Accurate inventory data is crucial to business success because inventory information impacts everything from customer fulfillment to financing. When inventory counts are wrong, service, efficiency and profitability all suffer. It prevents companies from forecasting accurately, and they may over-order inventory or find they don’t have enough stock on hand to keep their commitments to customers.
However, maintaining accurate inventory information can be challenging. Traditionally, many companies have relied on time-consuming periodic physical inventory counts, which can interfere with everyday business operations. Nowadays, many are moving to a more flexible and agile approach: cycle counting. While some accounting rules and tax regulations require annual or biannual physical counts, this article explores both options, and helps you choose and implement the best approach for your company.
What Is a Physical Count?
In a conventional physical count, an organization sets aside several days to count every single item in inventory, across all warehouses, stores and other locations. The result is a comprehensive count that serves as a means of checks and balances to ensure what you have on the shelves is accurately represented in your inventory management system.
Physical counts are typically performed annually, in large part because they are very time-consuming and can disrupt business. In fact, physical counts often require companies to suspend operations such as shipping and receiving for as long as the count is in progress. They can be extremely labor-intensive, even if companies use radio frequency (RF) tags or other inventory-scanning methods.
Traditionally, companies have valued the annual physical count as a way to start a new financial year with knowledge of their inventories and adjust their books to make business decisions based on accurate information. Companies with less inventory often find that the effort involved in annual physical counts is manageable and don’t see a compelling reason to change.
What Is a Cycle Count?
In a cycle count, the company continuously counts small samples of its inventory while making sure that everything eventually gets counted over a determined period of time. Using sampling techniques similar to those used by pollsters, companies extrapolate what they find to generate increasingly accurate information about their entire inventory. When companies begin cycle counting, they may deliberately count the same item repeatedly to see whether different individuals get the same results. This can help identify and fix problems in counting methods so everyone uses best practices and delivers accurate data.
Cycle counting often occurs every day. For example, if a company has 1,500 SKUs that need to be counted over the course of six weeks, it can tally its entire inventory by counting the items associated with roughly four or five SKUs per day. Some companies dedicate specific employees to cycle counting and may make it part of employees’ broader day-to-day responsibilities.
Companies typically work with their internal or external auditors to ensure that a cycle count is reliable and sufficient — over time, if cycle counting proves accurate, then auditors and accountants may accept them in place of a full physical count. As with any task that involves handling items of value, it’s important to segregate duties: The individuals who work all year with specific items shouldn’t be responsible for counting them.
Companies can choose among several different cycle counting methods. The choice of method determines which items are prioritized. Companies may count those high-priority items more frequently than others.
- By sales ranking: Sometimes called ABC analysis, 80/20 or the Pareto Principle method, this approach prioritizes counting of the items that represent the greatest value in a warehouse. It reflects the Pareto Principle that 20% of the SKUs in a warehouse typically account for 80% of sales, either because they are the most expensive or are sold most often. Companies group items into categories based on their value (A, B or C) and organize cycle counts accordingly, counting A and B items more frequently than C items. Note that the items you place in each category may change as your business evolves.
- By usage: This focuses on inventory items that are most frequently used, or items where being out-of-stock would create a major business or manufacturing disruption.
- By physical area: Another obvious and convenient method to manage cycle counts is physical location. For example, counting all items in a given department, cabinet, floor area or set of racks or bins.
- Random counting: This method randomly selects SKUs for sampling throughout the warehouse.
- Hybrid approaches: Companies develop their own best practices by combining methods to support their priorities. Hybrid plans often combine ABC analysis with other methods; for example, “A” value items are counted more often, but the software randomizes which ones are to be counted on a certain day. Or they may prioritize specific categories or adjust cycle counts to reflect seasonal spikes in sales of certain items.
Why Cycle Counting Is Effective
For many companies, cycle counting offers significant advantages over physical inventory counts. First, it’s less disruptive. Since only a small percentage of your inventory is being counted at any given time, the business can operate as usual. Cycle counting requires a smaller amount of continuing effort throughout the year, which can be easier to manage than a single massive count at the end of the year.
Because counts are being generated continuously, cycle counting can quickly uncover problems that might worsen if left unnoticed until the next full physical inventory count. In an era of constant ecommerce orders, this has never been more important. The company can also continuously track the accuracy of its inventory counts and refine its counting methods or training if those metrics slip.
Cycle Count vs Physical Count: What’s the Difference?
While both cycle and physical counts aim at the same goal — accurate inventory data — they take different approaches to get there. Those differences have significant implications for day-to-day warehouse operations. The following table compares both methods at a glance:
As the table above suggests, both counting techniques can improve inventory management. Annual physical counting is typically a large-scale effort, with relatively little flexibility and significant short-term disruption to the business. In contrast, cycle counting is continuous. It rarely prevents other business activity, but it can’t be ignored for lengthy periods of time or simply outsourced at year-end while your team is recovering from the holiday rush.
While physical counts provide certainty about inventory at the beginning of a new financial year, cycle counting is more closely aligned with the needs of many businesses for greater flexibility, agility and up-to-date information that informs decision-making. For example, companies with current cycle counts of key SKUs or manufacturing parts can avoid unnecessary orders and deploy their cash more efficiently.
Since cycle counting is an ongoing process, companies must establish the discipline of doing it on planned schedules so they don’t fall behind. Establishing cycle counting may involve coordinating with accountants to ensure counts are accurate, that counters follow consistent processes and everything ultimately gets counted when it needs to.
Finally, when cycle counts and physical counts reveal discrepancies, the business has a timely opportunity to improve before the problems get out of hand. But it only works if managers are prepared to act quickly by identifying and resolving the causes of the problems they discover. For instance, they might find that some items are more susceptible to loss, spoilage or theft than anticipated and require greater attention to safekeeping. Cycle counting can be viewed as a closed-loop process that triggers continuous improvement.
Cycle Count vs. Physical Count: Choosing the Best Way to Manage Inventory
As warehouses and other facilities become larger and more complex, physical annual inventory counts become more difficult, time-consuming and costly, and the relative business value of cycle counting increases.
Some companies rely on a mixture of cycle and physical counts. Some retailers cycle count stock all year, focusing especially on high-demand items. Then, they do a complete physical inventory after the holiday season ends. Other companies may perform one final physical count to establish a rock-solid foundation for a transition to cycle counting.
Optimizing Your Counts With Inventory Management Software
Cycle counting becomes much easier with a modern inventory management and WMS systems. Leading inventory management systems automate the cycle counting process, providing daily instructions for both individual counters and reviewers through intuitive checklists and dashboards. Such software also supports cycle counting using smartphones and other handheld devices, which can make it a faster and easier process and updates inventory numbers in real time.
Finally, inventory management and WMS solutions make it easy to highlight discrepancies between expected and actual counts, trigger recounts as needed and make inventory adjustments to the general ledger. They make what can be a long, arduous process straightforward and relatively low effort.
Smart cycle counting, implemented with an inventory management system, can reduce expenses, improve customer service, enhance warehouse efficiency and eliminate much of the traditional disruption associated with inventory. If you’re still relying entirely on annual physical inventories, it warrants serious consideration.
Cycle Counting FAQs
What does cycle count mean?
With cycle counting, a company continuously counts small samples of its inventory throughout the year. Cycle counting contrasts with physical inventory counting, which typically involves counting the company’s entire inventory quarterly or annually. Cycle counting spreads out the inventory counting throughout the year, instead of concentrating it into a single intense period.
What are the advantages of cycle counting?
Cycle counting can be less disruptive than physical counting because it generally doesn’t interrupt business operations such as receiving and shipping. It can also enable companies to spot emerging problems sooner because counting occurs throughout the year. The day-to-day effort required is lower, so the process can be more manageable.
Is cycle counting better than a year-end physical inventory?
As warehouses become larger and more complex, physical counts can become extremely time-consuming and labor-intensive, so cycle counting becomes an increasingly attractive option. In addition, cycle counting is less disruptive to daily business operations. However, some companies find it advantageous to combine physical and cycle counting to obtain a full and accurate picture of the items in their facilities.
How often should cycle counts be done?
Cycle counting is often a daily process, although each day’s count only involves a small fraction of total inventory. Depending on the cycle counting method used, the company may count some types of inventory more frequently than others. For example, many companies prioritize counting of the most valuable or most-used items and tally those items more frequently.