Cycle counting is an audit technique where inventory is counted on a cyclic schedule and a process of not just fixing the inventory error but understanding and eliminating the root cause for the inventory inaccuracy. It is also a method of measurement so that you have a benchmark for continuous improvement. If not done correctly, this process can be a waste of resources. This article will explore several different types of cycle count methods that can be used.
Control Group Method
Companies that are new to cycle counting tend to start with this method. It is a fast way to identify the root cause of the inventory inaccuracy through auditing most of your inventory processes with a small volume of items. Once the processes are fixed, all other item counts will be improved.
This small number of parts needs to be a good representation of your overall inventory and inventory processes. Representation to consider: purchased and manufactured items, physically large and small items, select items from your ABC analysis, high and low usage items.
You count this same control group on a daily to weekly basis. You continue to repeat this process for all your selected controlled items until no errors have occurred for 10 consecutive times. Once this is complete, you can select another group of items for the next controlled group or go to one of the other methods of cycle counting listed below.
ABC- Activity Based Costing Method
ABC is the most common technique for selecting items to count- it takes all of the items in your inventory and assigns a classification code (A,B or C) based on total annual usage dollars, frequency of issue, length of lead-time or other specific criteria that are relevant to your organization. Please see my article on “Back to Basics with ABC’s of Inventory” for a more complete definition on how this classification is created.
You will then determine the frequency of how often to count each classification code. Typically companies will count “A” items once a month, “B” items quarterly and “C” items once a year. Based on this calculation you will then know how many items per day you have to count to insure you “cycle” through the desired frequencies. With this method every item in your inventory is counted.
Process Control Method
Process Control cycle counting is controversial in theory, but effective in practice. This method should be looked at if your resources are limited, yet you want to have some type of cycle counting program.
The idea behind this method is the counter is given a list of items in an assigned location along with the quantity of that item. They verify every part in their assigned location. The counter is free to determine which items will be physically counted. Typically, these items are very low in quantity or packaged in ways that facilitate fast and easy counting, misidentified items or there is an obvious discrepancy. If a large quantity of an item is found in a location; no physical count has to be made. The counter compares the large quantity to the inventory record to verify part identification, location and gives an “eyeball” assessment to the quantity. This item is considered a “skipped” item and the inventory is not adjusted. Once all items on the count sheet have been verified, the counter will make a pass through the location to identify any items stored in the location that are not on the count sheet. If any are found, a cycle count of those items will be conducted.
Categorised in: Supply Chain Management