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Can inventory cycle counts completely replace stock-take in an organization?

Any manufacturer, distributor or warehouse manager is familiar with the concept of physical stock-take. While essential to maintaining inventory accuracy, it can be a disruptive process that causes down-time for business and leaves a lot of room for inaccuracy.

Inventory cycle counts, on the other hand, can complement or replace an annual stock-take exercise while improving day-to-day stock management and accuracy. Any strategy for verification of physical stock must include considerations for internal accounting and audit requirements.

What are Cycle Counts?

There is often confusion around the difference between a cycle count and stock-take, so first we need to look at what cycle counting really is.

Traditional stock-take involves stopping the business for the manual counting of every single inventory item, a huge, time consuming task that is usually completed on a quarterly, semi-annual, or annual basis. A cycle count, on the other hand, is the process of counting a part of your inventory in a continuous cycle, keeping stock data up to date on an ongoing basis.

In contrast to an annual stock-take, cycle counts are done on smaller groups of stock on a rotating schedule and far more frequently, ensuring a more accurate and timely record of an organization’s most important asset.

Because cycle counts only deal with a portion of the inventory, criteria for these portions can be defined by the organization. If, for example, a certain portion of inventory consists of high-value items, the company may choose to complete a cycle count for this segment more frequently, as well as make adjustments to the acceptable loss criteria. This makes cycle counts an extremely versatile tool for management of stock and for controlling stock losses.

What is the importance of accurate stock?

Any stock-take, be it manual or cycle counting, aims to account for the discrepancies between physical stock-on-hand and the stock available for sale or use as recorded in the company’s stock holding software.

Obviously, if your actual physical stock and stock available in your sales order system, for example, are vastly different, it will cause major problems in production or sales. If physical stock is not available when it is needed, orders cannot be fulfilled, customers are unhappy, and the bottom line is affected.

Conversely, overstocking items because stock available figures are inaccurate is equally as damaging. Extra stock ties up capital, uses warehouse space unnecessarily, is harder to track, and in the case of perishable goods, prone to expiry and wastage.

Having accurate stock inventory records means that many, if not all, of these situations can be avoided.

What are the Benefits of Inventory Cycle Counts?

The problems with traditional stock-takes are obvious – they are time consuming, disruptive, and prone to errors. Shutting down operations for a period in order to complete a stock-take is impractical and affects trading and costs.

Cycle counts address a number of these issues:

  1. Minimizes DisruptionsThe most obvious benefit of cycle counting is the minimization of disruptions to trading. By continually tracking stock in parallel with a company’s regular operations, annual stock-take can be completed in a much shorter time, if not eliminated completely. This streamlines the process and ensures less “shut down” time.
    Regular stock counts also have less of an impact on the availability of staff for other operational processes. This means fewer delays in not only operations but also fulfilment processess.
  2. Reduces over or under stocking and increases stock turnaround
    Data collected from regular cycle counts can be used to improve stocking and production decisions, reducing the capital that sits in inventory, reducing stock wastage, and avoiding situations where stock is unavailable. This reduces costs and cash flow problems.
  3. Real-time awareness of stock problems and faster corrections
    Cycle counts allow organizations to immediately identify where inventory variances are occurring and the cause of these problems. This means that corrective action can be taken immediately and can be monitored and verified.
  4. Improved Customer Service
    Directly, customer service is positively affected when stock is accurate and available for sale. Indirectly, accurate stock figures improve production and delivery speed, improving service delivery and customer satisfaction, in turn driving improvements straight to the bottom line.

How Do Cycle Counts Work?

How cycle counts are completed is influenced by several things:

  1. The scope of the counts. How much of the inventory will be counted influences the frequency of the counts and how it will affect production and trading.
  2. Frequency of cycle counts. Items can be grouped and counted at different intervals. Higher value items or items with fast turnover, for example, might be counted more often for greater accuracy and the ability to identify mismanagement more quickly.
  3. Labor capacity. Frequency of counts is influenced by the staff available to complete them. In scenarios where cycle counts are required frequently, an organization might consider employing full-time cycle counters.

There are multiple methods and methodologies for implementing cycle counts that are used as a basis for an organization to develop their own systems. According to SYSPRO, a leader in Enterprise Resource Planning, the following 3 steps are a good way to develop the organizational system:

Step 1: Control group Cycle Counting.  A small group of items are counted a number of times across a very short time period. Over time, this repetitive counting uncovers any errors in the count process.  After these errors in the process are correct, the process can be applied across multiple areas to more and more product categories.

Step 2: Random sample method. This approach to Cycle Counting entails the periodic selection of random items. This method is most commonly used in warehouses that contain a large number of similar items, but also will check the process and highlight any odd behaviors.

Step 3: ABC inventory analysis. One of the most commonly used methods is the ABC inventory analysis approach. This strategy ranks stocking items based on the highest to lowest annual sales volume at cost.  A lot of preparation is required as every item is assigned a letter, normally A, B, or C.  The basic method focuses on higher-value items that move most frequently and will be identified as “A” items, and counted more frequently, while the redundant stock, allocated as “C”, probably counted only once per year.

Hybrid approaches, or map-based Cycle Counts (determined by dividing the stock by the surface area used to store it) are also used.”

Ultimately, it is up to each organization to develop a cycle counting strategy based on its own needs and requirements.

How Often Should Cycle Counts Be Done?

The frequency of cycle counts is dependent on the organizational requirements and specific situations. Many experts recommend that cycle counts are conducted at least once a quarter, however cycle counts can be completed for different portions of inventory at different frequencies.

Generally speaking, “A” goods represent about 20% of your stock but 80% of your inventory value. This means that cycle counts for “A” list goods may be completed more frequently to ensure accuracy of inventory and reduce monetary loss on valuable goods.

Another influencing factor in the frequency of cycle counts is the accuracy of stock data and insights. More frequent cycle counts will dramatically improve the insights available and allow for better decision making and responsiveness to issues.

The frequency of cycle counts will also be influenced by accounting and audit requirements which require a historical record of count activities, variances found and corrective actions taken.

Each organization should assess their needs to find the “sweet spot” for cycle count frequency. Many TransLution™ clients complete cycle counts daily as based on a preset schedule managed by the software. They often find more frequent counts pay off not only in stock accuracy, but it cost less than annual wall-to-wall stock-takes.

How Does Software Affect Cycle Counts?

A good inventory management system should include the ability to complete cycle counts and integrate with the organization’s ERP software to keep data up to date in real time. TransLution™, for example, allows organizations to quickly complete cycle counts using barcode scanners, and updates the data directly to the ERP. This minimizes disruptions and allows the counts to be completed quickly and accurately.

Automating the capturing of cycle count data not only improves accuracy but means that anyone in the organization can complete cycle counts. Responsibility for the counts can be spread out and labor can be efficiently utilized for more than one task.

Automation also reduces the risk of fraud and theft.

Can Cycle Counts Eliminate Annual Stock-Take Entirely?

Some may say that cycle counting could not replace traditional stock-takes but rather complement them. Ultimately this decision comes down to the organization itself and its requirements for its stock management. The key is to include your compliance and audit groups in planning your cycle count strategy so their requirements are a part of the solution up front. TransLution works with clients to successfully completely satisfy their compliance requirements using cycle counts.

Middleby Residential, a world leader in commercial cooking, industrial baking and processing, and residential appliances, uses TransLution™ Software to manage distribution of repair parts for its residential appliances. In order to manage stock of a very large number of items, Middleby completes regular cycle counts using the TransLution™ Cycle Count system. Cycle counts are assigned to specific operators daily, but they can also be performed by their picking and put-away operators after they have completed their other tasks. By completing these regular cycle counts and tracking and reporting count results, Middleby has satisfied their audit and compliance requirements and they have successfully eliminated annual stock-takes. Read more about Middleby Residential’s  use of TransLution™ Software here.

Conclusion

Inventory cycle counts, whether to complement or replace annual stock-takes, play a crucial role in maintaining accurate inventory records. They are far less disruptive and more accurate than traditional stock-takes and the goal for every organization, therefore, should be to include cycle counts as part of everyday business operations.