Inventory is the lifeblood of any business, and managing it properly is critical to smooth operations and business growth.
There are various methods to manage inventory efficiently.
An efficient ERP system with a robust inventory management module is a tool that most businesses rely on today.
We hear a lot of terms in connection with inventory – stock taking, overstocking, reorder levels, cycle counting, understocking, and so on.
Today, we are going to discuss cycle counting.
Many business owners and managers seem to have confusion regarding cycle counting, especially vis-à-vis stocktaking.
Let’s understand exactly what cycle counting is and is not, to eliminate this confusion.
Conventionally, a stock-taking or inventory audit meant counting all the stock in a company, on a specific date.
This was usually at the end of the financial year, but depending on the inventory control policy of the organization, it could also be quarterly or monthly.
Every single stock of what a business uses, whether to manufacture or sell, needs to be counted.
This includes raw materials, spare parts, consumables, work in progress, and finished goods.
It goes without saying that this is a humungous task; but as this material is highly valuable, it is essential that it is carried out with precision.
Inventory cycle counting is a method that is used to count the inventory, but it varies from the conventional method.
Cycle counting involves counting a specific part of the total inventory regularly throughout the year.
This gives a much more precise count of the stock.
You can think of it as a method of checks and balances used by companies to verify that their inventory records and physical counts match.
When the cycle count is performed regularly, over time, the business would have counted all the goods they have.
With efficient inventory management strategies, you can eliminate or minimize transaction errors and have accurate records of your stock.
Regardless of the type of method followed by a company for inventory tracking, regular cycle counting is necessary.
In fact, it’s an essential auditing process that helps in managing inventory counts.
The company management decides the inventory management practices which are acceptable for their stock, depending on their specific situation in the company’s stock control policy.
Criteria like how frequently the high-value items should be counted, acceptable loss, and so on.
Conventional stocktaking gives rise to several problems for the business; the main one being disruption of business for the duration of the stocktaking.
All operations that involve inventory are paused; this is done to ensure the speed and accuracy of the stocktaking.
Usually, the factory or branch where the stocktaking happens is shut down until the completion of the activity.
However, with cycle counts, it is not necessary to shut down operations.
Let us examine in detail, the benefits of cycle counting in inventory management:
As cycle counts concentrate on specific stock ranges, they can be performed parallelly with normal operations, eliminating disruptions or keeping them to a minimum.
Cycle counting is a streamlined inventory management method, allowing the receipt, consumption, and dispatching of stock to take place as usual, without having to freeze operations.
When operations are frozen, you suffer a loss of business, which means revenue loss.
This can be avoided with cycle counting, especially when it is integrated into your system as a weekly or monthly routine.
Assessing inventory counts on an ongoing basis also helps in getting all the team members on the same page.
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Thanks to the increased frequency of counting the same inventory items, cycle counting helps to identify areas of inventory management problems quickly.
This enables management to take appropriate corrective action to resolve them.
Cycle counts can be used to track and verify relevant controls.
Cycle counting can help to take better stocking, manufacturing, and distribution decisions.
Any business tries to cut costs, and a huge portion of capital is invested in inventory.
Most businesses feel that having more stock in the warehouse is key to better customer service – always being able to fulfil customer orders, and ensuring no sale is lost – however, overstocking has negative impacts on cash flows.
This can be pretty disastrous for a business.
With accurate stock counts, you can take better and more accurate decisions, and be able to forecast better.
You can also minimize over or under-stocking, along with redundancy write-offs.
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As there is a lot of spare time between counts in the cycle counting method, there is sufficient time to resolve errors that could have occurred during operations.
Identifying errors is a breeze using the cycle counting method as compared to the conventional annual counting method.
It also increases the accuracy of the count, as you count smaller quantities.
As there isn’t a long gap between counts, you automatically reduce the time an error could continue in your operations.
In conventional inventory counting, in case of discrepancies, you would not discover it for months – which would eventually cost you money, and lead to dissatisfied customers.
With cycle counts helping you catch errors quickly, you can run your business operations more effectively, and know just when to place purchase orders.
Cycle counts don’t impact staff availability for critical operations, unlike annual stock takes.
Additionally, they don’t cause delays in fulfilment processes either.
Manual counting of your entire stock takes time and effort, and eventually, money.
Cycle counting helps eliminate all of this, and also causes fewer errors.
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The insights you gain from cycle counting eventually benefit your customers. How?
You are able to manage your inventory more efficiently, and have complete visibility into your stock – where it lies, what the proportion of each stock item is in relation to other items, and so on.
This will help you focus on your lead times so that you can plan your production to be complete in time to fulfil orders.
Stock turn is also referred to as inventory turnover rate; it just means the speed at which the stock is sold and replaced.
High inventory turnover or stock turns lead to reduce carrying costs, as inventory doesn’t stay in your warehouse for long.
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Implementing cycle counts helps companies to view the accuracy of their inventory counts as an important part of the entire business operations.
It helps them to make better purchase decisions for your company.
The most important reason for using cycle counting is to get an exact count of your warehouse inventory.
The count is unlikely to be accurate with manual methods, as counting smaller bundles of inventory is much easier and increases accuracy too.
This helps to deliver better customer service as well.
Additionally, it can help you increase profitability as well.
These factors need to be considered before you actually commence implementation of cycle counting in your business:
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Cycle counting is subject to several variables, as discussed below:
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There are different types of cycle counting, and each business has to choose the one that suits its operations the best.
Here are some suggestions:
A small group of items is counted a number of times across minuscule timespans.
In the long run, repetitive counting helps discover errors if any in the counting.
Once the errors are rectified, the process can be implemented over several areas to additional product categories.
In this type of cycle counting, random inventory items are selected periodically; it’s mostly used in warehouses that store massive quantities of similar items.
This method also helps to check for and identify discrepancies.
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This method is very popular, and it ranks SKUs according to the volume of annual sales at cost price.
This is a laborious method necessitating a lot of preparation, as each item is assigned alphabet A, B, or C.
‘A’ refers to the quick-selling and high-value items, which are also counted more often, with ‘C’ which is a redundant stock that’s counted just annually.
There are also hybrid approaches that combine two or more of the above methods.
Some companies use map-based cycle counts which are arrived at by dividing the stock quantity by the surface area required to stock it.
As mentioned earlier, each business needs to develop its own suitable approach for stock control depending on its unique requirements.
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While there is no risk involved in cycle counting, it may not be a good idea to rely overly on this one method while ignoring other judicious processes of inventory control.
Cycle counts alone, of course, are not capable of providing comprehensive, 360-degree visibility into your inventory.
They are just snapshots, which do not take into account matters like seasonal demands.
However, if you plan carefully and specify exact items and locations, you can reduce these potential risks greatly.
Robust ERP software like Tranquil can help you with:
Cycle counting can streamline inventory management and help in cost saving.