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Submitted by Dave Weismann on 30 November 2020

Don’t Settle For “Close Enough”: Replace Yearly Inventory Counts With Cycle Counting For Big Benefits

If you have a warehouse, you probably do an inventory count once a year. But is this the best way to keep track of your inventory? This approach to inventory management has proven to be error-prone, so why are companies still using it? This blog discusses the concept of cycle counting, how it can uncover and help you correct errors, and the benefits you can realize almost immediately by replacing yearly inventory counts with the cycle counting method. 

The Chaos and Carnage of the Yearly Inventory Count 

As long as there have been warehouses and inventory, there has been an annual physical count. Maybe twice a year, but typically only once a year, this ritual was usually done just to satisfy an audit so that the auditors would have an inventory valuation from a dollar perspective rather than from an inventory accuracy perspective. 

So, once a year, every year, it’s the same drill: You send everyone who isn’t nailed down out to the warehouse because it’s all hands on deck—engineers, sales order processors—people who've never been in the warehouse before being put in the position of interpreting part numbers and counting as best they can.
It will come as no surprise that this approach probably did more harm than good. After counts and recounts, at the end of the day, you very likely got to a dollar value that was within 3 percent or so and called it good because it made the accountant happy that the number was within $3,000. The trouble was that the operations folks were not at all happy because they were left with a ton of part numbers whose counts were off—typically by a small amount, but it added up into a big mess because, regardless of the small difference, those numbers were still not right. That’s why the yearly inventory count is disruptive to your business and not the best way to manage your inventory.

There Had To Be A Better Way…Enter Cycle Counting

The fact is you need to do physical inventory counts much more often than once a year to stay on top of inventory control accuracy. Simply defined, cycle counting is a planned set of counts—preferably daily, but often done weekly by the same person or small group of people whose job it is to make the selective counts required for cycle counting. In other words, you don’t count all your inventory every day (or week); you can break it up into segments that are counted cyclically or in other ways. It sounds simple, and the concept is indeed simple, but it is dramatically more effective.

Cycle counting has two important roles: The first, as just discussed, is that it helps you keep better control of your inventory count, or getting immediate feedback (the count today is X, which is the same as yesterday—yay!). The second—and one that most companies tend to undervalue or overlook entirely—is that you have the opportunity to delve into why counts are off, or root cause analysis. That research is critical because you can use that information to make operational corrections so that your inventory accuracy improves. It’s a form of continuous improvement that companies do not take advantage of, probably because it takes more effort, but the long-term payoff is worth it.

If You’re Going to Adopt Cycle Counting, Adopt All Of It

So yes, chasing down the reasons for counts being off is not fun and requires time and effort. That team needs to have the ability to talk through processes with the people who are involved with them, analyze data, look at systemic transactions, and be able to code adjustments appropriately. They need to know what to watch for—to recognize red flags. 
But the effort is worth it. You avoid dealing with counts being off for the same reason day after day or week after week. You improve processes and save money, time, and resources.

Setting Up Your Cycle Count Plan

There are many ways to set up and use cycle counts. A traditional approach is to identify your items as what is referred to as ABC categorization, which is primarily a dollar value evaluation. It can be challenging and requires the right data, so many companies don’t want to deal with it. However, you can get the data through item ledger entries in your ERP and use Excel or another tool to develop the 80/20 rules on what you're going to count and the frequency.

A much simpler approach often used by companies is to count X number of bins per day. It is simple but still planned, consistent, and daily. As long as you use that same plan over and over, you're still achieving the required number of counts.

There are other challenges with counting off the frequency. You must put thought into how you create these frequencies to ensure you have the bandwidth to accomplish your goal. Often, you might find you don’t have the resources and have to make adjustments to your plan.

In short, a little bit of planning goes a long way.

Microsoft Dynamics NAV or Business Central Can Help With Cycle Counting

Cycle counting is no doubt a big bang for companies wanting to improve inventory accuracy and be more efficient at it…and there is technology that can help—in the form of Microsoft Dynamics 365 Business Central (formerly Microsoft Dynamics NAV). With built-in inventory management features, Dynamics NAV/Business Central can play a significant role in your cycle counting process.

Talk to the experts at ArcherPoint to discuss the benefits you can realize from cycle counting in your organization and how to get started.

For more year-end tips, read about closing financial periods in Microsoft Dynamics Business Central.