Cycle Counting

There are a variety of problems associated with a thorough physical count of the inventory, such as production downtime while the count is performed, inaccurate counts, and the incorrect identification of parts.  This best practice describes how to use cycle counts to avoid a complete physical count.

One should use cycle counting as the primary way to eliminate the physical counting process.  To do so, there are a set of carefully defined steps to follow before inventory reaches an accuracy level sufficiently high to allow one to avoid the physical count.  One should read through all of the following steps and make a realistic assessment of a company’s ability to not only complete them, but also to maintain the system over a long period.  The implementation steps follow:

  1. Throw out the trash.  One should first clean up the warehouse before spending a great deal of time counting parts.  Accordingly, trash, obsolete parts, and old tools or supplies must either be thrown out or moved to an outlying location.
  2. Identify the remainder.  The first step reduces the amount of inventory items to be reviewed for part numbers.  This is now the main task – review all remaining inventory and post a part number on it.
  3. Consolidate inventory.  Once all parts are identified, it is time to cluster them together for easy counting, rather than leaving them in a variety of locations.  This takes several iterations before all inventory is completely consolidated, but do not worry about it – the main reason for consolidating as this stage is to make it easier to count and box the inventory in the next step, so a few unconsolidated items will not present much of a problem later on.
  4. Count and box the remainder.  Count all the inventory and then box or bag it.  There should be a seal on each container, with the quantity marked on the seal, so that a glance at the container will reveal the complete quantity of the part.  This is of vast benefit to cycle counters, who can now count hundreds of items very quickly.  Please note that it is not necessary at this point to correct all inventory balances in the computer, for the cycle counters will soon take care of this problem when they methodically review the entire warehouse.
  5. Create warehouse locations.  Clearly mark every bin location.  The location should include the aisle, rack, and bin number, so there is no question about where an inventory item is located.  This step is crucial for cycle counting, since one cannot count a part if one cannot first find it.
  6. Assign inventory to specific locations.  Go into the computer and assign a location code to every inventory item.  This may require special programming to put a location field in the computer database.
  7. Create a cycle counting report.  Create a computer report that lists all on-hand inventories, sorted by location code.  The cycle counters must have this available as their main tool for reviewing inventory.
  8. Segregate the warehouse.  Install a fence around the warehouse and lock the gate!  Now that cycle counting is about to begin, there should be no way for non-warehouse staff to enter the warehouse in order to remove parts.
  9. Initiate cut-off controls.  All inventory transactions related to a block of parts to be cycle counted must be completed prior to anyone running a cycle count report.  Otherwise, the cycle counter will find record discrepancies and correct them, which will be followed by the entry of preceding transactions that will render the inventory records more inaccurate than they were at the start.  Consequently, these controls must be in place prior to any cycle counting being conducted.
  10. Initiate cycle counts.  Assign cycle counters a section of the warehouse to count.  Issue them the latest cycle counting report.  They must carefully count all the items in every bin location and make corrections to the report to ensure that the computer database is correct.  The warehouse manager should monitor their progress every day to ensure that they are completing their counts on time.  A good cycle counting frequency is to review the entire inventory six times a year; this high volume of counting can drop later, once accuracy levels increase.
  11. Audit inventory accuracy.  Audit the inventory once a week.  A small sample of the total inventory is sufficient to determine the total accuracy of the inventory, which should be posted for easy review by the warehouse staff.  It may be necessary to post accuracy by aisle, in case some warehouse areas are particularly prone to errors.  If so, the best cycle counters should be assigned to the least accurate aisles.
  12. Use a bonus program.  The entire warehouse staff should receive a bonus at the end of each month, based on the audited inventory accuracy.  A good measure above which bonuses should be paid is 95 percent accuracy, with any item being defined as accurate if the counted quantity is within two percent of the amount listed in the computer (though this may not be a good measure in some industries, such as diamond processing).  This is an extremely effective way to maintain the interest of the warehouse staff in the continuing accuracy of the inventory records.

Though cycle counting will certainly allow one to avoid a physical inventory count, it is equally important to investigate why errors are occurring, not just to change inventory balances if they are wrong.  If one can get to the bottom of a transaction problem and fix the underlying error, it is possible to greatly increase record accuracy and require less work by the cycle counting staff to keep it that way.