Inventory Management Techniques: Cycle Counting

Companies, particularly those with larger warehouses may have audits of their warehouse, usually performed one time each year. If the company has multiple locations these audits will usually occur at all locations. During this time an auditor will come in and audit random items, checking to see if the number in the warehouse matches what the data shows. Additionally the auditor will check the cost for accuracy.

Traditional Method (Full Audit)

For smaller to medium sized warehouses auditing is less formal and can be done in a couple different ways. The first method is the traditional style where each item in the warehouse is counted. During this time everything is counted at one time, making the process sometimes long and tedious. Frequently it is necessary to disrupt business during the audit since outgoing inventory could throw off their count.

What is Cycle Counting?

Also known as a Partial Audit or an inventory counting technique whereby smaller areas of the warehouse are counted at a time. With smaller areas, cycle counting is quicker, but occurs more frequently than a traditional audit. For example you may count office supplies on Tuesdays and Shirts on Thursdays. Then on Mondays you count hats and on Friday it’s watches.

From a Cycle Count a couple inferences are made about the warehouse as a whole

1. The accuracy of the inventory counts in a cycle count, determines the accuracy of the entire warehouse
2. If a shortage is found, there will be shortages throughout the warehouse

3 Types of Cycle Counting

1. Control Group
2. Random Sample
3. ABC Analysis

Control Group Cycle Counting

Upon the initiation of cycle counting some companies may use a control group to test the accuracy of their method. This process involves a counting a small group of items many times in a short period. This is done to confirm the counting technique is accurate and if not will be corrected before moving thru the other areas of the warehouse.

Random Sample Cycle Counting

Warehouses with a large number of similar items can use this method to count product in their warehouse. By selecting a large number of random items the count can be performed each day or workday so that a large number of the items in the warehouse are counted within a reasonable period.

ABC Cycle Counting (The Pareto Principle)

This principle is applied on a theory that roughly 80% of the effects come from 20% of the causes. So in essence 20% of the parts relate to 80% of the sales. These are designated as the A Group. B Items account for 30% of the items and 15% of sales and C items represent 50% of the items in the warehouse but only 5% of sales. First, all the items in the warehouse must be assigned as an A, B, C, this is most successfully done with inventory management software where reports can give you an idea of what category each item fits into. Once this has been established, counting will be more frequent for items in group A, then group B and then Group C.