Inventory Cycle Counting 101: Best Practices & Benefits (2024)

Learn everything you need to know about tracking inventory with cycle counting, including themethods, process, frequency, steps and benefits.

What Is Cycle Counting?

Cycle counting is a method of checks and balances by which companies confirm physicalinventory counts match their inventory records. This method involves performing a regularcount and recording the adjustment of specific products. Over time, they have counted alltheir goods.

Warehouse managers and supply chain professionals often prepare the plan for staff to auditinventory. The most efficient inventory management plans lead to minimal transaction errorrates and extremely high stock record accuracy without taking away from staff's essentialtasks.

Regardless of whether a company uses periodic or perpetual inventorypractices to track their inventory, regular cycle counting is a necessary auditing processto manage inventory counts.

Video: What Is Cycle Counting?

What Does Inventory Cycle Count Mean?

Regardless of whether a company uses periodic or perpetual inventory practices to track theirinventory, regular cycle counting is a necessary auditing process.

BillConway(opens in new tab), NetSuite PracticeDirector,Blue HorseshoeSolutions(opens in new tab), describes theprocess ininventory management procedures:

“Many companies perform regular physical inventory counts as part of their yearlyfinancial accounting practices. Large companies with thousands of items typically haltoperations for up to a week or more to perform a full physical inventory count. Cyclecounting is an inventory management option that allows you to count items in adesignated area of the warehouse without stopping operations to perform a completephysical inventory.”

What Is Inventory Accuracy in Cycle Counting?

When used as a metric, inventory accuracy is either a count or a cost. Determine inventoryrecord accuracy (IRA) by using the inventory cycle count accuracy formula.

IRA = Matched inventory / # items counted

The goal of cycle counting is to identify and rectify any inventory record discrepancies. Aswith any process, it is helpful to understand your performance, if it is improving and howyou perform compared to industry benchmarks. A common KPI for this is the IRA number. Youcan adapt this formula for either the number of units or a dollar total. For dollars/units,use the formula:

IRA = [ 1-the sum of the absolute variance / #the sum of the total inventory ] x 100

For example, if a physical count was 354 and the system count was 375, calculate the IRA as:

Physical Inventory vs. Cycle Counting

A physical inventory counts all stock in a building, usually once or twice a year. Cyclecounting counts small, preselected sections of inventory multiple times a year, sometimes asoften as daily.

Performing only a physical inventory is a good choice for companies with minimal inventory.If you can easily count your stock without closing and inconveniencing clients, schedule andperform an annual inventory. For more information on conducting physical inventories, readNetSuite Best Practices: Annual Physical Inventory Counts(opens in new tab).

“If you are not performing your cycle counts correctly or they keep indicatinginventory discrepancies, perform a full physical inventory to determine your actualinventory position,” Conway advises. “If your company does not have a robustcycle counting policy or procedure in place, you should perform a full physicalinventory audit as part of an ERP implementation plan. This practice helps ensure youare starting with quality data.”

There are a number of advantages of a cycle count over a physicalcount — it saves time while helping you improve inventory accuracy and deliverproduct reliably — and there are a number of different approaches to cycle counting.Many companies perform cycle counting in addition to an annual physical count, often a goodapproach for those who have a solid grasp on their inventory.

How to Do Cycle Counting

You can perform cycle counting by scheduling high frequency, regular counts of sections orbays as part of everyday operations. Use inventory cycle counting methods to do counts dailyand assign specific workers to particular areas.

When developing a cycle counting program, first consider three main inputs:

Number of SKUs:
Determine how many products, or stock-keepingunits, you want to count at a time. Base what you choose to count on your overall numberof SKUs, the number of high-value products and what is reasonable to count in intervals.
Available Counting Resources:
This resource is dependent on thenumber of available employees and how much time they can dedicate to counting stock. Forexample, some companies suggest employees use the time before shift end to count SKUs intheir assigned areas. This timing takes advantage of the natural lull in employeeproductivity with relatively easy work. One important consideration: These employeesshould not have a stake in the accuracy of the numbers.
Counting Frequency:
How often you count inventory depends on howmany SKUs you want to cycle count in the year. For example, if you wish to count 1,000SKUs per year, count ~83 per month, ~21 per week, and ~3 per day, assuming you are onlycounting each SKU once annually. You may want to count high-value items more often.Either way, you must determine how long counters will take to record their SKUs daily.

Inventory Cycle Count Policy

An inventory cycle counting policy specifies when to perform counts periodically to confirminventory balances. Companies should also determine whether they will count productsrandomly or in a set pattern and whether they will have occasional “special”audits.

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Inventory Cycle Counting Process

Companies start inventory cycle counting to eliminate the root causes of errors. This actionleads to reliable control processes. After completing a full physical inventory to correctany stock discrepancies, the company institutes a regular counting program for maintenance.

Methods of Cycle Counting

The main methods for cycle counting rely on either the physical area or sales ranking. Forphysical area counting, review high volume items more frequently. When using sales rankingmethods, based on the Pareto Principle, count the faster-moving, more expensive items moreoften.

The Pareto Principle method, also called ABC cycle counting, assumes that 20% of theparts in a warehouse relate to 80% of the sales. These are the “A” items(“B” items accountfor 30% of the inventory and 15% of sales, and so forth). “A” items may be yourfastest-moving SKUs or most valuable assets. Inventory control software can identify thecounted as A, B or C items. You may want to count your “A” items morefrequently, and “B”and “C” less regularly.

You can base ABC cycle counting on other metrics such as transactions and production numbers.There are many metrics you can use to identify which items have a significant impact on yourorganization’s overall inventory cost.

However, most software systems rely entirely or in part on ABC cycle counting, irrespectiveof the metrics used to identify the As, Bs and Cs. Other methods of cycle counting include:

Cycle Counting by Usage Only:
This process counts items ininventory that you use the most. Each time staff removes or adds one of these items, itcan initiate inventory variance.
Control Group:
The process usually focuses on a small group ofitems that are counted many times in a short period and reveals any errors in the counttechnique (which can then be corrected).
Opportunity-based:
A form of cycle counting based on opportunities,such as critical points of the inventory management process, like when an item isordered or put away. These can be exception-based cycle counts, such as when the stockgoes below its predetermined threshold, or when short-picks occur. Short-picks are whena company ships an order with less than the quantity the customer ordered.
Random Sample:
Just like it sounds, you randomly select a certainnumber of items to count. You can perform the count daily to account for a largepercentage of the items in the warehouse in a reasonable period.
Objective Counting by Surface Area:
Irrespective of stock value,you will parse the storage area into smaller audit areas. Based on the warehouse map,the auditor counts items only in their allotted physical space.
Hybrid:
Each organization should develop its own best practices forcycle counting. They can base their hybrid approach on its warehouse map, or acombination of location, value and throughput. Most hybrid plans start with the Paretofrequency analysis, and then a company will adjust it based on its needs.

The Frequency of Cycle Counting Methods and When to Choose Each

How often you do a cycle count depends on your company’s goals and the method youchoose touse.

The Frequency of Cycle Counting Methods

Method	Frequency	When to Choose this Method
ABC Analysis (Pareto)	Count "A" items most frequently, followed by "B" items, and then count"C" items the least often. Assume that the number of counts willdecrease over time as the inventory records get more accurate. You willstill maintain the proportion of counts between A, B and C items.	Start with the ABC method when you need a customizable program thatgives extra attention to essential products.
Cycle Counting by Usage Only	Count the most frequently used items most often and then less often forthe other items.	Use this method when you have adequate controls for high-value items andneed more.
Control Group	Perform this count several times over a short period.	Use a control group when you want to find process errors.
Opportunity-based	Use to count items at crucial points in the inventory managementprocess, such as after every 10 transactions of a specific item.	Use to count items at crucial points in the inventory managementprocess, such as after every 10 transactions of a specific item.
Random Sample	Use to count items at crucial points in the inventory managementprocess, such as after every 10 transactions of a specific item.	Use this method when you stock many similar items.
Opportunity-based	Use to count items at crucial points in the inventory managementprocess, such as after every 10 transactions of a specific item.	Use this method as a different, time-saving way to check the accuracy ofyour processes.
Objective Counting by Surface Area	How often you count is based on company goals, but you should to it atleast once per year for each area.	To ensure storage locations are accurate. It can also help you find anypatterns of stock discrepancy based on site.
Hybrid	Counting frequency depends on which methods you set up.	Your company needs a more flexible method of counting.

Inventory Cycle Counting Benefits

No matter how good its replenishment, tracking and management systems are, organizations mustdo regular checks of actual inventory levels for key items. Maintaining an accurate itemcount can help reduce required safety stock and lower overhead costs.

Because it doesn’t force companies to shut down operations and perform a full physicalinventory count at once, cycle counting has become a popular inventory management strategyfor companies across all industries. Other benefits include:

Higher order fulfillment rates
Better customer service levels
More accurate inventory assessments
Higher sales
More time between physical counts
Fewer errors
Less inventory write-offs and obsolete inventory
A more efficient operation overall
Possible elimination of annual counts
Improvement of the closing process
Decreased audit fees
No employee overtime costs
Detection of thefts in a timelier manner

Cycle Counting Challenges and Risks

Even the most organized of companies can have problems with inventory cycle counting.It’seasy to introduce inventory errors when dealing with multiple locations, paperwork lags andoutstanding transactions. You can introduce false variances if you do not update the countin real time. Therefore, define your process, track your inventory accuracy and aspire to ahigh degree of accuracy.

How to Increase Accuracy in Cycle Counting

Inventory management professionals favor cycle counting to annual inventory counts for itstime and cost savings. Companies can improve accuracy by using a methodological approachthat accounts for any unique business needs and human involvement.

Make sure teams do the work at a time that makes sense for the business. Some businessesprefer to count at the beginning of the day, citing fresh staff. Other organizations say theend of the day is better because it does not take away from the staff’s routine jobs.Someorganizations use a warehouse management system to assign counting by station, so staffnever have to leave their station to perform their counts. More ways to sharpen accuracyinclude:

In the case of variance, recount the items at the line level.
Coordinate the reordering, picking and putting away of items after counting them.
During active counting, freeze any activity on the items and their locations.
Randomly alternate the counting staff.

Inventory Cycle Counting Best Practices

Irrespective of your inventory auditing method, its performance should be systematic and partof regular business operations. Each organization should also decide the interval forcounting based on its stock’s specifics.

Cycle counting best practices include:

Close all transactions for inventory items before the cycle count.
If using the ABC method, classify items into the respective counting groups usingspecified, documented processes.
Count all products for all SKUs listed.
Decide what to count when. It makes sense to count items that are of a high value orthat move quickly through the warehouse weekly. Count all other stock quarterly. Conwaysuggests listing items by warehouse location to decide how much you’ll count eachcombination each quarter.
Use the inventory accuracy formula to see changes over time.
Identify the fastest-moving items in the warehouse. Mark them as fastest to slowest tofigure out how to classify items for future counts.
Dedicate specific personnel to counting teams.
Ensure teams count all products at least once quarterly.
Use zero counts. “If warehouse processes cause an empty bin by a picking order,then a command is given to the warehouse worker to have them count the bin and confirmit is empty. This action quickly verifies that the bin is empty and will help thefacility confirm that the count completion of the item warehouse location level wascorrect,” explains Conway.
Initially, you may want to do counts twice to ensure that the numbers are correct. Asupervisor can check the counts against the inventory in the system.
Perform investigations when errors crop up.
Document everything: the process, the changes and the results.

Automation in Cycle Counting

Using automation in your cycle counting process can improve the accuracy of your results.Automation also lowers labor costs, boosts worker productivity, provides trust in your stocklevels and enables real-time visibility as your inventory changes.

Thanks to technology, the cycle counting process has become easier, less intrusive andrequires even less manpower. By replacing Excel spreadsheets or other manual inventorycontrol systems with inventory control software, companies can more efficiently track theirstock — all while reducing human error and saving time, money and valuable man-hours.

Use software to implement an inventory control system (part of a warehouse managementsystem).
Devices include mobile computers, robot counters and barcode scanners.
Software can select the number of items and locations to count at a specific time.

See how 2Pure Ltd streamlined its inventory management(opens in new tab), showinginventory details right down to the bin location, with NetSuite ERP.

How NetSuite Helps with Inventory Cycle Counting

NetSuite’s Inventory Count feature improves inventory tracking and provides increasedcontrolover key assets. With this feature, firms can categorize inventory based on the volume oftransactions and/or value, and enter regular periodic counts of on-hand item quantities tomaintain inventory accuracy.

With its standard functionality, NetSuite not only helps you gain better control of yourinventory, but takes it a step further by extending those activities to its warehousemanagement solution and mobile radio frequency (RF) devices. With the mobile app, users canscan bins and items, automatically recording the cycle counts without leaving the floor.This makes auditing inventory less intrusive to daily work and reduces manual errors due toincorrect keying and lag time.

By implementing a cycle counting strategy that’s supported by inventory managementsoftware,companies get more accurate inventory levels; automatic prompts for items that need to becounted; the ability to categorize items based on volumes or value; improved qualityassurance; and higher customer satisfaction rates.

Learn more about cycle counting in ourinventory management solution.

Cycle Counting FAQs

What is the purpose of cycle counting?
Cycle counting helps companies confirm the accuracy of the inventory levels reflected intheir inventory management system by counting select products on a regular basis. This canreduce inventory loss, unexpected out-of-stocks and obsolete inventory that result in bothlost revenue and unhappy customers. Unlike physical counts, you can do cycle counts duringnormal business operations.

What are the types of cycle counting?
There are a number of approaches to cycle counting, but the most popular ones prioritizecounting items that drive the most revenue or are the most frequently ordered. Otherstrategies count items based on physical location or randomly select SKUs spread throughoutthe warehouse. Companies may also use a combination of different counting methods.

What is cycle count in WMS?
A WMS, or warehouse management system, can make cycle counting part of your employees’dailyroutines. It can remind workers in a warehouse or store to perform a count and tell themwhich items to count that day. They can scan each item as they check the shelf or enter thequantity on hand, which the WMS can then compare to the numbers in the inventory managementsystem.

What is cycle count in retail?
Retail cycle counts follow the same principles as counts in other industries, but they mayhappen in stores rather than just warehouses. Comparing expected inventory levels towhat’sactually available can be especially important in stores since they’re frequenttargets oftheft. It’s important to train associates on how to perform counts and signs ofproblems.

When should cycle counting be performed?
Cycle counting is typically done on a monthly or quarterly basis, though some businesses maydo small counts weekly or even daily. It often depends on the type of goods you sell and thework environment. But cycle counts are much more frequent than a full physical count, whichmay only happen once or twice a year.