Cycle Counting Overview
Cycle counting involves counting a small amount of inventory in the warehouse each day, with the intent of counting the entire inventory over a period of time. Any errors found during these small incremental counts should result in an adjustment to the inventory accounting records. Also, an investigation into the reasons for each error found should be conducted. The eventual result should be detailed procedures and training that yield very low transaction error rates and high levels of inventory record accuracy.
The items selected for cycle counts can be defined based on many sort criteria, such as most used or highest cost. The most commonly used method is simply to start in one corner of the warehouse and progress through the various aisles and bins, so that all items are counted on a rotating basis. If the latter method is used, it may also be necessary to recount certain items more frequently, if they are critical to the production process.
Cycle Counting Benefits
By engaging in cycle counting, a business will almost certainly experience higher levels of inventory record accuracy, which leads to higher confidence in the resulting inventory valuation. This may, in turn, lead to the elimination of physical inventory counts, since the inventory records are already so accurate that no periodic physical verification is required. If inventory no longer needs to be counted at the end of each reporting period, the result can be an accelerated closing process. If the outside auditors feel they can rely on these inventory records, they may scale back their audit procedures, which in turn reduces the audit fees they charge to the company. Also, there would no longer be a need to pay employees overtime to count inventory, or to close down the production area while physical counts are conducted.
Cycle Counting Procedure
The following steps are required for a successful cycle counting program:
Complete data entry on all inventory transactions, so the inventory database is fully updated.
Print a cycle counting report, which states the bin locations that are to be counted, and assign it to the warehouse staff.
The cycle counters compare the locations, descriptions, and quantities stated on the report to what they see on the shelf. They also trace what they see on the shelf back to the report, in case some items have not been recorded within the database at all.
Investigate all differences found and discuss them with the warehouse manager, and determine whether there is a pattern of errors that may require further action.
If further action is required, alter procedures, training, staffing, or whatever else is needed to eliminate the error.
Adjust the inventory record database to remove the error found by the cycle counter.
On a regular basis, audit the inventory and calculate the inventory accuracy percentage. Post the results in a public place, and pay bonuses to the warehouse staff if they attain predetermined record accuracy goals.
Clearly, a high level of commitment to a cycle counting program is needed to ensure that these steps are followed on an ongoing basis.
Cycle Counting Problems
If the inventory records are not first updated with all outstanding inventory transactions, it is possible that a cycle counter will detect an error and adjust it. If the actual transaction is then entered on top of the cycle counter's adjustment, the result may well be a more inaccurate inventory record than had originally been the case. This problem is particularly common when the same inventory item is stored in multiple locations, so there may be confusion about which location record to adjust for an inventory transaction.