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Cycle Counting

Cycle counting is used to count inventory and verify its actual value against the stated book value. Although there are variations of cycle-counting methods, their purpose is to understand how materials and information move through an inventory system and other supporting systems. Cycle counting provides several benefits. The first is timely detection of process issues causing inventory record errors. Frequently reviewing inventory accounts provides a higher likelihood for finding errors and their root causes. Frequent cycle counting may also eliminate a need to shut down a facility if audit results show a high degree of inaccuracy. Another advantage is an ability to continually improve inventory accuracy.

There are several underlying reasons for poor inventory accuracy and hence poor investment choices. The first is a lack of work standardization and employee training, which results in inaccurate inventory counts or misplaced inventory. If employees are not properly trained to cycle count, the inventory records will not be current and accurate. Because inventory management decisions are made using information such as on-hand inventory quantities, inventory locations, and other relevant information, inaccuracies cause operational inefficiencies and inaccurate inventory. Also, if not properly protected, inventory can be damaged, spoiled, or stolen.

Cycle counting is really a system consisting of people, tools, and methods. There are proven ways to conduct audits properly. The first step is to map all material and information transactions, including roles and responsibilities. Second, policies and procedures need to be refreshed to reflect the efficient design of the cycle-counting system. Then employees must be trained to effectively support the new auditing system. If done properly, as the system is tested, the stated book values or quantities of inventoried items by location will align to the inventory transaction records. To the extent inaccuracies are found during audits, their resolution will need to be tracked so they can be eliminated through root cause identification and removal.

There are several proven methods to make a cycle-counting system more efficient and accurate. Leaning out the process is very effective. A process that is simplified and standardized, with inventory stored in standardsized containers (i.e., Kanban containers) and in easy-to-see locations will require less inventory. A second strategy is to count inventory for an item when the tracking system shows it is depleted. If there is little or no inventory at a storage location, then cycle counting will be quick and accurate; if there is significantly more inventory than shown in the system, this indicates an opportunity for improvement. A third strategy that requires investment is to reduce the complexity of a product’s design by simplifying its bill of material. The concept is that fewer items in inventory means fewer items need to be part of a cycle-counting system. These strategies will help reduce the cycle-counting time and resources while also improving accuracy of the system.

The consideration is how inventoried items should be selected for cycle counting. There are three common methods. The first is to zone count the items. In this method, all items are counted in a designated work area. The advantage of this method is that items not expected to be in the work area will be found by the audit. In effect, this is a 100% count of all the items within a selected zone. A second method is to statistically sample items using a sampling plan. There are several versions of statistical sampling that can be applied to cycle counting. One is the ABC classification based on item volume or value. A second is simple random sampling of the population. A third method is minimum variance stratification, in which an inventory population is broken into several strata. Each stratum has a minimum variance relative to any other stratification of the population. In other words, an optimum stratification occurs when the strata sample sizes are totaled and the total is less than any other stratification applied to that population. Minimum variance stratification is the most efficient of all the cycle-counting methods based on statistical analysis. It can produce a significant resource savings of more than 50% and provides an expected inventory book value and a confidence interval.

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