For any business, inventory management is crucial. It affects the costs and hence the profitability of a business. Cycle count is a concept which helps in the optimal management of the inventory.
What is a cycle count?
Cycle count is an inventory counting technique using sampling. It refers to counting a few items in the inventory, based on which one estimates the count of the total inventory in the business.
We can easily relate this with the polling system during elections. We can reasonably estimate the election results based on the opinions of a sample of people.
Why is a cycle count important?
A business becomes profitable when it timely meets the customer demand. For this, it needs to maintain an adequate inventory level. On the other hand, if a seller stores higher than the required inventory, holding costs increase. But a shortage of stock disrupts production and sales. Thus, a seller must have an idea about the optimal inventory levels in the business.
When the size of a business is small, the seller can count the inventory physically. But, when the business grows, the number of inventory items increases. Thus, it becomes difficult to count all the inventory items physically. Here, the cycle count concept proves useful. It helps in managing the inventory level in business.
Methods of Cycle Counting:
Cycle Count by Usage:
Under this method, items used frequently are counted more often. For this, one first classifies the inventory items based on their usage. This method, however, does not consider the cost of the inventory. Thus, this method could ignore the high-value items if they are used less often.
Cycle count by geography:
Here, the warehouse is distributed in smaller areas—all the employees who count the inventory work in the allocated areas. At the end of the exercise, one can update the records with the stored items’ exact location. It also helps one identify and resolve the discrepancies quickly, based on the area.
Cycle count through a control group:
In this method, one counts the same items many times within a short period. By frequent counting, one knows the errors in the technique. These errors are then corrected to arrive at an accurate counting technique. This way, one avoids significant problems that can occur in a business at the later stages.
Random sample cycle count:
This method is used when one has many inventory items. In this method, one randomly selects certain items for counting. This can be repeated every day. In this way, more items could be counted within a short time. Also, the rest of the business activities are not disturbed.
There are two ways to implement this method. These are constant population counting and diminished population counting. In the first one, the identical items are counted every time. Hence it does not cover all the inventory items and is useful when a company has similar stock. However, when it has different inventory items, a business may opt for the other method. Under this method, one excludes the items counted once during the subsequent counting. One counts only the balance items in the next cycle.
Cycle count using the Pareto (ABC) method:
Under this method, one counts the most critical inventory items more often. The importance of inventory is based on its contribution to sales. The lesser sold items are counted a lesser number of times.
Here, the inventory is classified under three categories, viz. A, B, and C. Items under Category A are lesser in number but highest in value. They contribute the maximum to the sales. Hence, these items are counted more often. Items under category B are counted lesser than A, and so on.
Opportunity based counting:
Here, one counts the inventory at important points in the inventory management system. One example of an important point could be the inventory re-order point.
How to implement an inventory cycle count technique?
We have now understood the various techniques to implement the cycle count. Let us now understand the steps to implement a cycle count effectively:
- Collate the inventory data and remove any discrepancies.
- Choose the appropriate method for the cycle count.
- Organize the inventory items properly. Keep all the items stacked and maintained.
- Count one inventory category at a time. This helps in the completion of the task during working hours. Also, other processes are not disturbed.
- Assign the task to the employees. Appoint senior members for the audit process.
- Run the cycle count technique.
- Identify and analyze any discrepancies and make improvements.
- Record the process for future references in detailed reports.
One must schedule the cycle counts at irregular intervals. In this way, one can prevent the employees from committing thefts. One can also use advanced tools and computerized systems for implementing this process. One can keep track of every single process through automation and computerization. They help in the selection of inventory items for counting and also improve the accuracy of the cycle counts. They also display results in an organized manner. This helps in making the required improvements in the processes.
Inventory management is crucial for any business and its profitability. One must keep stock of the available inventory. One can count the entire stock physically if it is less in number. But, with a more extensive inventory, such a thing becomes problematic. In this situation, cycle counting techniques prove helpful. There are various techniques to count the inventory, as discussed in the article. One must choose the method appropriate for one’s business. One must follow the steps discussed in the report to run a cycle count effectively. One can also use computerized software for the automation of this process.