Cycle counting definition
/What is Cycle Counting?
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.
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How to Conduct a Cycle Count
The following steps are required for a successful cycle counting program.
Step 1. Enter all Transactions
Complete data entry on all inventory transactions, so the inventory database is fully updated.
Step 2. Print Counting Report
Print a cycle counting report, which states the bin locations that are to be counted, and assign it to the warehouse staff.
Step 3. Compare Actual Inventory to Report
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.
Step 4. Investigate Variances
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. This is the most important cycle counting activity, since it can result in a substantial decline in inventory record errors once the underlying issues have been resolved.
Step 5. Update Processes
If further action is required, alter procedures, training, staffing, or whatever else is needed to eliminate the error.
Step 6. Update Inventory Records
Adjust the inventory record database to remove the error found by the cycle counter.
Step 7. Audit the Accuracy Percentage
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. Doing so aligns the interests of the warehouse staff with those of the company.
Clearly, a high level of commitment to a cycle counting program is needed to ensure that these steps are followed on an ongoing basis.
Methods of Cycle Counting
There are several methods that can be used for a cycle counting program. They are as follows:
ABC analysis cycle counting. This method prioritizes inventory items based on their value and importance—A items are high-value, B items are moderate-value, and C items are low-value. A items are counted more frequently due to their financial impact, while B and C items are checked less often. This approach helps focus resources on the most critical inventory, improving overall accuracy and control.
Random sample cycle counting. Random sample cycle counting involves selecting a random set of inventory items to count at regular intervals. It ensures that every item has an equal chance of being counted, regardless of value or turnover. This method is useful for identifying systemic errors or issues across the entire inventory.
Control group cycle counting. Control group counting focuses on repeatedly counting a small, stable group of items over a period of time. It helps identify and correct errors in the counting process or system setup before expanding to the broader inventory. This method is often used to test and refine inventory procedures.
Geographic cycle counting. In this method, counts are conducted based on the physical location of items within the warehouse or storage area. Specific zones or sections are scheduled for counting on a rotating basis. It simplifies logistics for counters and can increase efficiency in large facilities.
Opportunity-based cycle counting. This approach takes advantage of operational events, such as stock movements or restocking, to perform counts. Items are verified during regular warehouse activity, reducing the need for separate counting sessions. It integrates counting with daily operations, saving time and labor.
Event-triggered cycle counting. Event-triggered counting occurs when specific conditions arise, such as a stockout, discrepancy, or inventory adjustment. These events signal potential issues and prompt immediate verification of affected items. It targets problem areas to prevent errors from escalating or recurring.
Advantages of Cycle Counting
Cycle counting is highly recommended, because it brings several key advantages to the management of inventory. These advantages are as follows:
More accurate valuations. 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.
Eliminate physical counts. The use of cycle counting may lead to the elimination of physical inventory counts, since the inventory records are already so accurate that no periodic physical verification is required.
Faster closing process. If inventory no longer needs to be counted at the end of each reporting period, the result can be an accelerated closing process.
Reduced audit procedures. 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.
Lower labor cost. 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.
Disadvantages of Cycle Counting
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.
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