Cycle Counting (#192)
/In this podcast episode, we discuss how to install and use a cycle counting system. Key points made are noted below.
Interim inventory observations are just a physical count of the inventory that happens at any time other than the end of the year. You do an interim count when the inventory record keeping system isn’t giving you accurate results. That could mean there’s a perpetual inventory system in place that really stinks, or there’s a periodic inventory system, and that’s not designed to have accurate inventory records in the first place.
What to Do With Inaccurate Inventory Records
So basically the issue is that the inventory records are inaccurate, and what to do about it. There’re three options. You could guess at the ending inventory balance, which would be based on an extrapolation of the historical ending inventory figures for the past few months. This is generally a really bad idea, because it doesn’t account for all kinds of inventory write-offs that might have occurred, like obsolescence, or theft, or excessive scrap. So estimates of inventory tend to be too high, which means that the reported profit figure is too high.
Your next choice is to conduct a physical inventory count. If you’re going to do this, make them as infrequent as possible, for a couple of reasons. First, you have to shut down the warehouse to do the count. Second, the count involves staff time, and possibly on a weekend, so there’s also the cost of overtime. And third, the result isn’t necessarily all that accurate. The reason is that the people doing the count may not work in the warehouse, so they don’t correctly identify the inventory, or they miscount it.
Even so, there may be no choice, if you don’t want to take the risk of guessing at the ending inventory balance, and there’s no cycle counting system in place yet.
Which brings us to the third option, which is cycle counting.
The Nature of Cycle Counting
In short, cycle counting involves having the warehouse staff do a count of just a few inventory items every day. If they find a mistake, they correct it in the inventory records, so that the records match what they physically see. And on top of that, any error triggers a discussion about why there was an error, so there’s an ongoing investigation into the causes of record errors.
Over time, the number of underlying reasons for record errors goes down, which means that the accuracy of the inventory records goes up. To the point where there’s really no need to do a physical count at all. So that’s the brief view of cycle counting. I’ve installed the system in several companies, so I’ll add some additional thoughts about it.
The most important issue is that the basic record keeping system has to be a perpetual system, which is the one where the inventory records are constantly being updated for incoming and outgoing inventory items. And, the records have to be updated really fast. There can’t be a backlog of transactions that haven’t been added to the inventory records yet.
Otherwise, you get a situation where a cycle counter finds an error, and corrects the database to match what he found, and then the warehouse clerk records a transaction in the system that should have been recorded the day before, and now the inventory records are wrong. So to get around this problem, I suggest giving portable terminals to the warehouse staff, so they can update the records as they move inventory.
The next issue is how to select items for a cycle count. There’re a lot of ways to do it, like counting more valuable items more frequently, or counting items that are scheduled to be needed in production, so you can spot shortages in advance. My approach is the simplest of all, which is basically to start in the lower left hand corner of the aisle furthest to the left, and end at the upper right hand corner of the aisle furthest to the right. And that’s because it’s the simplest. The warehouse staff can do this themselves. Just put a piece of red tape at the spot where they stopped counting the day before, and count another small piece of real estate the next day, and move the red tape forward a bit to mark the new ending spot.
This approach is not fancy, but it’s not subject to much error – unless you lose the piece of red tape.
And actually, I’ve modified the basic system, so that we keep high-turnover items in one aisle, and have the best cycle counter count that aisle over and over again. That keeps any shortages from developing.
How to Do a Cycle Count
Now, how to do a cycle count. Figure out which block of real estate to count, and run a report from the inventory system that lists all of the items in that block. Then take the report over to the cycle counting area, and match everything on the report to what you see on the shelf. That covers half the work. Then you trace everything on the shelf to what you see on the report. The second step is needed to see if anything has been moved into a bin but not recorded in the inventory database – which is really common.
The next issue is figuring out when to do cycle counts. And the answer is, at the beginning of each shift. Once the flood of work hits the warehouse later in the day, it’s a real struggle for the warehouse staff to do cycle counts, so don’t put the pressure on them. Just get it done in the first few minutes of the day.
Another point is to assign the warehouse staff to specific count areas, so when you find an error later on, there’s no question about who’s responsible for it. That way, you can get a competition going among the warehouse staff, which gets pretty intense if you start handing out cash bonuses each week for who has the most accurate area.
The next thing to do is a weekly accuracy audit of the warehouse. This means comparing the inventory records at random to the physical inventory, and then posting the accuracy scores in the warehouse. This really matters to the warehouse staff, especially if they’re being paid bonuses, which I totally recommend.
In terms of progress, it’s pretty slow. The initial accuracy level might only be 10 or 20 percent, and it’s a long ways from there to 100% - which you might never reach. I usually declare victory in the upper 90% range, which could be anywhere from three months to a year down the road.
The Effects of a Cycle Counting System
But the nice part when you get there is that there’s absolutely no need for a physical count. If you were to do a physical count at that point, the accuracy level of the records would actually decline, because of the errors that creep into a physical count.
When the system is really working well, we’ve just printed out an inventory report and handed it to the auditors at the end of the year, and told them to go check our numbers. There was no physical count at all. The funny part was that the warehouse staff knew the records were perfect, so they trailed along behind the auditors – just to gloat when they couldn’t find anything wrong.
So, in short, the ultimate solution is definitely cycle counting, but it might take a while to get there. In the meantime, guessing at the ending inventory balance can be a career-limiting move, so it’ll probably be necessary to do some physical counts. The pain of doing those counts might provide a little extra boost to get going on a cycle counting program.