Does your business sometimes experience delays in order fulfillment, resulting in dissatisfied customers? Have you tried implementing a sophisticated inventory management software, only to find your counts are still inaccurate? If your inventory count does not consistently match what you physically have in your warehouse, your company could benefit from cycle counting.

Cycle counting is a process that replaces comprehensive annual inventories with smaller counts conducted on a continuous basis throughout the year. The process takes place during normal business operations, alleviating the need for an annual shutdown.

While products, process complexity and volume can determine whether cycle counting is right for your business, companies of all sizes can benefit from the process. Here’s how investing in a cycle counting inventory system now can create savings for your business in the long run.

5 Benefits of Cycle Counting

  1. Improved ability to fill orders: Because cycle counting allows smaller batches of goods to be counted multiple times a year, inventory variances in the ordering system are reduced. As a result, there are fewer items on back-order. You may decide, for example, to schedule six counts a year of your highest turnover items in order to more efficiently meet the needs of your customers.
  2. Current and accurate information to manage the business: When inventory records are inaccurate, orders for extra supply often are placed to provide “padding” that ensures goods will be there when needed. This excess inventory increases carrying costs and potentially increases the amount of obsolete stock on hand.
  3. Faster recognition of breakdowns in shipping, receiving and inventory transfer transactions: Increased transparency reduces extra costs from expedited freight incurred to make up for time lost dealing with inaccurate inventory records.
  4. Reduced disruption: Since only small batches are being counted at a time, there is no need to shut down operations for counting inventory. The process is integrated into the regular workflow and is completed by existing staff throughout the year – rather than by temporary workers on an annual basis.
  5. Increased ability to reduce errors and theft: Frequent counting allows potential discrepancies to be discovered and corrected more quickly, reducing the impact of errors. Regular counting also helps detect theft so countermeasures can be taken.

Implementing Cycle Counting

If overhauling an inventory system is a complex process, implementing cycle counting is even more nuanced. While you will most likely need to employ a multi-pronged solution that includes your auditor, banker and team, here are some tips to get you started.

Define and Map Your Work Processes

Work with your team to gain a comprehensive understanding of all steps that affect inventory. Chart the actual workflow, and document how the processes should work – down to the individual task level for each position involved in the process. This includes purchasing, receiving, stocking, order processing, fulfillment and shipping. Steps in the workflow should include completing and processing paperwork, entering data through automated scanning techniques or manually at workstations, and performing any required monitoring checks for inventory.

Define and assign roles for the inventory staff. To preserve transparency and data integrity, have the counting staff report to the accounting department rather than the manager of the facility where the count is taking place.

Ensure Employees are Properly Trained

Communicating the reasons for the change in inventory process and your expectations for results is vital. Ensuring your employees are properly trained will help them gain a solid understanding of the workflow and how one process affects another. Set up training sessions for your team to review inventory processes and individual responsibilities. 

Consider customizing your training so new employees receive more extensive training while more experienced employees receive periodic refresher courses as processes change. Test your employees on their knowledge of and ability to perform expected tasks, and provide constructive guidance for correcting errors.

Ensure Your Software Capabilities

Software should take a snapshot of inventory at the start of a cycle count and then allow adjustments based on what is found in the physical count. Tracking, accumulating and accounting for these adjustments is essential.

Define the Cycle and Segregate Counting

Begin cycle counting small parts of your inventory daily while doing one last physical inventory; then compare physical counts against the levels shown in your inventory management system.

Start with control group cycle counting. Select a control group made up of a cross-section sample of inventory. Then count the control group and compare it against your inventory management system data. Rotate your control groups according to an established schedule to ensure that all inventory in the warehouse is counted at least annually.

After you've implemented control group cycle counting, identified any sources of inventory accuracy problems and put the necessary solutions in place, begin implementing random cycle counting. Take a random mathematical sampling of your inventory to assess conformance against inventory accuracy expectations and then infer accuracy relative to your entire inventory.

Once you have those processes in place, you can choose how to cycle your counting, depending on needs. For example, you could count a percentage of your fastest moving stock each day, while counting other items less frequently. You might also choose to count all items of one type, regardless of where they are in your facility, or you could count all items in one location, regardless of type.

Set Realistic Goals for Error Tolerance

Your tolerance for error may vary depending on the degree of demand for any given item. You also may want to adjust your error rates down after you've made progress identifying process errors and human mistakes, and corrected them. On a regular basis, identify and report inventory inaccuracies – for example, improper counting, data entry errors, or goods lost to theft, damage or disorganization. Translate what these inaccuracies mean in terms of lost profit.

Continuously Improve Your Cycle Counting Process

Continuous improvement is a must. Regularly review your operational workflows with your staff to pinpoint broken process areas and identify solutions for reducing errors. Frequent and routine assessments will allow you to incorporate enhancements or new processes as business needs change.

Try to batch together several process improvements at one time to avoid confusing employees with multiple process iterations. Then roll out the changes through formal training sessions to ensure everyone is on the same page.

Next Steps for Cycle Counting

Start counting and measure the results!

If inaccurate inventory counts are a problem at your company, you need to take corrective steps as soon as possible. Not taking proactive measures may result in a loss of customers and reduced profits. If you need help remedying inventory inaccuracy, LBMC’s team of experts can help you get on the right track.

John Mark McDougal, CPA, is Shareholder-in-charge – accounting and assurance services and lead Shareholder – manufacturing/distribution industry, at LBMC. He can be reached at jmcdougal@lbmc.com or 615-309-2474.