Every organization warehousing an inventory of goods knows how critical an accurate count of these assets is to overall efficiency and profitability. When counts are off, you’re vulnerable to costly consequences like inability to fulfill orders, excess carrying costs on inventory you don’t need or can’t sell, flawed sales forecasts, ineffective warehouse management...a whole host of ills that drag your organization down.
But getting an accurate count has always been a burden on organizations—even those with relatively small inventories. That’s because the process typically requires that you shut down the business and count every item in the warehouse...a very time-consuming and error-prone undertaking.
Fortunately, there are more manageable (and accurate) ways to determine what’s in stock: cycle counts. With cycle counting, organizations segment their inventory into subsets, and those subsets are counted in specific locations, on specific days, on a recurring schedule. There are a few different approaches to cycle counting, and we’ll talk just about one in this post: Usage-based.
Usage-Based Cycle Counts
Traditionally, many organizations relied on Pareto’s “80/20” rule to give themselves a level of inventory confidence: they assumed that 20% of their inventory represented 80% of the total inventory value, so they focused on counting the higher-value items, with the rationale being that those were the items they couldn’t afford to lose sight of. Seems to make sense, but in reality it’s a terribly inefficient way to manage inventory.
Why? Well, let’s say you’re a manufacturer of mahogany desks. It makes sense to keep an accurate count of the mahogany wood since it’s the most expensive piece in your inventory. But if you don’t have the nuts, bolts, and screws to put the desks together, your entire production line could shut down for a day or two while you wait for those parts to come in. Yet under Pareto’s way of cycle counting, you would never take the nuts, bolts, and screws into account because they’re not expensive items.
With the usage-based cycle counting method (sometimes called frequency cycle counting), you count the inventory that’s most frequently used. The underlying principle is that the counts done on items that are most frequently touched have a higher probability of being inaccurate (and therefore have more potential to affect efficiency and profitability). If a bin of bolts is accessed once a day by one person, there’s just one chance each day for the inventory to be off at the end of the day, but if that bin is accessed twice a day by five people, there are 10 chances that the inventory will be off. The idea here is that high-usage items are where inventory inaccuracies are more likely, so these are the areas that should have the most counts.
The Basic Setup of a Frequency Cycle Count Process
The first step in doing cycle counts based on usage/frequency is to set up inventory by zones. Those zones—for example, your zones might be finished goods, raw materials, and subassemblies—or by locations: racks, cabinets, palettes, bulk storage. The inventory in each zone is then counted, after which you count how often each piece in the zone is accessed within a specific timeframe (90 days is common). When you know how often items in the zone are accessed, you’ll assign a frequency rank to each zone or location based on frequency (number of transactions). To assign a frequency rank, simply take the number of transactions and divide that by the number of items in that zone; the higher the number, the higher the priority for counting that zone.
Usage-based Cycle Count Best Practices
Doing the cycle counts is simple, efficient, and accurate when each item in your warehouse has a RFID tag or barcode label affixed to it. Workers simply use mobile scanners to read those tags and labels to get the information they need; at the same time, the information can be uploaded to the inventory management system.
There are some “must-dos” involved in cycle counting:
- First do a physical inventory count. If you haven’t been keeping up with your inventory management, it’s best to postpone cycle counting until you’ve done a physical inventory; this becomes your baseline. An annual inventory count is still necessary, unless your count is nearly 100% accurate
- Update immediately! Each time you receive inventory, it must be entered into your system. The best approach is to leverage technology that automatically uploads inventory data from your suppliers
- Schedule regular cycle counts. Schedule a cycle count every quarter – this is a minimum; ideally you’d be doing a cycle count each week or monthly. Knowledge is power, and the more you know, the more likely you are to take the right actions at the right times
As we mentioned earlier, there are several cycle count options—usage-based is just one of them. If you’d like to learn more about any of the methods, technologies, or best practices for counting your inventory, we’d love to chat!
