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Physical Inventory vs Cycle Counting

Why Cycle Counting Beats Physical Inventories

Chris Bratten | 15 August 2012

Accurately tracking inventory can be a costly affair for many distribution centers. Often, a DC will conduct a yearly, full-scale physical inventory to ensure an accurate review of the quantity for each SKU in a warehouse. This method of inventory verification is good for smaller warehouses that can conduct a physical inventory relatively quickly. For larger operations, those with a large inventory or run 24/7 services, it is not the most cost-effective or easy to execute. Fortunately, it is not the only option.

What Is Cycle Counting and Why Is It Effective?

Cycle counting is the process of counting a small, predetermined set of goods and materials frequently rather than performing a full physical inventory once per year. Effective cycle counting requires counting a certain number of SKUs each day, and each SKU is counted at a prescribed frequency. The Council of Supply Chain Management Professionals defines cycle counting as an inventory control and management practice that refers to a process of regularly scheduled inventory counts (usually daily) that "cycles" through your inventory. Users determine how often certain items or locations are counted using frequency or dollar values segregated into “ABC” categories. The main idea behind cycle counting is to pinpoint records that are in error and determine the cause of the error. This is a very important distinction to be aware of—that the goal is to correct cause of an error and not simply to correct the error itself. Companies that stop short of diagnosing the error and don’t uncover the reason for it are missing out on achieving efficient inventory management that can result in lower operating costs.

Commit and Be Rewarded

To be successful in cycle counting activities, you need to be committed to performing these smaller weekly audits. Cycle counting can take time in the beginning stages, but the payoff can be significant within just one year of implementing it as a business strategy. Conducting daily or weekly cycle counts ensures that each item is counted and tracked in a timely fashion. Some of the benefits of cycle counting include:

  • Reduced Costs: Business operations are no longer interrupted by full-scale inventory audits—saving on personnel costs and avoiding warehouse downtime.
  • Improved Accuracy: Warehouse staff can identify and fix inaccurate data such as misplaced or lost stock. This results in higher customer satisfaction by enabling your team to report on availability of an item immediately.
  • Reduced Losses: Cycle counting means more real-time monitoring and helps avoid inventory shrinkage – or the loss of product due to theft, damage or expiration.
  • Insights to Your Business: By understanding how product flows through your warehouse, you can determine when product lines are performing well and can be expanded. Additionally, you can make better decisions, such as when to reorder a SKU or when there is excess inventory.
  • Operational Efficiency: Less inventory discrepancies mean fewer exceptions to handle and less time searching for misplaced products.

Success Story: Gardner, Inc.

Gardner, one of the largest parts distributors for the lawn and garden industry, has been growing quickly through acquisitions and an expanding customer base. With a cycle count program in place, the company was able to avoid a full physical inventory this year by passing a 45-location random audit. By implementing a cycle count program, Gardner has enjoyed significant labor savings.

  • Gardner required 1 person for 2 hours to walk the auditors through the 45-location audit. This was done during regular business hours and did not require shutting the warehouse down. A full physical inventory required more than 30 people over 2.5 days to count every location while the warehouse was completely shut down.
  • Cycle counting helps find inventory problems (and fix them) before it’s found during picking, which can delay order processing.
  • In the end, the labor savings alone in this process was $7,700.

For Gardner’s recent audit, about $275,000 of inventory was counted and only 3 variances were found, totaling $1.11. The audit was conducted using the cycle count program within Gardner’s warehouse management system (WMS).

Before Starting a Cycle Count Program

Does cycle counting sound like something you would like to implement at your organization? Before making the leap, we suggest taking the following steps to prepare for integrating a cycle count program into your operation.

  1. Meet with your finance and operations departments to discuss how performing cycle counts will impact the business.
  2. Meet with auditors to discuss expectations, requirements, and the process.
  3. Analyze the cycle count functionality and reporting within your warehouse management system or ERP to make sure it meets the requirements. Set it up, test, and validate before implementing.

Author: Chris Bratten

Chris is a Logistics Consulting Manager at Bastian Solutions, based in Louisville, Kentucky. He has a Bachelor of Science in Mechanical Engineering from Rose-Hulman Institute of Technology and a MSME from Purdue University. Since starting with Bastian, Chris has developed and maintained strong relationships with his clients; designing solutions and supporting system integrations.


Don Pullen says:
8/28/2018 10:08 AM

Nice job Chris.

Chris Bratten says:
8/28/2018 10:08 AM

Thanks Don, glad you enjoyed the post!

richard taper says:
8/28/2018 10:08 AM

So this is PI counting under a different name. Your stock count is 10% accurate all the time instead of 100% accurate when audited. How is the material flow of live products taken into account when counting without additional software to freeze those products before the count? producing inconvienence to production or sales. Or is this the usual emperors new clothes Managment self agrandisation jargon that creeps over the industry. We used to have common sense now we have CMI'S kpi's, Lean, Cycle counting sic. All seamingly made to make graduates sound smart when they acctually know bugger all about running a DC.

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