What is Cycle Counting in Inventory?

What is cycle counting?

Cycle counting is the process of regularly counting a small portion of inventory. It’s a way for companies to check inventory without the enormous disruption of stopping for a full physical inventory count.

Different, specified items are counted at different stages of the cycle. This allows companies to monitor continuously that other stock keeping efforts are accurate – and find out quickly if factors such as theft might be having an impact on stock levels.

In some ways, cycle counting is like the polling done before elections to predict results. If pollsters ask a representative sample of voters who they plan to support, and ask them often enough, they can identify sentiments that might not otherwise have been picked up.

By performing regular cycle counts, companies can use certain items to test whether their assumptions about overall stock levels are accurate. Companies can pick from several different types of cycle counting to get the most appropriate sample.

What is the difference between a physical count and a cycle count?

A traditional physical count involves counting every single item of your inventory. It’s a expensive, complicated and time-consuming business that can take several days and is often performed only once a year. Items cannot be moved during a physical count for fear of them being counted more than once, so all work must stop while the count takes place.

In cycle counting, small samples of inventory are continuously counted. The perpetual nature of cycle counting allows work to carry on as normal, or with only slight disruption. However, because not everything is counted at once it is not possible to put an exact value on all items held in stock at any one time.

Why is Inventory Cycle Counting so Important?

Because life is increasingly complicated and today inventory moves in complex ways.

For example, even a relatively small retailer might have several brick-and-mortar stores, sell directly to customers from its own website, and also via third-party sites such as Amazon. It may source products from hundreds of different suppliers and must process returns as well as sending items out as they are ordered.

Knowing how many units of each product it has – and where they are – is vital if it is to avoid disappointing customers. The situation is even more complicated if products are perishable.

A study from ECR Retail Loss found that inventory record inaccuracy (IRI) has a substantial impact on sales, with revenue lost because products are out of stock or otherwise unavailable. A controlled test found that reducing IRI could increase sales by between 4-8%.

The “human factor” is also important. Many companies rely on part-time or temporary staff. They’re often recruited and managed by agencies and are sometimes working on zero-hours contracts.

While training is hopefully provided, it cannot be assumed that all staff will log the movement of products correctly. For these and other reasons, items can – and almost certainly will – be misplaced.

Cycle counting gives an accurate, real-time view of what is stored in a company’s warehouse, store or facility. Crucially, it can warn if other inventory management measures are not reflecting reality. This allows companies to address problems before they hamper business.

Benefits of cycle counting

Because it is designed to identify problems early, cycle counting is a very cost-effective way of managing inventory risk and policing other forms of inventory management. It takes relatively little time and effort, but its findings can lead to substantial savings.

The strategy is also flexible, allowing companies to decide which items are most important to them and check them more frequently. It can – indeed should – be combined with other methods of inventory management to give companies the confidence to go about their business without fear of sudden upset.

So minimal is the disruption of cycle counting that there are few downsides. A “pros and cons” list to establish its benefits is remarkably one-sided.

How to conduct a cycle count

The principle of conducting a cycle count is simple. A retailer picks a small, set number of SKUs (stock keeping units) out of many thousands for each count. It could count a different set of SKUs each cycle – whether that be daily, weekly or monthly – or the same ones each time.

This helps the retailer confirm how many examples of a particular item it has in stock, highlighting any discrepancies with what it expects from its sales data. It also allows retailers to infer if other, related, items are likely to be available or needed.

For example, a DIY retailer that identified an unexpected shortage of nuts would be advised to check its reserves of bolts and washers too. A grocer that discovered an unexpected shortage of tortilla chips might be concerned that it was overstocked with perishable dips, and could discount them accordingly.

How you choose to count your inventory is also important. While manual counting is possible it is slow, tedious for employees and inevitably results in human error. Automated cycle counting software running on smart devices can standardize and speed up processes.

How often should you cycle count inventory?

The frequency of sales counting varies from company to company, though it should be on a regular schedule. Companies in a sector with a fast product turnover would naturally benefit from more frequent cycle counting, while those with slower-moving items might leave a longer gap.

Retailers selling FMCG products from multiple platforms may benefit from counting as often as is practically possible.

Types of cycle counting

To choose which items to count, there are three types of cycle counting methods companies can employ: random sample cycle counting, control group cycle counting and ABC cycle counting.

Random Sample Cycle Counting

Random sample cycle counting is where a different product is selected and counted every time, at random. Companies can choose to pick a different product for every count until all items have been counted – known as diminished population counting.

Because this method sees all items counted eventually, it can be useful for uncovering “shrinkage” or theft by staff, which might favor particular ranges.

A company wishing to count all of its products over a set period can divide the number of SKUs by the number of counts to establish how many should be counted each time.

Control Group Cycle Counting

An alternative is control group cycle counting, where a small selection of items is counted repeatedly over a fixed period, to see if any anomalies are found. These can be used to identify problems with other counting processes, by comparing findings over time.

ABC Cycle Counting

However, the most common type of cycle counting is the ABC method. This is based on a variation of the Pareto Principle, sometimes known as the 80:20 rule. It states that 80% of outcomes are caused by 20% of causes.

This business rule of thumb has proved a remarkably consistent benchmark for many sectors, whether that is a bar deriving 80% of its income from 20% of its customers, or a fashion store selling 80% of its products to the one-in-five shoppers who really love its style.

The 80:20 rule can be applied to inventory, too. A jeweler may find that 80% of its inventory value is tied up in the top 20% of its most expensive products. A convenience store might see 20% of its range accounting for 80% of sales, as shoppers use the store to top up household essentials.

When using the ABC method, companies assign a value to each item. The top 20% of items – which account for 80% of sales or value invested – are ranked ‘A’. The next tranche – around 30% of items that account for 15% of sales – are ranked ‘B’. The remaining half of the products, accounting for 5% of sales or value, are ranked ‘C’.

The A-grade items are counted most often, as they are fewer and they are of the greatest value to the company. B and C-graded items are counted less frequently, on a sliding scale.

Using Scandit MatrixScan Count for Cycle Counting

MatrixScan Count is a lightning-fast, intuitive and error-free multiple barcode scanner software solution that makes cycle counting workflows up to 10x faster in retail and other industries. It enables more frequent cycle counting and improves employee experience.

Press a single button to scan multiple barcodes simultaneously and get real-time feedback using augmented reality. The smart data capture solution runs on iOS and select Android devices and includes pre-built UI to reduce development time to a minimum.

Learn more about the MatrixScan Count out-of-the-box solution for smarter inventory counting.