Cycle Counting and Inventory Shortages

Successfully managing inventory can be difficult. There are many moving parts, from determining the level of inventory that should be kept to maintaining the inventory levels necessary to avoid shortages and excess inventory. While there are many ways to count inventory, cycle counting is one of the most efficient methods to prevent inventory shortages and target discrepancies between reported versus actual inventory. 

What is cycle counting? 

A cycle count is an ongoing method of counting inventory. Instead of counting inventory all at one time (typically called a physical inventory), businesses can split the count into smaller sections and prevent having to close for inventory count days.

Cycle can be done two ways:

1. Periodic Counting

A periodic cycle count involves taking a small count of inventory at specified times. This inventory counting method is not used to predict total inventory, but instead, the total count is determined when all the items are counted over time. This type of counting can take place as often as daily, but is usually conducted at least once every three months. As it is costly to count the entire physical inventory at once, this process is a less expensive alternative. 

2. Perpetual Counting

A perpetual count of inventory is a continuous process. Businesses use a POS system or management software to count SKUs in and out of inventory on a daily basis. This allows the company to identify exactly how much inventory they have at any given point in time. This is helpful for preventing inventory shortages, but can be more expensive to run due to the processing involved. 

The benefit of this system is that with good processes, there should be a  highly accurate system of inventory. However, without doing actual inventory counts from time to time to measure how well teams are following the processes, there may still be some unexpected inaccuracies.

Using sampling to determine periodic cycle count strategy:

Sometimes referred to as an “ongoing basis cycle,” the sampling technique of cycle counting includes taking a sample of inventory and using it to determine the total count of inventory. Here are two methods of sampling:

  1. One method of performing a  cycle count is random sampling. A company that has a large number of similar items can select a number of random items to count. For a constant population count, the items are all chosen at complete random, which means some items could accidentally be counted twice and other items may not be counted at all for several months. For a diminished population count, inventory that has already been counted is excluded from future inventory counts. The downside of this is that it requires companies to keep track of which items have already been counted.
  2. Another option for the sampling method of inventory counting is ABC cycle counting. Similar to an ABC analysis, this technique involves dividing a company’s products into A, B, and C groups based on importance and percentage of sales. Once materials are classified into their specific groups, each group will be counted at differing frequencies, with A being counted the most and C the least.

Why is cycle counting important?

If a company doesn’t have the right inventory counts when planning, this can result in shortages and/or excess inventory—both of which can be costly and disruptive. Shortages can cause businesses to miss or deliver late on customer orders, while excess inventory ties up working capital. Excess inventory is costly to store as well, meaning that there is less capital available to use for other business expenses. 

What is an inventory shortage, and how does it relate to cycle counting?

An inventory shortage is a discrepancy in inventory that cycle counting helps identify. When the number that inventory should be and the actual count of inventory doesn’t match up, the results are often disruptive and costly. Discrepancies often lead to shortages, with businesses under the impression that they have more inventory than they actually do, and results in the wrong amount of replenishment inventory ordered. A cycle count helps identify when there is an inventory shortage so teams can take action on correcting that discrepancy.

Periodic vs. Perpetual Cycle Counting

Periodic cycle counting can be an effective way to count inventory when there aren’t resources to do a full count. It is also less expensive, so it’s helpful in saving capital. For small businesses that may not have the funds to buy a management system, a periodic cycle count is usually the best option. In this system, a company may choose to count a sample of parts once every quarter, for instance.

Perpetually counting inventory is better for planning since it consistently identifies and prevents discrepancies, but it is more expensive and often infeasible for businesses without the necessary capital. In a perpetual inventory system, a business uses software to track every transaction on every part.

You’ve got an accurate inventory count. Now what?

Running regular inventory cycle counts will ensure accurate inventory, but how can you successfully optimize your inventory? LeanDNA helps to prevent shortages and reduce excess inventory in order to optimize inventory levels, all while helping manufacturers save time and working capital.

See how  LeanDNA can work for you.

FAQ

Cycle counting is a method of counting inventory that breaks down the process into smaller chunks. Instead of counting all of the inventory at the same time, businesses can:

  1. Put a plan in place to continuously count inventory with a perpetual system.
  2. Use a sampling method so they don’t have to count the whole inventory.
  3. Count inventory in small groups at designated times.

An inventory shortage occurs when there is a difference between the recorded and physical inventory. Also known as inventory shrinkage, inventory shortages can be caused by any number of things, including (but not limited to) theft, damage of goods, and delivery complications.

Calculating an inventory shortage is done by physically counting the pieces of inventory for a given SKU and comparing it against the number reported in your inventory system or database.

A perpetual inventory system is a digitized method of cycle counting where inventory is counted continuously through the use of computers and management software.

The periodic inventory system is a method of cycle counting that involves breaking inventory into smaller groups and counting inventory on a set schedule, such as monthly or quarterly. A total count of inventory is completed over time, instead of all at once.

A physical inventory system is when a business counts all of its inventory at once. It is extremely manual and time-consuming, with many obvious disadvantages, such as potentially closing the warehouse or shop for a whole day just to take the inventory count.

Taking a physical count of inventory usually takes place once per year. Since it is very manual and time-consuming to count all of the inventory at a warehouse or store, this usually only happens once a year so that the company can close to complete the count in one day.

When a company perpetually counts inventory, they use management software to continuously count items coming in and out. A physical count is typically done once a year all at one time, so at any other point in the year, their count may not be as exact as a company that has been perpetually counting their inventory.