Cycle counting

Cycle counting is the process of verifying the on-hand quantity of a specific number of stock products every day. In previous articles, I have described how to set up and maintain an effective cycle counting program and why this process is usually better than a full physical inventory for maintaining an accurate perpetual inventory in your computer system. But verifying on-hand quantities is only one of the advantages of cycle counting. The other benefit of a cycle counting program is to improve your business processes, including:
* Making sure that all material movement is properly recorded.
* Ensuring that stock receipts are put away in the proper location.
* Verifying that the right quantity of the right item is shipped on outgoing orders or is pulled from stock for an assembly.
* Preventing shrinkage from theft and the mishandling of stocked items.
Absolute Value of (Quantity Counted – Current Stock Level)] ÷ Current Stock Level
Process improvement results from carefully analyzing significant stock discrepancies.
Including the "absolute value" of "Quantity Counted – Current Stock Level" in this equation signifies that a discrepancy should be analyzed if significantly more or less inventory is found during the cycle counting process.
It is impossible to achieve effective inventory management without accurate stock levels in your computer system. A comprehensive cycle counting program is a valuable tool for ensuring that the quantities in your computer system agree with what is physically in the warehouse. But to be certain that stock levels remain accurate over time, you must investigate significant stock discrepancies and take corrective action to prevent similar problems from reoccurring in the future – that is, you must utilize cycle counting to improve the way you run your business!

Stock counting, cycle counting

Cycle counting and the process of counting some stock items or warehouse locations every day are a valuable tools in ensuring the accuracy of your perpetual inventory. We've seen numerous cases in which organizations, after implementing a comprehensive cycle counting program, have had a much more accurate perpetual inventory than they had when they performed full physical inventories. Because accurate on-hand quantities are vital to both providing outstanding customer service and maximizing inventory turnover, it is not surprising that more and more distributors and manufacturers are implementing cycle counting programs.

But cycle counting programs can be difficult to maintain over a long period of time. Many firms become frustrated with the "coordination" problems inherent in cycle counting that are usually not found in a full physical inventory. When companies conduct a full physical inventory, they temporarily halt all normal material movement – that is, they stop filling orders, putting away stock receipts, shipping material, etc. Before this is done, a special effort is made to ship as many orders as possible and put away all stock receipts. During the actual counting process the business is virtually closed down. Counters do not have to worry about someone doing something that will affect the quantity in stock during the full physical inventory process.

Extensive preparation is necessary for a full physical inventory. It is not practical to complete this preparation before each daily cycle count. It is equally difficult to conduct cycle counts only when a business is closed and there is no material movement. After all, cycle counting should be performed every day. Even if a company counts before or after normal working hours when there is little or no material movement, paperwork involving items being counted can be "floating" somewhere in the warehouse or office. For example, a quantity of an item may have been pulled from the shelf but not yet shipped. Or a stock receipt for a product may have been put away but not yet entered into the computer system.
This simple process has the potential to dramatically cut the time necessary to perform daily cycle counting. No longer will people roam around your facility trying to determine if a particular order was picked or put away before or after a product was cycle counted. The result: More accurate inventories with less effort and frustration, a winning combination for any organization. This method could turn out to be a very valuable tool in your quest to achieve effective inventory management!

Physical Inventory and Cycle Counting

Most companies count their fast-moving items more often than their slow-moving products. And some products are easier to count than others. As a result, the "cost of counting" can vary from one item to another.

In calculating the counting element of the carrying cost, we usually start by grouping similar stocked items that are stored in similar storage units. We then determine the average number of products in each group that can be counted in one hour as well as the labor cost of performing the count. This cost includes the time spent:

* Performing the actual count
* Entering the count information into the computer system
* Reconciling any discrepancies in the count

The total cost per hour is divided by the number of products that can be counted in that hour. The result is then multiplied by the number of times each product is scheduled to be counted in a year to arrive at the total cost of counting a specific product.

Cycle Counting -1

by Jon Schreibfeder
Without accurate stock level information in your computer, effective inventory management is impossible. No matter what sophisticated tools you have in your inventory management system, if the computer thinks you have 100 pieces of an item, and there are really only three on the shelf, the system won’t replenish your inventory when it should or order the right quantity.


Unfortunately, most distributors only verify the stock balances in their computer once a year, when they perform a physical inventory. During the physical count, every item is counted and, if necessary, the balance in the computer is adjusted to reflect the actual quantity on the shelf. Even if you assume that the physical inventory results in an accurate count of each stocked product (a big assumption for many distributors), how long do the counts remain accurate? One month? Two months? Six months? Eleven months after the physical count, what percentage of stocked products still have an accurate available quantity in the computer?

In order to receive all of the benefits from a good inventory management system, stock balances must be at least 97% accurate, every day of the year. This means that the actual available quantity of every item in the warehouse is no more than 3% greater or less than the available quantity displayed on your computer inquiry screens. If the computer says there are 100 pieces of an item on the shelf, there should be no less than 97, nor more than 103. Note that 97% is the minimum acceptable standard. One hundred per cent accuracy is the optimal goal that you should strive to attain.

The best way to ensure that a minimum of 97% accuracy is maintained is to continually count your products. That is, count part of your inventory every day, and count each item several times per year. This process is called "cycle counting."

If the answer is so simple, why doesn’t every distributor abandon their annual physical inventory and cycle count? Do distributors enjoy the annual wall-to-wall count so much that they refuse to give it up? I don’t think so. In fact, many distributors have implemented cycle counting programs only to abandon them when they see that their inventory accuracy hasn’t improved, it may even have gotten worse!

For all of its benefits, there is one logistical problem which makes cycle counting more difficult than a complete inventory. That problem is material movement. Think of the environment that exists (if you follow the guidelines in the previous two articles) when you conduct an annual physical inventory:
* All stock receipts have been placed in their proper bin location.
* All printed sales orders and transfers for stock material have been filled.
* Computer records for these receipts, sales orders, and transfers have been updated.
* All customer returns have been processed and the material returned to stock.
* No customer orders are filled nor material moved until the counting of all products in the warehouse is completed

All material movement has stopped. You are counting a fixed target.