Cycle Counting

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Cycle Counting Overview

Cycle counting involves the daily, ongoing review of a small proportion of total inventory. By engaging in an ongoing cycle counting review, a company can achieve a consistently high level of inventory record accuracy, while also investigating the underlying problems that cause inventory record errors. Cycle counts are conducted by experienced warehouse personnel, who schedule it into their normal daily work routines. A cycle counting program can be designed to give higher priority to those inventory items with higher usage levels (to avoid stockout conditions) or higher values (to avoid large-dollar inventory valuation errors).

Cycle Count Benefits

Cycle counting yields two significant benefits, which are:

Improved record accuracy. With a continual counting process in place, it is extremely likely that all or most of the items in a warehouse will be counted many more times than the usual once-a-year approach that occurs with a single year-end physical inventory count. Thus, inaccuracies will be found and corrected more quickly than would otherwise be the case.
Reduced errors. Of even more importance, the warehouse staff should be investigating why errors occur, and fixing the underlying problems. With an ongoing error correct program in place, the warehouse manager will quickly find that there are far fewer inventory record errors to fix.

Cycle Count Selection Methods

There are three methods most commonly used to select inventory for counting in a cycle count program. They are:

Valuation emphasis. Select the 20% of the inventory items that account for 80% of its total value, and assign a greater count priority to these items. Accountants prefer this approach, because the resulting dollar value of the inventory is more likely to match the entity's accounting records.
Usage emphasis. Select the 20% of the inventory items that account for 80% of its total usage, and assign a greater count priority to these items. The materials planning staff prefers this approach, because there is less chance of the materials planning system having incorrect source information, which in turn means that there will be few stockout conditions to interrupt manufacturing or sales.
Location emphasis. Simply start in one corner of the warehouse and work your way through it by sequential location code. This approach ensures that the entire inventory will be counted the same number of times, and is the simplest approach.

Certain inventory items may be so critical that you should schedule cycle counts of them every week - or even every day. Other inventory items may move so slowly that a single annual count is sufficient.

Cycle Counting Procedure

To engage in cycle counting, you first have to clean up the inventory records sufficiently, and then you can conduct the actual cycle counting. The clean up steps are:

Identify all inventory. Make sure that each item is correctly labeled with a part number.
Consolidate the inventory. Cluster parts together for easy counting, rather than storing the same item in multiple locations.
Count and box the inventory. Count all the inventory and then box or bag it. Seal each container, with the quantity marked on the seal, so that a glance at the container will reveal the complete quantity of the part.
Create warehouse locations. Clearly mark every bin location, which should include the aisle, rack, and bin number.
Assign inventory to locations. Access the computer system and assign a location code to every inventory item.
Create a cycle counting report. Decide which method you will use to select items for a cycle count, and have a programmer create the report. The report must include the item number, item description, and on-hand quantity, sorted by location code.
Lock down the warehouse. Install a fence around the warehouse and lock the gate. Also, require an inventory log-in and log-out procedure for any inventory passing through the warehouse gate.
Initiate cut-off controls. Create rules to complete all inventory-related transactions in a timely manner. Otherwise, cycle counters will find record discrepancies and correct them, which will be followed by the entry of preceding transactions that will render the inventory records more inaccurate than they were at the start.

Once you have completed the preceding steps, use the following activities to conduct a cycle count:

Assign count areas. It is better to have cycle counters specialize in certain areas of the warehouse, which tends to improve their count accuracy.
Print the cycle counting report. Verify that all inventory transactions have been completed, and then print the cycle counting report.
Conduct the count. Trace all items listed on the report to their physical locations, and record corrections on the report. Also, trace all items in the assigned physical locations back to the report, which will uncover items not recorded in the inventory database at all.
Investigate and discuss. Review the historical records in the inventory database to determine why errors occurred, and discuss your findings with the warehouse manager and the other cycle counters. The group should decide if there is a pattern of errors, and how to keep the errors from arising again.
Adjust procedures. The group should decide if it should alter its materials handling, training, and recordation procedures to eliminate the error.
Correct errors. Enter an adjusting entry in the inventory record database to match the database count total to the actual total.
Audit the inventory. Audit the inventory once a week, and post the results for easy review by the warehouse staff. It may be necessary to post accuracy by aisle, in case some warehouse areas are particularly prone to errors. If so, assign the best cycle counters to the least accurate aisles.
Pay bonuses. Pay the entire warehouse staff a monthly bonus at the end of each month, based on the audited inventory accuracy.

Cycle Counting Problems

There is a significant risk of having a cycle counting program actually increase the number of inventory record errors. This problem arises when there is a delay in entering inventory transactions into the computer system, so that an inventory counter is basing a cycle count on incorrect on-hand records. The problem can also arise if the storage system is complex, with the same item being stored in multiple locations, and when the counters are poorly trained. Finally, if high-value or high-usage items are counted more frequently, this also means that low-value or low-usage items will be counted less frequently, and so are likely to have a lower level of inventory record accuracy.