What is an Inventory Cycle Count?

Warehouses that run like well-oiled machines know that audits are essential. Reconciling your on-hand products with your records is foundational to accurate data at all stages of the logistics pipeline.

But as businesses grow and diversify their product offerings, traditional “all hands on deck” audits every quarter lose their efficacy. 

There are many different systems to help large organizations account for their products. Inventory cycle counting is one of the most popular.

What is Inventory Cycle Counting?

Inventory Cycle Counting is an inventory counting system that offsets the burden of traditional audits by rotating product counting in a cyclical schedule. 

Inventory cycle counting is ideal for large warehouses with lots of products or many different types of products. 

Advantages of an Inventory Cycle Count

What are the advantages of introducing a complex cycling system when you can just do a physical inventory? There are several.

1. Inventory cycle counts do not interrupt warehouse operations.

When a business is small, shutting down warehouse operations for a day might be inconvenient. It may even cause a few orders to bottleneck and frustrate a few customers. But for large businesses, shutting down warehouse operations — even for a couple of hours — could be financially catastrophic. 

Therein lies the glaring problem with traditional physical audits. It requires a total shutdown of all warehousing operations to count the inventory and reconcile product data. 

That’s why cycle counts are so appealing to larger warehouses. Employees can perform cycle counts during business hours because of the segmented nature of their assignments. Managers don’t need to burden counters with counting the entire storehouse, but only one subset. 

This convenience makes inventory cycle counting less of a chore for employees, as well.

2. Inventory cycle counts are more flexible than traditional audits.

A thorough physical audit is relatively cut-and-dry. It requires a shutdown of warehouse operations, the majority of employees’ effort, and a full count of all products. It’s not a very elegant system, especially in fast-paced warehouse environments where every second counts. 

On the other hand, inventory cycle counting has over half a dozen variations designed to accommodate specific business goals. Warehouse managers can not only customize which items to count, but how they’re counted, when they’re counted, and who counts them.

These variations have a net result of higher accuracy, efficiency, and supporting critical day-to-day operations. 

3. Inventory cycle counts are more accurate than physical audits.

No audit is perfect. Inaccurate counts and shrinkage are inevitable. It’s an unfortunate reality, but warehouse employees can even rig the counts to cover up product theft. 

However, the more frequently you count, the closer you get to a 100% confidence level. Inventory cycle counts are not contingent upon an “all hands on deck” scenario of everyone in the warehouse counting together. This flexibility makes them strong alternatives to traditional audits.

Organizations don’t usually punt their physical audits altogether, though. Traditional annual or bi-annual audits are supplemented by regular (monthly or even weekly) inventory cycle counts.

Human error makes it impossible to have 100% confidence in inventory data, but a robust cycle counting system gets you pretty darn close.

4. Inventory cycle counts uncover problems that traditional audits miss.

Inventory cycle counts are excellent means of accurate accounting and diagnostic tools that reveal inefficiencies in warehouse operations. For example, by randomly shuffling counters, you can identify and isolate “problem counters” who pathologically report inaccurate numbers. 

Then, you can drill down into why that’s the case. Perhaps it’s a need for more training, better tools, or they have some malintent. 

Inventory cycle counts also help stakeholders identify common inventory problems (such as stock-outs) quickly. Warehouse managers can respond by ordering more products before the error causes a negative customer experience. 

Inventory Cycle Counting Methods

Now that we’ve outlined the benefits of inventory cycle counting, let’s look at some of the most commonly-used methods.

1. ABC counting method.

This counting method prioritizes the highest-value products.

The ABC categorization methodology is essential for warehouses with product types of varying value. The idea is based on the Pareto Principle, otherwise known as the 80/20 rule. This rule states that — generally speaking —  20% of your products are responsible for 80% of your profits.

ABC counting parses out those products according to their value. The highest-value products go in the A category. The mid-tier and low-value products go into the B and C categories, respectively.

Warehouse managers then prioritize their inventory cycle counts to favor the high-value products in the A category. For example, leaders may schedule cycle counts in the A category weekly, in the B category monthly, and the C category quarterly.

2. Usage-based counting method.

Any time an item exchanges hands — either via a manufacturer, distributor, or finally to the customer — it introduces potential inventory variance. 

This counting method combats that by prioritizing the most frequently-accessed products. “Accessed” could mean processed into the warehouse, processed out of the warehouse, or physically touched in any way. 

3. Hybrid counting method.

The hybrid counting method blends the Usage-based and ABC counting systems to prioritize the most-accessed high-value items. 

This method is necessary when the ABC categories grow to an unwieldy level. Managers can parse out their ABC categories even further, prioritizing the highest-accessed A category products. 

Inventory variance in these products causes the most harm to the organization’s bottom line. Therefore, it logically follows that leaders would want to focus on accurate counts within this segment. 

4. Geographic counting method.

The geographic counting method prioritizes counting products in a particular physical space. Coupling this strategy with random counters in random intervals can help identify problematic areas, such as theft or obsolescence. 

5. Opportunity-based counting method.

This method prioritizes counting products at a particular stage in your logistics pipeline. Examples of key events that trigger a count in this system are:

• Counting products at their reorder point

• Counting products when inventory levels dip below a certain level

• Counting products when they’re processed into your warehouse

This method is far and away one of the best for discovering inefficiencies in your pipeline. The fact that you’re counting the same product multiple times throughout its lifecycle means that you can isolate errors to their respective stages (ingest processing, reordering, etc.).

This specificity allows stakeholders to discern problem areas or problem employees with greater confidence. 

Best Practices for Inventory Cycle Counting

Interested in implementing inventory cycle counting? Here’s how to set yourself up for success.

1. Ensure your inventory data is up-to-date.

I know we’ve just spent the better part of this post heralding cycle counts as superior to traditional audits. That said, a good old-fashioned count certainly has its place in a well-run warehouse. 

A best practice is to conduct at least one before you implement a new cycle counting system. It’s a chore, but it will set you up with a baseline level of accuracy and eliminate many logistical headaches.

2. Randomly alternate between counting staff.

It’s a frustrating reality, but warehouse theft is on the rise. One survey revealed that warehouse employees propositioned 40% of delivery drivers to commit conspiracy.

In a traditional audit, the majority of employees count all items. This method opens up bad actors to plenty of opportunities to either tamper with the count or conspire to malicious ends.

Randomly alternating your counting staff can help expose unethical (or even just incompetent) counters. 

3. Leverage technology to mitigate errors and count efficiently. 

One of the best ways to mitigate human error is to outsource as much as possible to technology. For instance, barcode scanning systems can not only speed up your counts tenfold but eliminate the potential mistakes of logging inventory by hand. 

Digital inventory management software is also a must for storing, analyzing, and reconciling inventory data. 

Conclusion 

Inventory cycle counting is a more sophisticated approach to reconciling inventory data for large-scale warehouses. It utilizes randomness, variation, and flexibility to provide more accuracy than traditional audits without interrupting critical warehouse operations.