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Cycle counting is a method of inventory management that involves physically counting a portion of inventory on a regular basis, rather than conducting a full physical inventory count.
In this comprehensive post, we'll go over:
If the word "inventory audit" makes you want to crawl under your desk in the fetal position, then cycle counting may be the answer for you.
Let's jump in.
Cycle counting for ecommerce businesses is a systematic method of inventory management that involves physically counting a portion of the inventory on a regular basis, rather than conducting a full physical inventory count.
The purpose of cycle counting is to maintain accurate inventory records, identify discrepancies and errors, and improve inventory management decisions. In ecommerce businesses, cycle counting can be performed using technology, such as barcode scanning, real-time data tracking and trained personnel to ensure accuracy and efficiency.
By counting a portion of inventory regularly, ecommerce businesses can maintain a real-time picture of their inventory levels. This reduces the risk of stock shortages or overstocking, and helps you make informed decisions about purchasing and sales.
You can think of a cycle count as a "snapshot" of your inventory health. Rather than waiting until the end of the year to take a full picture of your inventory, cycle counting enables you to regularly take snapshots of a portion of your inventory.
Regular cycle counts help to maintain accurate inventory records, reducing the risk of stock shortages or overstocking.
By regularly counting a portion of inventory, ecommerce businesses can make informed decisions about purchasing and sales, based on real-time information about inventory levels.
Maintaining accurate inventory records helps reduce the risk of stock shortages, which can negatively impact sales.
Plus, reducing the risk of stock shortages and ensuring accurate inventory records is key to improving customer satisfaction and building customer loyalty.
By counting a portion of inventory regularly, ecommerce businesses can avoid the time-consuming and disruptive process of a full physical inventory count. This increases efficiency and reduces the impact on operations.
Reducing the risk of stock shortages and improving inventory management decisions can also reduce the cost of overstocking or restocking inventory.
Cycle counts help ecommerce businesses maintain better control over inventory levels, lowering the risk of stock discrepancies and improving inventory management processes.
In this section, we'll go over the differences between cycle counts and physical counts, and which might be better suited to your business.
A physical inventory count is a process in which a business physically counts all of its inventory, including raw materials, finished goods and supplies, to determine the actual inventory levels and compare them to the recorded inventory levels.
Physical inventory counts are typically conducted once or twice a year and may be performed manually or with the use of technology, such as barcode scanning.
The results of a physical inventory count are used to make informed decisions about purchasing and sales, and to improve inventory management processes.
Physical inventory counts and cycle counts are both methods of inventory management, but they differ in their approach, frequency, and impact on operations.
Here are some of the disadvantages of physical inventory counts compared to cycle counts:
Time-consuming: Physical inventory counts can be a time-consuming process, requiring a significant investment of personnel and resources.
Disruptive to operations: Conducting a full physical inventory count can interrupt normal business operations and impact customer satisfaction.
Increased risk of discrepancies: Due to the length of time between physical inventory counts, discrepancies and errors in inventory records can accumulate, increasing the risk of stock shortages or overstocking.
More efficient: Cycle counting is a more efficient method of inventory management, as it only involves counting a portion of inventory regularly, rather than counting all inventory at once.
Improved accuracy: Cycle counts also help businesses maintain accurate inventory records and identify errors in a timely manner.
Reduced impact on operations: Because you’re only counting a portion of inventory, cycle counting has a reduced impact on normal business operations, compared to a full physical inventory count.
Better inventory control: Cycle counts help to maintain better control over inventory levels, reducing the risk of stock discrepancies and improving inventory management processes.
It's worth noting that, while inherently much more efficient, cycle counting may be the best choice for your business.
Here are some drawbacks you may run into when implementing a cycle count inventory process:
Conducting regular cycle counts can be labor-intensive and require additional personnel and resources, which can increase labor costs for e-commerce businesses.
While cycle counting is designed to identify discrepancies and errors in inventory records, the process itself can introduce errors, particularly if counting procedures are not followed consistently or accurately.
Conducting cycle counts can require the temporary removal of inventory from circulation, which can interrupt normal business operations and impact customer satisfaction.
Cycle counting only verifies a portion of inventory at a time, meaning that there is a risk of inaccuracies in the portion of inventory that is not counted.
For businesses with low inventory levels or low-value products, the cost and effort of implementing a cycle counting process may outweigh the benefits.
Given these advantages and disadvantages, how do you decide on the best process to consistently maintain an accurate inventory count?
Here are some examples of ecommerce businesses that should use the cycle count system and why:
Ecommerce businesses with large inventories and frequent turnover may benefit from cycle counting to ensure accurate inventory records and prevent stock shortages or overstocking.
Ecommerce businesses with multiple locations and decentralized inventory management systems may benefit from cycle counting to ensure consistent and accurate inventory records across all locations.
Ecommerce businesses that sell perishable products, such as food or pharmaceuticals, may benefit from cycle counting to ensure accurate inventory records and prevent spoilage or waste.
And here are some businesses for which physically counting inventory (not cycle counting) would probably be more appropriate:
Ecommerce businesses with low inventory levels and infrequent turnover may not require the level of detail and accuracy provided by cycle counting, and a full physical inventory count may be sufficient.
Ecommerce businesses that sell low-value products, such as low-cost consumer goods, may not require cycle counting due to the low cost of replacing inventory in the event of inaccuracies.
Ecommerce businesses with limited resources, such as time and personnel, may not have the resources to implement a cycle counting process, and a full physical inventory count may be more feasible.
If your business falls into these categories, it may be best to just stick with traditional annual inventory counts. The cost and effort of implementing a cycle counting process may outweigh the benefits.
Here are some diagnostic questions to help decide if cycle counts are suitable for your business:
By asking and answering these questions, ecommerce business owners can determine if cycle counting is right for their business, and what resources and processes may be required to implement it effectively.
Alright, now that you've got a solid grasp of what cycle counts are and how they're beneficial, let's get into the details of how to actually conduct cycle counts in your business.
Before you grab the barcode scanner and start scanning, it's important to lay a foundation that will set you up for success in your first cycle count.
The first step is to determine the scope of the count, including which products or categories will be included in the count and the frequency of the count.
Next, establish a counting schedule that takes into account sales patterns and inventory turnover rates, to minimize the impact on normal business operations.
Train the employees who will be conducting the physical count on the counting procedures, best practices, and the use of any counting technology, such as barcode scanning.
Review the current inventory records to ensure that they are accurate and up-to-date, and make any necessary adjustments before the count.
Establish clear and consistent counting procedures, including the use of counting technology, if applicable, to ensure accuracy and efficiency.
Review and update the system records to ensure that they accurately reflect the inventory levels, and to minimize the risk of discrepancies.
Prepare for the count by ensuring that counting personnel have the necessary equipment and resources, and by communicating the counting schedule to all relevant stakeholders.
Let's run through the entire cycle count process using a hypothetical business as an example.
This business specializes in selling outdoor gear and equipment and wants to try cycle counting their camping gear category, which includes tents, sleeping bags, and backpacks.
The business (we'll name it "Trailblazers Supply Co." for the sake of example) establishes a schedule for the cycle count, choosing a day and time when sales are typically low and the inventory is not expected to change significantly.
The Trailblazers leadership team then selects a team of two employees to conduct the physical count and verify the accuracy of the records. The employees are trained on counting procedures and best practices.
On the day of the cycle count, the team begins by physically counting the camping gear. They use barcode scanning technology to accurately count the items and verify that the physical count matches the system records.
If discrepancies are found between the physical count and the system records, the team notes the discrepancies and updates the system records to reflect the accurate count.
After completing the physical count, the team verifies the accuracy of the system records. They take stock of all the discrepancies identified during the cycle count.
If discrepancies are found, the team investigates the root cause and determines whether the discrepancies are due to human error or a technical issue with the system.
If necessary, the team takes corrective actions to improve the accuracy of the inventory records. This can include adjusting the records to reflect the accurate count or implementing process changes to prevent similar discrepancies in the future.
Finally, the team updates the system records with the accurate inventory information from the physical count. They also document the results of the cycle count, including any discrepancies and corrective actions taken.
By conducting a cycle count in this manner, Trailblazers Supply Co. can ensure high inventory record accuracy, identify discrepancies and errors, and take corrective actions to improve its inventory management processes.
The team then repeats this exact process on all product categories until all have been accounted for.
Start with a small portion of inventory: Before applying this method to all inventory at once, start with a smaller portion to get a feel for the process and identify areas for improvement.
Use technology to automate the process: Implement technology such as barcode scanning, inventory management software, and real-time data tracking to streamline the cycle counting process and improve accuracy.
Train your team on best practices: Provide training for your team on counting procedures, best practices, and the importance of accurate inventory records. This will help ensure consistent and accurate counting.
Conduct cycle counts at different times of the day: To ensure accuracy, consider conducting cycle counts at different times of the day or during different periods of high or low inventory activity.
Use cycle counting results to inform purchasing decisions: Use the results of cycle counting to inform purchasing decisions and adjust reorder points based on actual inventory levels.
Continuously evaluate and improve the process: Continuously evaluate and improve the cycle counting process to ensure accuracy and efficiency. This can include incorporating new technology, adjusting counting procedures, or adjusting the frequency of cycle counts.
Involve multiple departments and personnel: To ensure a comprehensive and accurate inventory count, consider involving multiple departments, such as operations, finance, and purchasing, in the cycle counting process.
If you choose to implement the cycle count process, you'll inevitably run into the question of "which products do I count first?"
The following techniques were developed to answer that question and to give business owners multiple approaches to selecting products for the cycle count process.
The frequency of cycle counts depends on the size and complexity of your inventory, as well as the level of accuracy you require.
For some businesses, daily cycle counts may be necessary, while for others, weekly or monthly counts may be sufficient. The key is to find a frequency that works for your business and provides the level of accuracy you need.
Inventory record accuracy can be determined by comparing the recorded inventory levels to the physical inventory levels. A good metric to shoot for is an accuracy rate of 95-98%.
This level of accuracy will help minimize the risk of stock shortages or overstocking, and ensure that inventory records are up-to-date and accurate.
The formula for calculating IRA is:
IRA = (Physical Quantity Counted / Recorded Quantity) x 100%
For example, if you have 100 items recorded in your inventory and you physically count 95 items, your IRA would be 95%. A high IRA indicates that your inventory records are accurate, while a low IRA indicates that there may be discrepancies or errors in your records.
When a customer purchases products in the middle of a cycle count, the inventory levels will change, potentially affecting the accuracy of the count.
To ensure that the count remains accurate, it may be necessary to adjust the count to reflect the customer purchase, or to pause the count and resume it after the purchase has been processed.
One approach to minimize the impact of customer purchases during a cycle count is to count a portion of inventory that is not currently in use, such as items that are in storage. Another approach is to conduct cycle counts outside of peak business hours, when there is less customer activity.
The best way to deal with inventory errors during cycle counts is to identify the root cause of the error and to take corrective action to prevent it from happening again.
This may involve adjusting inventory records, modifying processes, or providing additional training to counting personnel.
It is also important to monitor inventory levels regularly and to reconcile inventory records to ensure that inventory errors are identified and corrected in a timely manner.
Inventory management software can help with cycle counting by automating many of the manual processes involved, such as generating counting schedules, tracking count results, and updating inventory records.
The software can also provide real-time visibility into inventory levels and help to identify discrepancies or errors in a timely manner.
Inventory management software can automate many of the manual processes involved in cycle counting, such as generating counting schedules, tracking count results, and updating inventory records.
With Linnworks, for example, you can set up cycle counting schedules and assign counting personnel, and the software will keep track of the count results and automatically update inventory records. The software can also provide real-time visibility into inventory levels and help identify discrepancies or errors in a timely manner.
In addition, Linnworks integrates with barcode scanning technology, which can further increase the accuracy and efficiency of the cycle counting process.
By using software like Linnworks, you can improve the accuracy and reliability of your inventory records and minimize the risk of stock discrepancies or overstocking.
To learn more about how Linnworks can help you maintain inventory accuracy, manage inventory across multiple channels, and streamline your warehouse operations, click the button below to see it in action.
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