What is Cycle Counting?

Last Updated: June 24th, 2022
Researched and Written by: Lexi Wood

Cycle counting refers to the continuous tracking of inventory levels in a warehouse environment. Without accurate inventory counts, you can fall behind and fail to fulfill customer orders. Cycle counting makes inventory management easier by using select inventory to speed up the auditing process by breaking it up into smaller sample batches.

Why is Cycle Counting Important?

Physical inventory requires a lot of time and manual labor to complete. In many cases, production has to stop since the entire inventory must be accounted for at the end of the audit process. Yet inventory is necessary to identify areas of loss, such as theft or fraud, along with other potential discrepancies between what is ordered and what is shipped.

Cycle counting is an important alternative to traditional methods of inventory counting which require physically checking items are counted accurately. Cycle counting audits a particular sample which is then repeatedly checked. In order to do this, a small number of products are selected for counting to represent the whole inventory based on criteria ranging from product value to order frequency. As a result of only auditing this control group, audit counts can be made without requiring a shut down of production or fulfillment for a physical inventory count.

Cycle counting also forms a valuable part of warehouse management since it can reduce inventory errors by identifying problems in the process. While this automated process is more efficient than physical inventory, there are some drawbacks to consider before implementing it into your inventory management system. The biggest of which is that using the wrong criteria for selecting a sample can lead to inaccurate inventory.

Types of Cycle Counting

There are many cycle counting methods, and the one which works best for your business will depend on a variety of factors. The most well-known types are:

Pareto

One of the most common cycle counting methods, inventory is counted according to its value. High value items are counted more often than anything else. Essentially, this is based on the adage “80% of sales come from 20% of clients”, better known as the Pareto principle, hence the name. The idea is that the items with the highest value need to be accurately counted the most to ensure availability since they make up the majority of sales orders.

The Pareto method is preferred in supply chain management because of its focus on high value inventory. However, an overemphasis on this method can impact production if low value items are ignored for too long or customer demand changes.

Usage

Cycle counting by usage only means inventory is counted based on how frequently it is added or removed to the overall system. Using this method, the items which are sold or used most often are the ones which create the audit sample since they are the most likely to be moved about the facility during fulfillment. This can save valuable time during counts, since items which are not sold frequently won’t have to be counted as often.

The usage method is popular for seasonal businesses which prioritize different products throughout the year. Counts may be done on winter wear in colder months, then switch to summer gear as the temperature rises. For example, it’s far more important for a retailer to know how many swimsuits are on hand in June than it is to spend time counting snow boots in storage.

Opportunity

Opportunity-based cycle counts are similar to the usage method, although it bases counts on key points in the supply chain rather than looking at individual item frequency. For instance, it might perform counts only when a certain low inventory threshold is reached.

Statistical Process Control

The statistical process control method performs cycle counts only on inventory which may be inaccurate. For example, a product which is in high demand may be counted to ensure it is in stock while less popular items are counted in more traditional ways on a daily or weekly basis. This method saves valuable resources by prioritizing the inventory which matters most.

Geographic

This cycle counting method is also called “location based” since it counts inventory in a set order based on the literal real-world locations within the warehouse. Since related products are often stored and sold near each other, this method is useful for knowing how a selection of goods is performing. This type of inventory audit can work well in warehouses operating with first-in, first out (FIFO) or last-in, first-out (LIFO) rules.

However, this method carries some risk, as it depends on products being correctly placed at all times. Any last minute adjustments to the supply chain can result in massively incorrect numbers from items not being where they’re supposed to be.

Hybrid

Finally, the hybrid counting method combines the others to best match what your facility needs. Which items are included in the audit will vary depending on your own select requirements. And what is counted can change based on new demand or internal data as determined by ABC analysis.

ABC Analysis

One of the keys to determining your method is to use ABC analysis. This is the process in which the inventory or warehouse manager classifies different items as either A, B, or C Class. Items which are Class A are those which will be counted the most while B then C are counted less frequently.

For example, imagine a retailer of swimming supplies and accessories using an ABC cycle counting method. The most valuable product in terms of price contains high-end scuba gear. The top selling products by volume are low-cost flip-flops. Using the usage method, flip-flops would be Class A. Yet the Pareto method would likely classify the flip-flops as Class C and put the scuba gear into Class A due to their high value. However, they could still be A items if they sold in high enough volume to make up the majority of revenue.

Does it seem confusing? No two businesses will place the same value on the same products. With ABC analysis, you can determine which of your products should be in each class in order to determine which cycle counting method will work best for you.

Cycle Counting Best Practices

A lot of small businesses keep inventory manually, filling in spreadsheets after taking a physical count. While this can work for new operations, the metrics can quickly fall behind as the business grows. And manual data entry can lead to mistakes when workers miscount. Cycle counting adds automation to inventory control. By following cycle count procedures, you can optimize your operations to reduce inaccuracies from human error.

These are the main steps for an effective cycle count process can be broken down as:

  • Organize: Create an effective storage system at your warehouse to facilitate easier counts, such as a barcode or SKU scanning system which can automatically scan inventory items
  • Generate List: Compile a list of which items need to be included in the count according to your preferred method
  • Audit: Perform the count and verify the results as accurate over a set period of time
  • Review: Check the counting process for improvement and collect the relevant inventory data
  • Repeat: Continue performing counts until you achieve accuracy (over 90%)

No matter how advanced your cycle count method, you will still need to take physical inventory at some point. This might be done on a quarterly or annual basis, spending on the scope of your warehouse or retail operations. In order to make this as easy as possible, you’ll need to improve your inventory hygiene. This refers to your ability to locate stock within your facility. Essentially, you can’t expect accurate inventory counts if your items are scattered across a warehouse with no rhyme or reason. Keeping them in order makes audits easier.

Implementing a cycle counting program into your daily operations can provide long-term time and money savings. Finding the right counting technique will depend on the number of items you have, how you store and ship orders, and what products you consider most valuable to your bottom line. Improve your warehouse management system with the best cycle counting methods.

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