Cycle Counts: An Essential
Tool for Inventory Management
If your business sells physical products, you’ve likely faced the frustration of stockouts or instances where your inventory software shows you have an item in stock, but you can’t locate it in the warehouse. Perhaps some products became obsolete, and you discarded them without updating your software. Or maybe there’s a bottleneck in your processes, failing to capture inventory movements accurately. These issues are just a few examples of common inventory discrepancies that can occur, regardless of how advanced your tracking technology or procedures are. This is why periodic inventory audits are essential.
One effective method for conducting these audits is known as cycle counting in the supply chain world. Cycle counting involves physically counting a portion of your inventory and comparing it to the data in your tracking systems, such as Warehouse Management Systems (WMS), Inventory Management Systems (IMS), or Enterprise Resource Planning (ERP) systems.
In this article, we’ll delve into the principles, benefits, implementation strategies, and best practices of cycle counting. Trust me, if you manage any type of inventory, you need to read this.
Table of Contents
Principles of Cycle Counting
Cycle counting is a systematic approach to inventory verification where small subsets of inventory are counted on a rotating schedule. The primary principles of cycle counting include:
1. Segmentation of Inventory: Inventory is divided into segments, often based on factors such as sales volume, value, or other criteria like ABC analysis. The bases for segmentation are determined by the nature of the business and the requirements of business operations.
2. Regular Intervals: Counts are performed at regular intervals, ensuring that all inventory items are counted within a specified period. The counts of fast-moving items must be performed regularly, like every week or every month. In contrast, the counts of slow-moving items can be performed once in six months or once a year. Consulting a professional is important to determine the frequency of cycle counts based on segments and company priorities.
3. Error Detection and Correction: Cycle counts are used to detect discrepancies between recorded and actual inventory levels. These discrepancies are investigated and corrected promptly.
4. Continuous Improvement: The process aims for continuous improvement in inventory accuracy and management practices. The aim of cycle counts must be to reduce inventory discrepancies so that the cycle count frequencies can be reduced.
Benefits of Cycle Counting
Cycle counting offers numerous benefits over traditional full physical inventory counts, including:
· Increased Accuracy: Regular cycle counts help maintain higher accuracy in inventory records, which is crucial for effective inventory management.
· Reduced Disruption: Unlike full inventory counts that often require shutting down operations, cycle counting can be integrated into regular business activities with minimal disruption.
· Improved Inventory Turnover: Accurate inventory data helps businesses manage inventory levels better, reducing overstock and stockouts.
· Enhanced Customer Satisfaction: Accurate inventory levels ensure that customer orders can be fulfilled promptly, improving overall customer satisfaction.
Cost Efficiency: Regular cycle counts are often less costly than full inventory counts as they require fewer resources and less time.
Implementation
Let’s consider the example of a business called “Sysco Food Service.” This warehouse supplies local businesses with essential food products like cooking oil, vegetables, sauces, and frozen foods. Since restaurants never close, they need consistent food deliveries every other day. Imagine the chaos if a restaurant places an order and Sysco responds, “We’re very sorry, but we’re closed today for inventory counting.” The restaurant is open, customers are arriving, and there’s nothing to serve. Naturally, the restaurant would start seeking other reliable suppliers like Gordon Food Services or local wholesale shops.
This scenario highlights a significant challenge for Sysco. Inventory checks are necessary every few months to remove expired or obsolete items, but closing operations each time isn’t practical. To address this, Sysco’s supply chain expert proposed a solution: “What if we perform Cycle Counts instead of full Stock-takes?” They divided the warehouse into three sections: frozen food, fresh food, and non-perishable dry products. Within these categories, some items sold quickly, while others moved slowly. Using ABC analysis, the inventory was further categorized.
For instance, let’s focus on the frozen food category. According to the analysis, this category needs cycle counting every six months. Within this category, fast-moving and slow-moving items were identified, determining how often each should be counted. Instead of counting the entire frozen inventory and deploying all employees, only four or five people count Category A items every month. Category B items are counted every three months, and Category C items every six months. This approach minimizes disruptions, requiring just a few hours to count a section of the inventory, rather than dedicating an entire day to counting everything.
Do you think this was a smart suggestion by the supply chain expert? I certainly think so. It was a brilliant idea, allowing Sysco to maintain its status as the top supplier for local restaurants. This story illustrates the importance and execution of cycle counts. However, implementing this strategy can be challenging. To successfully implement this strategy there some crucial considerations to ensure successful implementation in your business. But before we try to implement it, you would be wondering what benefits did Sysco get from implementing this Cycle Count strategy?
Benefits for Sysco
· Inventory Accuracy: Inventory accuracy improved from 85% to 98%, reducing stockouts and excess inventory.
· Operational Efficiency: Regular cycle counts were conducted without disrupting daily operations, unlike the previous full inventory counts.
· Cost Savings: The company saved on labor costs associated with full inventory counts and reduced carrying costs due to better inventory management.
· Customer Satisfaction: Improved inventory accuracy led to better order fulfillment rates and increased customer satisfaction.
Steps for Implementation
1. Top Management Support: Strong support from top management is crucial for the successful adoption of cycle counting practices.
2. Segmentation: Divide the inventory into large, commonly distinguishable segments. Learn more about this topic in a dedicated article called “Inventory Segmentation.”
3. ABC Analysis: ABC analysis categorizes inventory into three classes or more classes as required: A (high value, low volume), B (moderate value and volume), and C (low value, high volume), etc. Items in category A are counted more frequently than items in category C.
4. Scheduling: Develop a schedule that specifies how often different categories of items will be counted. For example, A items might be counted monthly, B items quarterly, and C items annually.
5. Training: Ensure that staff involved in cycle counting are adequately trained in counting procedures, use of technology, and the importance of accuracy.
6. Technology Integration: Utilize inventory management software that supports cycle counting. These systems can automate scheduling, track discrepancies, and provide reporting tools.
7. Root Cause Analysis: When discrepancies are found, perform a root cause analysis to understand why they occurred and take corrective actions to prevent recurrence.
8. Continuous Monitoring and Improvement: Regularly review cycle counting results and processes to identify areas for improvement and adjust practices as necessary.
Best Practices
To maximize the effectiveness of cycle counting, businesses should adhere to several best practices:
1 Consistency: Conduct cycle counts consistently according to the predetermined schedule. Consistency ensures that inventory records are continuously accurate.
2 Accuracy in Data Entry: Ensure that inventory transactions are recorded accurately and promptly. Errors in data entry can lead to discrepancies.
3 Segregation of Duties: Separate the responsibilities of those who handle inventory from those who perform counts to reduce the risk of errors and fraud.
4 Use of Barcodes and RFID: Implement barcoding or RFID technology to streamline the counting process and reduce human error.
5 Audit Trail: Maintain a detailed audit trail of all cycle counts, including dates, personnel involved, and discrepancies found. This documentation is vital for tracking and resolving issues.
6 Random Sampling: Occasionally include random samples of inventory in cycle counts to ensure comprehensive coverage and catch any potential issues.
7 Immediate Resolution: Address discrepancies immediately. Investigating and correcting errors promptly prevents them from compounding and affecting future counts.
Conclusion
Cycle counting is an essential tool for effective inventory management. By regularly auditing small subsets of inventory, businesses can maintain high accuracy, reduce disruptions, and improve overall efficiency. Implementing a successful cycle counting program involves strategic planning, adequate training, and the use of technology. When executed correctly, cycle counting can lead to significant benefits, including cost savings, improved customer satisfaction, and a more streamlined inventory management process. As demonstrated by Sysco Food Service, adopting cycle counting can transform inventory management practices, leading to enhanced operational performance and competitiveness.