There seems to be quite a lot of confusion around Cycle Counting vs. Stocktaking. So, before we discuss the importance of Cycle Counting, we will need to understand WHAT Cycle Counting is, and What Cycle Counting is NOT:
What is a Cycle Count?
Traditional inventory audits or stock takes, involve counting all of the stock that the organization has on a particular date. Typically this is at the end of the year but can be monthly, depending upon the organization’s Stock Control Policy.
Which stock needs to be counted? All of it, everything the organization uses. Everything for Manufacturing, Engineering and anything else in the stores – Raw Materials, WIP, Consumables, Spare Parts, and Finished Goods, everything bought in.
This is a huge task but based on the value associated with all of this material, it must be done accurately.
Seems like we need a better and more accurate way of doing this because of the value associated with the stock…Cycle Counting is better and more accurate method:
- In contrast to the above, it is a process of counting a pre-determined portion of the total inventory far more frequently throughout the year at regular intervals. The result is a far more accurate stock control account.
- Importantly, Cycle Counts can be based upon any number of criteria. The organization determines those acceptable management practices for their stock, based on their unique situation, in their Stock Control Policy. The policy will determine the main criteria, like the frequency to count the high-value items based upon the value of the items and the acceptable loss criteria, or the level of focus where inventory management issues have been detected or are suspected.
What are the benefits of Cycle Counts?
The traditional “Stocktake” causes a number of problems for the organization, the most significant problem being the requirement to “freeze” the organization while the stocktake it is being carried out to ensure that it is as accurate as possible i.e. all operations affecting the inventory must be halted. The organization, therefore, typically shuts down the branch or factory for the stocktake period, to ensure that it is completed as quickly and as accurately as possible. This brings into consideration timing as it affects trading and overtime costs for staff for speed.
Cycle Counts alleviate a number of these issues.
Minimizes process disruptions:
The count focusses on a selected range of stock and therefore can be carried out in parallel with a company’s normal operations, causing minimal disruption. Cycle Counts represent a streamlined method of inventory management and consequently ensure much less disruption on the business processes associated with receiving, consuming or dispatching of stock. The “freeze” is no longer required!
Faster corrective actions:
Due to the frequency of the counting of the same stock item, Cycle Counts can quickly determine where the inventory management issues occur, the causes of these problems and allow a suitable corrective action to be implemented. The Cycle Counting process can then be used to monitor and verify the relevant controls.
Guides stocking, production and distribution decisions:
Cycle Count data can also be used to guide stocking, production and distribution decisions. Every organization looks to reduce costs, and a large portion of capital sits in inventory. A typical response to improving customer service and lost sales is to ensure that the organization has more “Coverage” i.e. more stock in the warehouses, and WIP in the plant. This, however, affects the cash flow negatively and can kill a business.
Accurate and frequent decision-making:
A far more accurate stock position allows for more accurate and more frequent decision making, regular and improved reviews against forecasts and less chance of stock-outs or over-stocking and write-offs for redundancy.
Minimizes staff disruptions:
They have less impact on the availability of staff for other operational processes like stock control and distribution functions. Not only are they less disruptive to your operations, but they are less likely to introduce delays into your fulfillment processes than are full stock takes.
Improved customer service:
Insights gained from Cycle Counts ultimately benefit your customers by helping you better manage your stock – not just how much of it you have, but also where it’s held, and the proportion it’s held in, relative to other stock items. This, in turn, will ensure improved focus on your lead times, manufacturing priorities and ensure that you’re focused on producing on time.
Increases “stock turns”:
Cycle Counting can also increase “Stock Turns” and reduce inventory costs by minimizing the time that stock spends in your inventory.
How do Cycle Counts work?
Cycle Counts are subject to multiple variables – most importantly:
- The capacity of the team – due to the value of the stock and a reduced write-off, a number of full-time Cycle Counters can be employed to count and maintain accuracy.
- Scope of the count – how much of the inventory in the warehouse will be counted in a day, week or month, and how will this affect trading.
- Frequency – the higher the value and more trade on an item, the more accurate the count will be but also any mismanagement will be quickly identified.
- The item location – the warehouse layout should consider the bulkier and more frequently traded items being closer to the doors, but this also puts those items more at risk hence a far more accurate stock quantity is required.
There are a number of different Cycle Counting methodologies, which will all be used as the organization develops its own system. The following 3 steps are a good way to develop the organizational system:
Step 1: Control group Cycle Counting. A small group of items is counted a number of times across a very short time period. Over time, this repetitive counting uncovers any errors in the counting 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 SKUs 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.
It is best for the organization to develop its own “Best Practice” for stock control, based upon its own unique situation. Cycle Counting will definitely improve controls.
Are Cycle Counts foolproof?
Cycle Counts are not inherently risky, however, over-reliance on Cycle Counts at the expense of other prudent stock control processes has been identified as potentially risky business behavior. This form of inventory audit can add to stock control errors only where there are already systemic issues with a company’s policies and procedures.
By their very nature, Cycle Counts can never give you a full picture of the status of your inventory, and as ‘snapshots’, they may not take account of subtleties such as seasonality.
Careful planning and the specifying of precise items and locations can mitigate these perceived risks.
How can ERP use Cycle Count data?
There are a number of areas where your ERP should be invaluable in this area:
- The data processing capabilities of ERP software should be consolidating the whole stock situation for the Organization.
- The ERP should help plan Cycle Counts, whether random item selection or ABC method.
- Assess and help analyze the counts to highlight weaknesses in your inventory control.
Automated Cycle Counts can involve the use of Auto-ID software and specifying Cycle Count parameters within the given criteria. This data can then be uploaded to your ERP platform for optimum benefits.
In this way, regular (but unpredictable) counts of small percentages of your inventory can yield major process streamlining and cost-saving benefits.