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INVENTORY
CYCLE
COUNTS
This document will explain what cycle counts are and how they are done. While we
draw reference to the VISUAL™ ERP environment, the cycle count principles in this
white paper work irrespective of your ERP.
A cycle count program is essential if you want to have accurate inventory levels throughout
the year. Annual counts primarily serve financial reporting needs of the business
while cycle counts serve both financial reporting and daily operating needs.
Cycle counts can be as simple as counting specific locations or products on a rotating
basis to using ABC product and velocity analysis as your cycle count strategy.
If done regularly and properly achieving 97% inventory accuracy, in quantity and by
location, is attainable and will eliminate the need for annual inventory counts.
THE CHALLENGE
Cycle Count Definition: A subset of inventory that is counted on a periodic basis per a pre-
determined set of criteria.
Nobody likes inventory counts. Companies close operations, bring in additional staff, load
everyone up with caffeine and sugar, then start counting and recounting items that they
can’t even recognize. After at least two passes through the warehouse, the inventory is
deemed accurate, the ERP inventory is adjusted, often involving a big write-down, and
quickly thereafter, everything returns to normal.
Before asking what inaccurate inventory costs your company, we should first ask “where
do we feel the impact of inaccurate inventory?”. We believe there are three primary pain
points:
1. Financial– reduced inventory turns and reduced fill rates reduce profit margins
2. Service - reduced fill rates and back-orders reduce customer satisfaction
3. Productivity – everyone scrambles to verify inventory due to lack of trust in the
system
When companies conduct annual physical counts, inventory is only accurate on the first
morning after the completion of a count. Over the next few weeks and months, erroneous
transactions start to have their effect and inaccuracies creep back into the system. The ability
to find what is needed when it is needed declines and trust in the system is eroded. As errors
are uncovered staff must perform ad hoc “remedial counts” and adjust the ERP inventory.
Every year, this cycle repeats. All errors that are not noticed during daily operations are all
uncovered at once and adjusted for in the financial all at once.
Inventory Optimization is a Business Outcome that is dependent upon the four main pillars of
an efficient warehouse: technology, processes, people, resources. If a business attempts to
conduct its Inventory Optimization exercise either manually or with software without
considering these other factors, then it will not succeed. The process requires participation
from senior management to purchasing to floor personnel. This document will consider each
of these individually and explain this cross functional process.
Why do Cycle Counts? Companies that do regular cycle counts have 50% higher inventory
accuracy levels than companies who only do annual physical counts, have fewer hi or low
swings in inventory levels, and they enjoy more turns. In addition, Visual ERP users that
employ regular cycle counts will be able to offset inaccuracies caused by Visual’s automatic
backflush and auto issue processes.
Candidates for cycle counting should already have reasonable system controls and accuracy
and be doing periodic full physical counts. Cycle counting maintains system integrity, but does
not replace disciplined inventory control policies and practices.
THE PROCESS
Those that are interested in cycle counting typically fall into a few categories.
• Materials Managers often care about the manpower required to count. Counts
must be done, so how can they be less painful.
• There are the financial types such as controllers and plant accountants, who see
how inventory inaccuracies create uncertainty in the organizations valuation.
• Operations and production staff need to be able to trust the inventory numbers in
the system so that they are not caught over or under producing for an order.
• Customer Service staff want to make sure that they don’t make promises that
they can’t fulfill.
The requirement is the same – having trustworthy inventory data reduces juggling of shortages.
Operations Can replace Much smoother process when Cycle Counts are conducted
Full Count Pays for itself Represents expense for time and lost manufacturing
Tip: True inventory accuracy is having BOTH quantity and location accuracy
Cycle counting by location begins from one end of the warehouse to the other, based on
surface area. In this system, a schedule is created and followed so that each location’s
contents are counted on an assigned day, and that all locations’ contents are counted at
least once. This approach is easiest to implement and it treats all inventory types equally.
Cycle counting by ABC analysis and velocity is determined first by Pareto frequency
analysis, and then manually adjusting as needed per item based on usage, sensitivity, or
other factors.
The Pareto method determines what to cycle count based on percentage of inventory
value (cost multiplied by usage for period). Items with a higher determined value are
counted more often, while items that have little movement are seldom counted. This
concentrates effort on higher volume of use items but almost ignores low value items
which may still be critical for production. Cycle counting by usage relates count frequency
to the risk of transactional error – the more something is used or moved, the more likely it
needs to be checked.
Other factors or considerations when defining how a company will conduct cycle counts
also include: Requirements of auditors and financial stakeholders, Government
compliance and regulations, High risk items, High value items, Historical inventory
accuracy of an item.
Option 1 – Pen & Paper – Option 2 – Power Cart Option 3 – Mobile Terminal
This process typically including: Mobile – For maximum efficiency,
takes 100%+ more time Workstation, PC with cycle counting should be
and resources than an access to Visual™, Printer conducted within a
automated system. and Scanner. This can also warehouse management
be used for re-labelling and system. The counting
inventory adjustments. The operation is performed on
typical return on mobile computers with
investment for a power cart integrated barcode
in regular use is 3 weeks. scanners that allow the
operator to automatically
identify items, and enter
inventory counts via
keypad. The software then
transmits data to a
database in real-time.
Progress can be managed
on the WMS full screen
control centre. Once
management accepts the
counts as accurate, the
WMS synchronizes the
count data with the ERP.
Portable Intelligence Inc. has developed a WMS called RF Plus™, which is available
for Visual Mfg., MS Dynamics NAV, Syspro and other ERP systems. Counts with RF
Plus - The Physical Count screen works in conjunction with Count IDs from VISUAL.
CONCLUSION
In a team environment including representatives from management, warehouse, production, IT,
Set targets, Decide on what inventory types to count, Plan your counts with pre-determined
criteria/rules, Source help to set up the program, Train personnel to be inventory count specialists,
Ensure personnel have the right tool for the job.
“The Inventory count program paid for itself after the first use – it’s well worth the investment”
-RF Plus™ user
Whether a company uses RF Plus or any other form of automated inventory management, we
encourage the use of daily cycle counts.
When done properly and as recommended herein, companies will experience the
following:
1. Inventory accuracy will achieve that critical 97% mark which is the point
at which the annual inventory process is not required
2. Productivity and trust in the WMS will increase
3. Customer satisfaction will increase
4. Order fill rates, inventory turn rates and profit margins will increase
SOURCES
Contributors to this document include the following personnel from Portable Intelligence Inc.
Jeff Lem, Founder and President, MBA, P.MM, MBA, 20 plus years in supply chain industry and
over 100 WMS installations. Portable Intelligence is also a VISUAL user.
Parminder Grewal, PM, has over 10 years as a user of VISUAL ERP and TM Plus™/RF Plus™,
having successfully deployed and used both products in previous roles.