Warehouse Tips & Guides Operations

How to Develop a Warehouse Inventory Cycle Counting Process

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Bill Conway, NetSuite Practice Lead
Bill Conway, NetSuite Practice Lead

Streamlining business processes and paving the way for future growth

Managing a large inventory involves a number of different procedures. Part of that management process is keeping accurate inventory of the items in your warehouse.

Performing full physical inventory checks can be expensive and disruptive to regular operations, but the dangers of inaccuracy can be detrimental to the health of an organization. Errors in inventory can lead to shortages, excess stock, or even line shutdowns. It also makes the warehouse unreliable and vulnerable to theft. 

Cycle counting is a way to prevent inventory errors without shutting down the whole facility for a full count. While a regular inventory count is usually a large but simple task (start counting everything on the shelves), cycle counts tend to be more complex. Procedures may vary depending on the needs of the organization, but a few best practices remain consistent across the board. 

Cycle Counting Compared to Physical Inventory

Full physical inventory counts usually require a complete shutdown of the warehouse or distribution center operations while the count is completed. This usually costs the company a lot of money in lost productivity and hours paid to the counting teams, who are typically pulled away from other tasks. If this is the only method for recording inventory, facilities tend to have counts less frequently in order to save money and time. However an infrequent count can cause serious levels of inaccuracy. 

Cycle counts work by sampling a group of items and taking inventory of only that section. Similar to a research poll on public opinion, the accuracy of the sample section is then used to estimate the accuracy of all other areas in the warehouse. This helps ensure a better statistical accuracy, and eliminate systematic problems with keeping track of stock. 

As with any statistical procedure, there is also a margin of error. To mitigate this error, it is important that a cycle count becomes part of a facility’s established inventory management process. It is also important to choose a preferred method and remain consistent in practice. 

Methods for Cycle Counting

There are 4 common methods to conducting cycle counts in your warehouse. Research suggests both benefits and risks associated with each one, so it’s important to decide what works best for your organization's goals. In some cases, combining aspects of each method can help lower the potential for error and create a more profitable outcome. 

ABC Analysis

Perhaps the most commonly used method is ABC analysis. It is also the most complex method in many cases. ABC analysis is based on the Pareto principle which suggests that 80% of all outcomes directly stem from 20% of causes. Applied to inventory management, ABC analysis assigns a particular value to each product in counting inventory. This means that items with higher value get counted more frequently than items with lower value. 

Value can be determined in a number of ways. Most often value is assigned to each class of item by dollar amount, demand, or turnover rate. The count frequency of each class of item is proportional to this 80-20 rule. 20% of the products get counted 80% of the time and so on down the line. 

In practice, it looks something like this: 

Class A - Top Tier

  • Highest Dollar Value or Highest Demand 
  • Lowest Quantity / Space Requirements (About 10%)
  • Counted every month

Class B - Mid Tier

  • Average-to-High Dollar Value or Demand
  • Medium/Small Space Requirements (About 20%)
  • Counted Every Quarter

Class C - Low Tier

  • Lowest Dollar Amount or Demand
  • Highest Quantity / Space Requirements (About 70%)
  • Counted 1-2 times per year

This method can be beneficial because it focuses counting efforts on only the items or areas that have the most impact on the success of the business. However, this method does pose risk for over-counting certain prioritized areas which can lead to inaccuracy of the sample. In some cases, you can reduce the risk by allowing warehouse employees to reassign or adjust the value of certain areas based on defined criteria and observations. This can help refine the process over time by focusing on products that truly need the most attention. 

Opportunity-Based 

The opportunity-based method of cycle counting is oriented around transactions. Counts are conducted when an item undergoes change or has movement. For example, counts might occur when an item is re-ordered, changes locations, or stock depletes below a predetermined level. Employees count only the areas that have a high chance of error due to change, focusing efforts mainly on what is necessary.

Process-Based 

The process-based method of cycle counting works by allowing managers to choose which items or areas to count during each period. At first glance, this may seem like an ineffective method because it would allow employees to simply choose the easiest shelves to count for the day.

However, it actually tends to work well when in use. While there is the risk of bias,  research shows that this bias is mainly toward items with the highest likelihood for discrepancies. 

Location-Based

This method is similar to the process-based method in that it does not account for the value of the items. However, the sample is usually decided by an inventory management software. Items are counted based only on their physical location within the warehouse with the repeat goal of counting all shelves over a period of time. This ensures a truly random sample which can prove to be more accurate. Even in other methods, taking the location of the product into account can reduce the chance for error.

Best Practices for Cycle Counts and Inventory Management

No matter what method your company chooses for cycle counting, or if you choose a hybrid of multiple methods, certain practices are essential in all cases. In theory, these methods seem simple, but putting a cycle count into motion can be complicated. To make sure your process is the most efficient and profitable for your organization, it’s best to integrate your cycle count process into your regular inventory management procedures. 

Keep Regular Physical Counts

Keep in mind that implementing a cycle count process does not eliminate the need for full inventory counts. It simply reduces the need to have them as frequently. In many cases, it’s best to have a full inventory count at least once every year. 

How Often Should You Run a Cycle Count? 

At Blue Horseshoe, we believe that the required frequency of your cycle count depends on the complexity of your warehouse operation. In many cases, it’s best to do a weekly cycle count, however in cases where this is not possible, a monthly or quarterly frequency is sufficient.

Once you create a schedule, it’s also important to stick to it. Deviating from a scheduled cycle count can affect its accuracy in determining the state of inventory overall. It’s best to prioritize the cycle count even if something on the calendar threatens to interfere. If time or resources simply do not allow for the full scope of the scheduled count, the ABC analysis method can help prioritize certain areas and allow teams to focus efforts on a smaller portion.

Make A Solid Process

Especially when onboarding new employees, it’s best to have your cycle count process well documented and integrated into your warehouse management software platform. That said, it is also best to only use well-trained employees to perform your cycle counts. Those who are familiar with your process will not make as many mistakes when carrying it out. If you have the resources for it, alternating between 2 or more trained counting teams on a regular basis can reduce the risk of error as well. 

Other Tips

Before running a cycle count, make sure to close or finish all open transactions for the items being counted. This will prevent inaccuracy and the need to interfere with production. 

That said, it’s also best to conduct counts during certain periods of inactivity so as not to get in the way of the warehouse’s regular operations. 

How to Automate the Process

The goal of a cycle count is to reduce the time it takes to run full inventory. Computer technology makes the process even more efficient by automating certain aspects of the workflow. While some technology may be out of reach due to cost, certain common solutions are already available for businesses of any size. 

Using an ERP

To avoid the need for paper tallies and the additional cost of filing physical counts, Enterprise Resource Planning software (ERP) and Inventory Management Systems (IMS) can keep track of this on a computer network. 

By combining inventory information, warehouse processes, business goals and other strategies, these programs help teams to understand and make use of important company resources instantly. They also allow for employees and other stakeholders to access this virtually from many devices, often in real time. 

Some programs like Microsoft D365 can help you both run your cycle counts and manage multiple aspects of your supply chain overall. 

Product Scanners

While product scanners have been used by warehouses for quite a while now, they are still essential to everyday operations. Typically each item will be tagged with a barcode that makes counting an item equivalent to a single scan. Often the information is automatically loaded into the inventory management system or ERP, and that data can be analyzed for cycle counts automatically. 

Although they are often more expensive RFID scanners can be more efficient. With RFID, multiple products can be logged with a single scan. 

Voice-Directed Systems

Previously, voice-directed systems were only available to larger warehouse operations. However, the technology is now becoming more available. With the use of headsets, voice-directed systems can help conduct cycle counts, item picking, and many other warehouse processes by automatically directing employees through a specific workflow. 

Robotics

As with many industries, robotics and artificial intelligence are the future of warehouse operations. Even today, this technology is already automating procedures by using machines to pick items based on the SKU. In some warehouses drones will even scan the aisles to conduct inventory without disturbing human workers. 

Implementing a New Cycle Count Procedure

If you have not already been using a cycle count process in your regular warehouse operations, it can be difficult to develop one at first. However, patience and attention to detail will reward your facility with better accuracy over time. 

To get started, you’ll want to first conduct a full physical inventory to assess the state of your warehouse overall. Use this as a control to assess your chosen cycle counting method for accuracy. 

Then, set a goal to improve upon any accuracy standards for your inventory or counting process. When you spot a discrepancy, look for the root cause. Eliminate any systematic issues with your process or with any problem areas. Errors with one section can help you understand the errors that may be prevalent across your entire warehouse. 

When developing a method and assigning value to certain products, be sure to consult with different departments and all relevant stakeholders. Different teams will ascribe different values to certain items. Depending on the needs for your company, you may want to consider a hybrid model to achieve the most efficient and accurate method of cycle counting.

Conclusion

Developing a cycle count into your regular inventory management process is essential to the accuracy of your stock information. Customers want to know that your information about product availability is complete and accurate. While frequent wall-to-wall inventory counts may not be feasible or profitable, you can still maintain the accuracy of your inventory by conducting regular cycle counts. 

However, warehouses are complex operations. There are a number of problems that can make the supply chain process difficult or ineffective. While some solutions may be costly to implement, consider how much money an inefficient process could cost a warehouse every year. Blue Horseshoe can help you redesign your facility operations and provide valuable insights that help your business reach maximum efficiency. Take a look at how our many services can help your operation grow on multiple levels, starting today.

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