Inventory management is one of the crucial aspects that contribute towards business success. Inventory management ensures smooth flow of business activity. In order to carry out all the manufacturing as well as retailing operations successfully, it is imperative that adequate amount of inventory is estimated, ordered, a track on its movement is kept and it is reordered at the correct time in order to avoid any bottlenecks in the manufacturing process. One of the Inventory management ways is Cycle count.
Inventory management systems are complex systems encompassing all the facets of inventory management like estimating inventory levels, fixing to reorder points, determining price levels, ensure smooth flow to distribution channels and keeping a track of inventory in storage
We will focus on the methods to keep count of the units of inventory in storage i.e. Stock Keeping Units (SKUs).
Methods of Stock Verification
Generally, most of the organizations rely on any one or more of these methods of stock-taking:
- Periodic Stock Taking – physical counting of stock at regular, predetermined intervals like monthly, quarterly, or every six months.
- Annual stocktaking – putting the entire facility on hold for one or two days and counting each and every item of inventory once every year.
- Cycle Count – counting a specified section of inventory at a time – continuously throughout the year.
What is Cycle Count Method of stocktaking?
Under Cycle Count Method of inventory management, either a random selection of inventory units or a selection based on some predetermined criteria, in certain specific location of a warehouse or storage, is checked on daily basis. Here, all the SKUs in a warehouse are not checked. A specific location for a particular item of inventory is selected and checked on daily basis.
This random selection may be done manually or generated by WMS (warehouse management system).
Predetermined criteria may be based on ABC Analysis or Pareto Principle or any other specific criteria specifically adopted by the company.
1) ABC Analysis
Here, the inventory items are classified into three groups ‘A’, ‘B’ and, ‘C’ according to the levels f the sales revenue they generate. Group A forms 20% of the inventory but contributes almost 80% of the revenue. Group B forms 30% of the inventory and contributes 15% of the revenue. Group C amounts to 50% of the stock but contributes only 5% of the total sales.
Hence, here; when cycle counting is adopted, Group A items will be checked frequently as against items from Group C.
2) Pareto Principle
Under Pareto Principle, stock units are grouped into two – significant and not so significant. Significant units amount to 20% of the inventory but generate 80% of the sales. And insignificant units contribute 20% to the total revenue and form 80% of the inventory. The insignificant items may include spare parts, consumables, minor stores, and supplies etc.
Here also, under cycle counts are more concentrated on checking significant items.
However, items of C group or under of insignificant value should not be ignored or delayed for checking for a long time. Sometimes, unavailability of these materials also may cause disruption in the assembly line.
Advantages of Cycle Count Method
Cycle Counting Method definitely outweighs the traditional methods of stocktaking and offers numerous advantages which are as follows:
- It is easier to plan and implement. It requires figuring out inventory classifications and store locations. Then, actual implementation can be done with much ease in very little time.
- It doesn’t halt the facility as it can be undertaken on the regular basis before normal working hours begin.
- Cycle Count gives a much more accurate picture of the actual stock levels as against those shown by the system. The rate of detection of errors and its reporting, if any, is also faster as only small specific areas are covered at a time.
- As the area and sample size covered under Cycle Count Method are small, it can be executed successfully at comparatively lower cost and be deploying fewer human resources.
- It keeps the inventory management staff alert and serves as a good mechanism to have a constant check on them.
- Cycle Count Method immediately highlights any discrepancy between the actual physical stock and the stock records. Hence, the stock levels and reorder points can be adjusted accordingly.
Disadvantages of Cycle count method
The only disadvantage of Cycle Count Method of stock management is that it cannot be a success if the organization and its management are not committed and disciplined to devote time and efforts to carry out Cycle Count stock audit on regular basis.
It also fails to achieve its objective when after an error has been highlighted by the system, it is not corrected by the management and steps is not taken to prevent its occurrence.
Criteria for successful implementation of Cycle Count stock audit
When an organization seeks to implement Cycle Count Method, to avail of all the benefits offered by this system, it has to first ensure that:
- There is a detailed documentation with regards to valuation criteria of the stock items and areas to be checked have been specified.
- Before beginning with Cycle Count, any outstanding balances, as far as stock is concerned, should be cleared and the entries should reflect the final balance after these accounting adjustments.
- Cycle Count should be arranged frequently so as to cover entire warehouse over the period of a quarter. Then it should be started again.
- The personnel responsible for inventory management and those for taking stock under Cycle Count Method should be different.
- As soon as any error is detected, a mechanism to correct it and train the staff to prevent its occurrence again should be in place.
- The selection areas to be inspected shouldn’t be disclosed in advance. The selection should be random and disclosure should be made just before the inspection.
- Cycle Count Method must be supported with periodic full inventory check from time to time.
Cycle Count Process
The process of Cycle Count will be as follows:
- Determination of the stock valuation criteria and store unit locations.
- Determination of the daily inspection schedule
- Clearing the outstanding balances and other accounting entries for the respective unit coming up for stock taking.
- Preparing the list of inventories in that unit as per accounting records.
- Assigning the duties, carrying out the stocktaking and matching the physical SKUs with those mentioned in accounting records.
- In case of discrepancy, notifying the authorities and taking corrective measures by either installing extra safeguards or by adjusting the stock levels.
- Carrying on with the predetermined schedule and finishing the stock verification of the entire warehouse in a quarter.
- At this point, before beginning with a new round of Cycle Count Method, a periodic stock check can be scheduled to ascertain the efficacy of Cycle Count stock check.