Cycle counting: the path to inventory nirvana?

Many companies conduct an annual “all hands on deck” physical inventory... and the company – and its employees – hate them.

Between the shrinkage suffered from pick and holds and lost inventory resulting from spoilage, damage and theft, these companies fight a losing battle to preserve an accurate and useful tally of their goods. So why conduct these types of inventories? One reason is that by staging physical inventories each year, companies keep the process fresh in people’s minds and “help” them remember where specific stock is located. Despite these gross inefficiencies, they can’t imagine moving to cycle counts, because they believe it would be too disruptive to change.

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We witness many warehouses and distribution centers operating like this. Their employees typically need to sacrifice an entire weekend to do a physical inventory, which ends up costing the company overtime pay while being neither particularly accurate nor useful. Contrast this with the far less time-consuming process of doing regular cycle counts, which involve counting just a small portion of the total inventory – typically at the end of every work day.

What is cycle counting and why is it beneficial?

The goal of cycle counting is to methodically work through the entire warehouse inventory on a continuous and far more manageable basis. By verifying inventory quantity by bins regularly, misplaced items can be found and quickly returned to their correct locations, and errors can be caught sooner. This makes it much easier to correct physical inventory quantities based on specific location, on an ongoing basis.

Cycle counting is not just about inventory accuracy

Cycle counts bring a warehouse many additional benefits, not least of which is the ability to reduce unnecessary inventory levels, often called fear stock. This practice also helps to usher in efficiency gains at the warehouse, ultimately resulting in increased sales thanks to improved customer service, knowing that inventory is actually available. Cycle counts can achieve this because they make it possible to:

• Maintain the right balance of popular SKUs
• Make the best use of limited storage space
• Make it easier to manage stock rotation (FIFO)
• Reduce stock carrying costs and fear stock
• Improve warehouse productivity and employee morale

A warehouse’s inventory numbers can be skewed or miscounted due to many factors. These errors can creep in at any touchpoint while the inventory is in the warehouse, including when goods are first received or put away. Mistakes can also be made during the picking, staging and shipping phases, and it’s worth mentioning that a chaotic, untidy or disorganized warehouse has a negative effect on accuracy and efficiency. While most missing inventory eventually turns up in the wrong location, inventory that is missing, damaged or stolen costs businesses dearly. 

How cycle counting works

As an example, let’s say that $1,000 worth of a product goes missing. Assuming the product has a 5 percent margin, the warehouse needs to sell an additional $20,000 worth of those goods just to recoup its lost costs. That doesn’t take into consideration the possible impact to customers caused by delayed or cancelled orders.

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As a yardstick, the median inventory shrinkage as a total percentage of inventory should generally be close to 0.2 percent, while best-in-class operations are able to reduce that to less than 0.005 percent. Likewise, the median for losses due to material handling damage is often around 0.05 percent, with best-in-class teams keeping that figure down to 0.002 percent. For many warehouses and distribution centers, shrinkage is often closer to one percent, meaning that there is enormous room for improvement.

Daily cycle counts as part of a warehouse team’s regular routine directly deliver a host of benefits to warehouse operations. What we’ve seen is, these counts quickly raise bin level accuracy to well over 97 percent. They also help to eliminate the need for wall-to-wall physical inventories, and make the most efficient use of space and resources.

Adopting cycle counts also results in several complementary benefits, including a reduction in exception handling for discrepancies, the elimination of labor costs and service disruptions caused by a physical inventory, and fewer lost sales due to stock outages.

Last but not least, cycle counting introduces a planned, systematic method for controlling when and where cycle counts need to be made across the warehouse over time, along with cycle counting at the bin on the fly when errors are discovered.

How to implement cycle counts in your warehouse

For any warehouse or distribution center, the notion of abandoning the trusted practice of physical inventories in favor of cycle counts naturally appears to be a daunting task. The best way to approach it is to understand that cycle counts provide the warehouse an opportunity to enable continuous monitoring of inventory accuracy over time. Cycle counting is one of those processes that can be phased in gradually, perhaps by starting with high turnover goods.

Once implemented, however, the commitment to daily cycle counts quickly becomes a way of life, allowing team members to replenish minimum count requirements, verify that bins and SKUs are in the correct location, and adjust for discrepancies. The overall result is a far more accurate and up-to-date snapshot of actual inventory levels, without the onerous task of a full-scale physical inventory. If this saves your business money and makes your customers and employees happier in the process, why wouldn’t you embrace it?