  9. This might seem intuitive, but the full cycle count process should be organized and documented for future reference.
  10. Understand the importance of keeping cycle counting and inventory recording as different procedures. This will increase the accuracy of your inventory management.

FAQ About Inventory Cycle Counts

Effective inventory management is a struggle for many ecommerce businesses. These are some of the most common questions associated with inventory cycle counts.

When Should I Count My Inventory?

Ideally, your inventory counts should occur when operations cease at the end of the day or before they start. If you must do your inventory while operations are continuing, you must have a system in place to account for newly arriving merchandise or items picked for shipping.

How Often Should You Count Your Inventory?

The short answer is as often as possible. A full cycle count of all of your inventory should be done at least once a quarter. However, many warehouse operations do daily cycle counts for strategic sections to avoid counting large amounts at the end of the quarter. Physical counts should be done at least once per year.

Can I Use Anyone To Count Inventory?

You can, but it’s not advised. Most warehouse operations have count teams or individuals that have been trained on procedures and are monitored for accuracy. You should have a tracking mechanism in place to assure your teams are counting accurately. 

Do I Need A Warehouse Management System / Inventory Management System?

You can do it all by hand and track it in Excel, but the risk of errors is significant. A warehouse management system (WMS) and inventory management system (IMS) will dramatically improve your accuracy and allow you to do robust reporting on demand. Also, an IMS will sync with online marketplaces and integrate with your ordering, sales, and shipping platforms for a seamless experience.

Bottom Line

Better inventory control is one of the easiest ways to improve revenue, but many companies focus their attention elsewhere. This is a mistake. Conducting complete physical inventories can be a daunting undertaking, requiring time, staffing, and closing down your warehouse. It doesn’t have to be this way, though. Cycle counts provide an alternative method of monitoring inventory that can be completed regularly, with a small team, and without suspending operations and losing money. Beyond that, the various ways to conduct cycle counts provide flexibility for your company. Find the one that works for you and tweak it as needed. No matter which cycle count approach you choose, you’re going to get more frequent and accurate numbers regarding inventory.

Setting up a cycle count system can be a little challenging if you’re used to full-scale physical inventories. Still, by following the guidelines and best practices we’ve outlined in this article, the transition should be simple and painless.

 

Help with inventory management is one of the many benefits to working with a 3PL. If you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.

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