Cycle counting is an inventory-control method that lets businesses conduct a regular count of several items in different areas in a warehouse, without constantly adding up the entire inventory. Cycle counting at regular intervals is less disruptive than performing a full physical count of inventory, which often requires the shutdown of manufacturing, shipping or other portions of the business.
Two inferences are made in a cycle count – first, that the accuracy of the items that are chosen to be counted can be used to determine the accuracy of the items in the warehouse overall, and second, that if an error in the cycle count is discovered, it could then be expected to occur for other items in the warehouse.
Cycle counts can be conducted along with a company’s daily operations and can be performed by a small, specially trained team. These counts can improve the accuracy of the perpetual (or continuous) inventory system by helping prevent significant adjustments at year-end and increasing the company’s ability to rely on the system or ordering and production scheduling, leading to more efficient inventory control.
How cycle counts work
Cycle counts require someone to physically count a portion of an inventory at a preset frequency so that each item is counted at least once in an accounting period (usually a year). Fast-moving or more expensive items typically are counted more often than slower moving or less expensive ones, and some items are counted every day.
Methods for using cycle counting include employing control groups, random sampling or ABC analyses.
- A control group may be used to test that the method that is employed to count items provides the best results. Typically, this involves counting a small group of items several times in a short period and finding and fixing possible errors in the counting technique.
- Random-sample cycle counting involves selecting, at random, the items to be tallied. Two techniques that can be used in random-sample counting are constant-population counting and diminished-population counting. In constant-population counting, the same number of items are added up each time a count is made; some may be counted often and some not counted since the selection is random. In diminished-population counting, a number of items are counted but then excluded from being counted again until all items in the warehouse have been tallied up; so each count involves the selection of items from an ever-decreasing number of eligible items to be counted.
- The ABC cycle-counting method is based on the Pareto principle, which states that for many events, 80 percent of the effects come from 20 percent of the causes. The ABC cycle counting method uses this principle to assume that 20 percent of the items in a warehouse correlate to 80 percent of sales; these are the “A” items. Meanwhile, “B” items account for 30 percent of the items and 15 percent of sales, and “C” items represent 50 percent of the items in the warehouse but just 5 percent of sales. Inventory-control software can help companies determine how items should be categorized; those with the highest sales value (an “A” item) should be counted most frequently.