Cycle Counting

Updated on January 2, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Cycle Counting Inventory?

Cycle counting refers to an inventory control technique that involves estimating a warehouse’s inventory without counting every object inside. Organizations use it to track the ongoing inventory for reporting, accounting, distribution, and operational functions. Businesses can ensure the accuracy of their inventory counts using this technique.

Cycle Counting

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Such an auditing technique can help save time and allow businesses to steer clear of plant closure for adding up all the items in the inventory. Companies may conduct this process while carrying out regular operations through a small team of specially trained people. This process can be of various types, for example, control group, random sampling, and ABC.

Key Takeaways

  • Cycle counting refers to a method that involves only counting a small part of the total inventory at fixed intervals while ensuring eventually, all the items inside the inventory are counted over a certain duration.
  • There are various cycle counting techniques that businesses can utilize to ensure inventory accuracy. Some examples are random sampling, ABC, and statistical process control.
  • A noteworthy cycle counting benefit is that it provides businesses with a cost-effective way to mitigate inventory risk.
  • Best cycle counting practices include documenting processes, results, and changes and carrying out investigations when errors occur.

Cycle Counting Explained

Cycle counting refers to a process that involves counting a small part of the inventory at regular intervals, for example, weekly or monthly. Businesses perform this procedure to check their inventory to avoid the enormous disruption of operations that typically result from a complete physical inventory count. This method is suitable for large warehouses storing various products or different kinds of items.

The steps businesses must follow to carry out a cycle count are as follows:

#1 – Review Records

Organizations might want to begin with a database that is accurate. They must start the process by correcting and reviewing the data entry concerning every inventory transaction.

#2 – Upload/Print A Cycle Count Report 

Next, businesses must create a cycle counting report.

#3 – Start Counting

The people engaged in counting must review all inventory locations, quantities, and descriptions from the report that they created. They must compare the figures in the report to the actual items on the warehouse shelf.

#4 – Carry Out An Investigate And Reconcile

The next step involves identifying the differences identified during the counting process and reconciling the same with the business’s inventory manager. In this step, one must look for error patterns.

#5 – Alter Procedures

Execute inventory counting procedures or policies when necessary.

#6 – Make Adjustments To The Records

Make alterations in the database consisting of inventory records so that it reflects what is present on the shelves.

#7 – Compute And Repeat

Organizations must regularly audit their inventory and compute the accuracy percentage. This process allows businesses to verify the items they have in stock. Mostly, organizations need to go by their reorder points and sales to monitor what is in their warehouse. If they utilize any inventory management software, updates concerning quantities occur in real-time.

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Methods

Let us look at the cycle counting techniques in detail.

  • Random Sampling: This method involves selecting and counting different products each time. Organizations can decide to choose an item for each count until the counting of all products takes place. This method can help a business identify theft or shrinkage.
  • ABC: This method involves assigning a value to every product. The top 20% accounting for 80% of the overall revenue has an ‘A’ rank, while the next 30% and the remaining 50% of the items accounting for 15% and 5% of the total revenue, respectively, have the ‘B’ and ‘C’ ranks, respectively. Note that the businesses count the A-ranked products most often since they are the items with the highest value to them. On the other hand, the counting of B and C-ranked products takes place less frequently, based on the value to the organization.
  • Control Group: In this case, the repeated counting of a small number of products occurs over a specific duration to find any anomaly. Organizations can carry out such a process to spot problems related to other counting procedures.

Some other types of this method are as follows:

  • Location-Based: It involves counting stock in parts of any warehouse one by one. In this case, typically, businesses assign different counters to the warehouse’s different sections.
  • Statistical Process Control: This technique first involves utilizing software to find out the items that have the highest possibility of being associated with inaccurate inventory. Then, the employees start counting those products.
  • Opportunity-Based: When using this method, businesses count products at certain times, for example, when the stock for that product is low or the item is reordered.

Types

This auditing technique is of two types. In other words, it can have two approaches. Let us understand them.

  • Diminished Population Counting: Once the counting of the products is over, the company may not count some items at all. The counting of other items occurs frequently because of a random selection procedure.
  • Constant Population Counting: Once the counting of products is over, the business excludes the same items from cycle counts in the future until the counting of all items in the inventory is complete. After that, this process starts again. 

Examples

Let us look at a few cycle counting examples to understand the concept better. 

Example #1

XYZ Shampoo Company carries out a cycle counting process every quarter in their warehouse for three kinds of shampoos by using the random sample technique. A team of 5 people is responsible for counting a specific number of bottles of each shampoo. Then, they estimate how many bottles the entire warehouse has. Note that they replace every bottle inside every night.

As a result, they are likely to count some of the bottles a couple of times. That said, the impact of such duplication is minimal as they count many shampoo bottles.

Example #2

In May 2023, San Jose, California-based Vimaan announced the launch of StorTRACK to address the ongoing challenge associated with warehouse inventory accuracy. This new offering is the next generation in technology concerning cycle counting.

It carries out automated scanning of all shelves in a warehouse. Moreover, it utilizes advanced machine learning to count inventory, read labels, generate a digital and visual reconstruction of a warehouse, and reconcile against any warehouse management system (WMS). Thus, it allows businesses to ensure 100% inventory accuracy.

Best Practices

Some of the best practices of this technique are as follows:

  • Classifying items into respective counting groups through the utilization of documented, specified processes when using the ABC technique 
  • Closing every transaction for stock items prior to the cycle count
  • Counting every product for the stock-keeping units (SKUs) listed 
  • Ensuring teams count every item at least quarterly 
  • Utilizing the formula concerning inventory accuracy to spot alterations over time 
  • Identifying the fastest-moving products in the warehouse and marking or ranking the items as fastest to slowest
  • Dedicating particular personnel to the different counting teams 
  • Documenting the alterations, processes, and results
  • Performing investigations when errors materialize
  • Initially, carrying out counts twice to ensure the numbers’ accuracy 

Advantages And Disadvantages

Let us look at the benefits and limitations of this method.

Advantages

  • It offers a cost-efficient way of managing risk associated with inventory.
  • This method saves both time and effort.
  • It offers organizations flexibility, enabling organizations to identify which products are essential for them and count them more frequently.
  • The method ensures minimal disruption.

Some other cycle counting benefits are as follows:

  • Improved customer service levels
  • Higher rates of order fulfillment 
  • Fewer errors
  • More accurate inventory evaluations
  • Absence of employee overtime costs
  • Identification of thefts in time
  • Decreased obsolete inventory and inventory write-offs 
  • Increased sales
  • Potential elimination of yearly counts 
  • Lower audit fees

Disadvantages

  • If businesses do not carry out the process correctly, for instance, if they do not close out the transactions, the cycle counts may be inaccurate.
  • When businesses have multiple locations, they must know the count for every location and all locations combined. This requires additional planning and coordination.
  • This method can lead to an operational standstill. However, it does not lead to as much disruption as a physical count.
  • A business might find it challenging to select the right method and frequency. 
  • Motivating and training the staff can be challenging.

Cycle Counting vs Physical Inventory Counting

Understanding the concepts of cycle and physical inventory counting can be confusing for one who is new to inventory management. People can eliminate potential confusion and understand how the two processes differ by knowing their distinct characteristics. Let us look at them.

Cycle CountingPhysical Inventory Counting
Businesses count certain SKUs over a certain period.Organizations count all SKUs in one go. 
This method is suitable for large warehouses with different types of products. It is suitable for organizations dealing with limited stock. 
A small team of employees can carry out this type of counting.The physical inventory method typically requires the full attention of a lot of employees. 
It offers businesses flexibility. This method offers minimal flexibility. 

Frequently Asked Questions (FAQs)

1. What is an SOP for inventory cycle counting?

A statement of purpose or SOP for this audit method in inventory management includes clearly defined responsibilities and roles. Moreover, one must note that such a method must include safeguards, processes, corrective actions, and controls.

2. What are the cycle count discrepancies?

When carrying out this method, individuals may find some inventory records do not match the actual counts. This mismatch is known as a discrepancy. Note that discrepancies may occur because of any of the following reasons:
– Inventory movement
– Inventory variance
– data entry errors
– Inventory shrinkage

3. What is a cycle count variance?

Cycle count variance, or CCV, refers to the difference between the total inventory count recorded by a business and the actual physical count following a cycle count. Organizations can compute this metric by computing the difference between the recorded and physical counts for all products and then adding the absolute values.

This article has been a guide to what is Cycle Counting. We explain its methods, advantages, examples, comparison with physical inventory counting, and types. You may also find some useful articles here –

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