What Is Cycle Counting? (With Types)

By Indeed Editorial Team

Published June 1, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A correct inventory count is essential for most businesses, whether they develop and distribute locally or worldwide. Businesses and modern warehouses often use cycle counts to audit its inventories accurately. Learning how cycle counting works can help you understand how different organizations use it. In this article, we discuss what cycle counts are, identify why they're important, examine types and examples of cycle count methods, and provide a comparison between physical inventory and cycle counts.

What is cycle counting?

Cycle counting is an auditing strategy for approximating a warehouse's inventory without counting each object. A cycle count is a sampling strategy that involves counting specific products and deriving the number of products in the warehouse from their amount. There are several methods of cycle counting, and they all depend on different circumstances. A cycle count's result can be inaccurate depending on the warehouse's strategy. This is because it isn't an exact count, and its accuracy depends on the strategy of the count method.

Related: What Is Warehouse Logistics and Why Should You Use It?

Why are cycle counts essential to businesses?

Cycle counts are essential for businesses because they help create accounting reports to track current inventory. Businesses also use them for their distribution and operational functions. A cycle count helps a business continue to operate during an inventory count as it only involves a small number of items. Physical inventory counts require businesses to close and cease operations or manufacturing processes to prevent irregularities in the count. An inventory cycle count leads to fewer errors, increased sales, and better customer service levels. It can also improve the business's closing process, reduce audit fees, and detect theft promptly.

Types of cycle count methods

There are several methods businesses can use for cycle counts:

Control group

A control group cycle count is a testing method that businesses use to ensure result accuracy. It involves examining the process on a minor section of a facility or warehouse and measuring its accuracy to determine the known number of items. The method can undergo improvement trials until it demonstrates complete accuracy. Businesses subsequently extend the method across its warehouses.

Example: King Stores wants to build a cycle counting method, and it tests its trial method on a small section of the warehouse where it already knows the number of products. It tries the technique in another small warehouse section because it considers an opportunity-based concept for the test. The early results are inaccurate, so the store revises its process. The updated method gives accurate results twice, so the business extends the process across the facility.

Random sample

Random sample counts involve randomly choosing the items to count. There are two options: constant population counting and diminished population counting. The first method involves staff returning the products to the general storage location after counting them. This means staff can select those items more than once for counting. In the second method, staff returns the products to a different location from the general storage area. They continue to do this until they count all products in the inventory.

Example: Spar Best Stores performs a monthly cycle count inventory of two toys in its warehouses through random sample counting. Staff members count a specific number of boxes of the toys and estimate how many the warehouse contains. The staff members then replace the boxes in the warehouse at the close of each day, creating a chance to recount the same boxes more than once. The effect of duplication is nevertheless minimal because they count many boxes.

ABC analysis

The ABC cycle count method uses inventory management software to categorize warehouse products. There are three categories, according to the number of products they sell:

  • A items: A items are the 20% of the warehouse's listed products with the most frequent sales, providing 80% of the business's total sales. Warehouse staff tends to count these products more frequently than the others.

  • B items: B items make up 30% of the warehouse's listed products that have less frequent sales than A items but more frequent than C items. B items typically equate to 15% of the warehouse's sales, and staff only count them occasionally.

  • C items: C items are the remaining 50% that have the rarest sales, and they make up only 5% of the warehouse's sales. Staff rarely count C items.

Example: Oliver's Mart performs regular inventory checks on its warehouse using an automated inventory management system. It categorizes each item in its stock as an A, B, or C item based on this data. It counts A items every week, B items each quarter, and C items every six months to minimize counting while preserving an accurate inventory.

Related: How to Create an Effective Warehouse Resume (with Tips)

Location-based

The location-based counting strategy counts inventory in several parts of a warehouse one at a time. It commonly involves assigning multiple counters to several sections. This cycle count requires the warehouse to consistently update its maps with current information.

Example: Blue Glass Library wants to determine whether it has all its inventory. The head librarian assigns three staff members to check one-third of the cabinets to ensure all the books, audio, and video materials are in place. Staff members each take a week to observe their assigned shelves, re-organize the materials, and update the inventory system to detect missing books. This happens during regular library hours over a month.

Opportunity-based

The opportunity-based method is another strategy for cycle count inventories. It counts products at certain times. For example, when a specific number of a product finishes, when the stock for that product is low, or when the company requires reordering.

Example: Tree Roots Restaurant and Cafe hosts a monthly fish fry where it sells baskets of fried cod. The chef notices the amount of fish remaining in the cooler. The chef counts the remaining fish boxes when they've used all those down to the bottom shelf. This chef then brings in a specific number of additional boxes to make the cooler total up to 50 boxes.

Statistical process control

This method of cycle counting uses software to determine which products have the highest likelihood of incorrect inventory. The software uses a statistical process control method, and staff consequently focus on counting those products.

Example: Brandon Mart is a distribution organization that commonly uses statistical process control to count its inventory. The inventory management software recognizes its food products inventory is most likely incorrect, as it frequently undergoes buying and rearrangement within the warehouse. The employees monitor the inventory of food products each month while counting other warehouse products only three times a year.

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Usage-only

The usage-only method is a cycle count method popular among luxury stores. Staff members count the products they most commonly use or sell most frequently in this process. The system can result in fewer counts and incorrect inventory numbers for expensive products that people don't use very frequently.

Example: At the Landmark Pool, the lifeguard sells sunscreens, snacks, and beach towels. The sunscreens are the most popular products, so employees count the sunscreens left at the end of each day. They count the snacks and towels every three weeks. They can detect any inconsistency in the number of sunscreens they sell each day using this method. It may take a week to notice a missing towel.

Hybrid

The hybrid method involves adopting multiple cycle count methods for managing inventories. A warehouse can use a hybrid of different approaches to reach the results required for its accounting and reporting needs. For instance, a company can adopt statistical process control and opportunity-based methods to improve inventory accuracy.

Example: New Luke Innovations used an ABC cycle counting method but discovered that its inventory didn't fit into the ABC categories. The store subsequently changed the categories to rely more on use than sales instead. It developed a system that merges how frequently a product sells with its value and the likelihood of an inaccurate inventory. The store uses inventory management system software to determine the possibility. This new hybrid method enables the company to monitor its most essential products more accurately and perform fewer counts.

Related: What Is Customer Satisfaction and Why Is It Important?

Physical inventory vs. cycle count inventory

A physical inventory counts all products in a warehouse once or twice a year. In contrast, cycle counts count small, predetermined inventory sections several times a year. The counting can be as frequent as daily. Only conducting a physical inventory is appropriate for businesses with minimal inventory. For example, when a business can count its products without closing the warehouse, inconveniencing clients, and disrupting staff schedules.

There are several advantages of a cycle count over a physical count. The cycle count saves time and helps warehouses improve its inventory accuracy and deliver products reliably. The different types of cycle counting give warehouses several options to increase accuracy. Many businesses use cycle counts alongside an annual physical count. This is typically a suitable method for businesses with a good understanding of its inventory.

Please note that none of the companies, institutions or organizations mentioned in this article are affiliated with Indeed.


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