Inventory Cycle Count Explained

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Inaccurate inventory costs your business. It leads to unhappy customers, bad purchasing decisions, and more backorders. But by performing a regular inventory cycle count you can maintain accurate recorded stock levels throughout the year.

This article explains what the inventory cycle stock taking method is and the best practices for conducting one.

What is an inventory cycle count?

An inventory cycle count is a regular audit of inventory stock levels performed by a business on a subset of items. This is achieved by counting small volumes of inventory and comparing each count with the stock levels currently showing in the business’s inventory system.

When discrepancies are found during an inventory cycle count, the necessary adjustments are made to the inventory records to remediate them.

Cycle counts validate (or invalidate) the accuracy of your recorded inventory levels and can help to quickly identify items or locations to investigate.

inventory cycle count

An inventory cycle count enables businesses to maintain relatively accurate stock levels all year round.

Inventory cycle count vs physical count

Inventory cycle counts differ from traditional physical counts because they only deal with a portion of the total inventory in a business at one time. This enables the business to continue operations while the count takes place. In a traditional physical count, all business activities must be paused until the recorded levels have been updated with the results of your audit.

Some key advantages of an inventory cycle count vs a physical count:

  • There’s less disruption to your daily operations.
  • You can catch discrepancies before they become a problem.
  • You’re less likely to make mistakes when counting smaller batches of inventory.
  • You’ll have more time to improve processes and fix discrepancies between counts.
  • It helps you maintain accurate inventory levels throughout the whole year.
  • You’re less likely to experience stockouts.
  • It reduces your backorder rate and shortens fulfilment times.

Inventory cycle count formula

Before you can use the inventory cycle count formula, you must perform a cycle count and pull out the current recorded levels from your inventory system.

The formula for calculating an inventory cycle count is:

Physical Count / Recorded Count × 100 = Inventory Accuracy Rate

The inventory cycle count formula tells you the accuracy of your recorded levels as a percentage. For example, if in your cycle count you tally 15 of an SKU, but the recorded levels in your inventory system say 18, the accuracy could be calculated as:

15 / 18 × 100 = 83.33

This means that your recorded levels for that stock-keeping unit (SKU) were 83.33% accurate.

The optimal inventory accuracy rate for an SKU is 100%. Businesses should aim for at least 97% or higher to ensure efficient operations and high customer satisfaction rates.

inventory cycle count in a warehouse

A cycle count of your inventory means staff not performing the count can continue their work uninterrupted.

Benefits of inventory cycle counting

Inventory cycle counting is undertaken in manageable sections regularly throughout the year. It saves time and resources because you are only focusing on a limited number of items at a time.

Here’s a quick breakdown of the key benefits of inventory cycle counting.

Cycle counts ensure accurate stock levels throughout the year

The time between each inventory count is reduced with cycle counts, which means records are up to date more often.

By regularly inspecting inventory, you can also identify inventory shrinkage and determine the root cause more easily, as less time will have passed since the stock went missing (when compared with annual counts).

This allows you to implement preventative measures promptly, reducing the risk of discrepancies compounding over the entire year.

They’re more accurate and less intrusive than traditional physical counts

Cycle counting improves the accuracy of inventory tallies. Since you’re counting relatively smaller batches of inventory, you’re less likely to make mistakes.

Traditional physical counts usually require the entire staff to down tools and pause fulfilment until every item has been accounted for and levels have been updated. By undertaking smaller, more frequent inventory counts you can also continue normal business activities without the need to shut down operations.

They enable smarter purchasing choices

With the continuous assessment of your on-hand stock, your purchase decisions are more targeted and informed. This means you’re better placed to avoid potential stockouts of popular inventory SKUs.

You’ll also be able to notice discrepancy trends – for example, you might notice that 5% of a particularly fragile SKU will be lost to breakages – and increase or decrease your order quantities to match those trends.

You can give customers a better experience

With accurate, well-maintained inventory records, your customers are more likely to receive their orders, in full, when they expect to receive them.

Knowing what items you have, where they are, and in which quantities allows you to facilitate quicker order fulfilment and delivery, which, along with quality and price, are top-of-mind for most customers.

Satisfied customers are more likely to become repeat customers and recommend your products when they receive them without delays.

They’re easy to manage

Inventory cycle counts can be easily planned and executed using inventory management software. You can use filters to select stock items, locations, and other information that can be printed out or exported to a spreadsheet that counters can carry with them.

Once the new stock levels are recorded on a spreadsheet, they can be imported into your inventory system and updated in seconds.

3 main types of inventory cycle count

Inventory cycle counts can be performed in a few different ways. There’s no right or wrong approach. But knowing all of them can help you choose the most suitable strategy for your business.

First, let’s look at the two methods for performing cycle counts:

  • A random cycle count picks a random selection of inventory to regularly count. This method is often used by warehouses with an extensive range of similar products.
  • A control group cycle count conducts an initial count of a small group of products. These are then recounted by different employees in a short timeframe.

Each of these methods can also be combined with one of the three main inventory cycle count types, which are:

  • ABC analysis cycle count
  • Location-based cycle count
  • Opportunity-based cycle count

1. ABC analysis cycle count

ABC analysis is used to determine which products in your inventory stock carry the most value. It’s based on the Pareto Principle, or the 80/20 rule, which states that 80% of outcomes come from 20% of inputs.

By determining the 20% of products that drive the most value for a business, you can prioritise your inventory cycle counts to focus on the most valuable goods.

To initiate an ABC analysis cycle count, you must first categorise your entire inventory based on each product’s total value to the company.

Here’s how categories work in ABC analysis:

  • A = Items that account for 70–80% of total inventory value
  • B = Items that account for 15–20% of total inventory value
  • C = Items that account for 5% of total inventory value

These percentages are only guidelines. A less-specific method of ABC categorisation could look like this:

  • A = Items with a high value or that yield the highest profit
  • B = Items not as valuable as A but more valuable than C
  • C = Items with a low value or that yields the least profit

Classify your inventory into these three categories and conduct cycle counts accordingly. By counting items that fit into categories A and B more frequently than C-category items, you can concentrate your efforts on the products that bring the greatest value to the business.

2. Location-based cycle count

Location-based cycle counting tallies all items in a specific physical area of your business. Counting inventory by physical location is a simple and convenient way to manage your inventory cycle counts.

Those locations could be:

  • Sections within your warehouse
  • Individual departments
  • Floor displays
  • Retail areas
  • Racks
  • Bins
  • Aisles

The method counts inventory in each location one at a time. Location-based counting usually involves assigning employees a specific area to undertake and record physical inventory counts.

This system also involves updating business floor plans and warehouse layouts with the latest information.

3. Opportunity-based cycle count

Opportunity-based cycle counts focus on auditing inventory at critical times, such as when recorded levels go below a certain threshold or when an item needs to be reordered.

This method can help shorten the labour time required to undertake and reconcile a count, as the quantities of stock to count are often lower.

Opportunity-based counts also ensure stock levels are updated near when inaccuracies could become costly. Knowing that you have more in stock of an SKU than is recorded in your inventory system can prevent premature ordering.

inventory cycle count

Inventory cycle counts are useful for finding discrepancies before they pile up and become a serious problem.

Inventory cycle count best practices

The most important aspect of inventory cycle counts is accuracy.

To ensure the accuracy of your inventory cycle counts, consider:

  1. Your SKU quantities – Establish how many SKUs or products you want to count each time. This should be based on the number of high-value products and what volume can be reasonably counted in each counting period.
  1. Your available resources – The tools you can use to assist with the count, how many employees you have, and the amount of time they can dedicate to stock counts.
  1. The frequency of counts – How often you undertake cycle counts will depend on the counting method chosen and the number of SKUs to be counted.

8 inventory cycle count best practices

  1. Make use of modern technologies such as stock taking software and mobile scanners to streamline your counts.
  2. Compare current and previous counts to identify trends. (Trends indicate an area or process that needs further investigation.)
  3. Time your cycle counts so that they do not interfere with order picking and receiving processes.
  4. Plan and prepare inventory cycle counting well in advance. Create a cycle count schedule to ensure counts are performed at regularly spaced intervals.
  5. Alternate which staff members perform cycle counts to limit the risk of an employee covering up for their own theft or damages.
  6. Ensure that all transactional activities are suspended on the set of items selected to be counted.
  7. Track your key inventory metrics to determine if your inventory cycle counting processes are improving or failing over time.
  8. Document your full cycle count process for future reference. Separate your inventory cycle counting and inventory recording as two different procedures.

Cycle counting example

In practice, cycle counting can be performed using several methods – including hybrid approaches that cater to specific business needs.

As an example, we’ll now walk through the process using the ABC analysis method.

Let’s assume you conduct regular inventory checks using your automated inventory management system or manual records. With this information, you would allocate each SKU to a category A, B, or C item using the classifications mentioned above.

Once per month, you perform a cycle count on category A items. This ensures your highest-value goods are usually accurate.

Once per quarter, you perform a cycle count on category B items. This ensures your second-highest-value goods are updated four times each year.

Once or twice per year, you perform a cycle count on category C items. This ensures you do not waste a lot of time performing cycle counts on the products that drive the least value for your company.

After performing multiple counts of a category, you then compare the data from each count. If you notice that a specific item from category A, for example, is frequently inaccurate, you will be able to investigate the issue and resolve it quickly.

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Oliver Munro - Unleashed Software
Oliver Munro

Article by Oliver Munro in collaboration with our team of specialists. Oliver's background is in inventory management and content marketing. He's visited over 50 countries, lived aboard a circus ship, and once completed a Sudoku in under 3 minutes (allegedly).

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