If you have a business or have seen one operate, you must know the importance of inventory management. Without proper inventory accuracy, a business might fail. Let’s look at the stats first!
About 62% of organizations in the USA and Australia have below 80% inventory accuracy. And in the US retail operations alone, the inventory accuracy is between 58% and 63%.
This inaccuracy directly impacts a business’s day-to-day operations. Research states that if a business manages its inventory appropriately and prevents stockouts and overstocking, then it can easily reduce up to 10% of its total inventory cost.
It’s a win-win.
But how do businesses lose such a prominent percentage of their inventory? What are the reasons? The reasons might be a lot like misplacement, damage, inaccurate inventory cycle counts, manual errors, and lack of technological implementation.
In this blog, we will discuss how inventory cycle count (Counting one inventory section at a time) can impact inventory accuracy, which in turn directly impacts a business’s bottom line.
What is Inventory Cycle Count?
The inventory counting cycle is the process of counting a single batch or section of inventory over time rather than the whole at once.
You might be thinking – why should you count inventory multiple times a year when you can manage it just once a year?
Well, over 30% of businesses experience stockouts due to inaccurate counts. This can damage your reputation and lead to a loss of customers. For example, if you counted your inventory in January and received 100 return orders, 29 damaged products, and 20 incorrectly labeled items by March, relying on physical counts could leave you unaware of these issues for an entire year. This could result in significant inventory inaccuracies and chaos.
To avoid this, many businesses implement cycle counting, which can help reduce errors by over 90%.
Counting the whole inventory at once (Physical counting) is a time-consuming process;
- It may take a few days to a few weeks (depending on the number of teams you have)
- It may feel overwhelming to keep track of such a massive number of SKUs
- It may be subject to errors if not done using a system
Therefore, cycle counts are performed to prevent the problems associated with physical counts. Inventory cycle counts give you more accurate data without the need to stop all the operations just for the sake of counting.
In cycle counts, you can just count the number of SKUs available in a particular section of the warehouse, which makes counting easy and accurate.
Bill Conway – NetSuite Practice Director, Blue Horseshoe Solutions, tweeted about the importance of a regular inventory cycle count. In which he said,
Difference between physical counting and Inventory cycle counting
Physical counts are mostly time-consuming and need more manual labor. On the other hand, inventory cycle counts are less time-consuming and can be done in a few hours (depending on the number of SKUs you are counting and in which intervals).
Which counting process will suit your business depends entirely on the type and size of your business. If you are a small business with limited SKUs, physical counting may work for you. But if you have a wholesale business with a large number of SKUs, inventory cycle count will be your guardian angel.
| Factor | Cycle Count | Physical Count |
| Frequency | Daily/weekly | Annual |
| Disruption | Minimal | High (operations halt) |
| Accuracy | Real-time updates | Snapshot accuracy |
| Cost | Lower long-term costs | High labor/temporary staff |
| Best For | Large warehouses, eCommerce | Small inventories, audits |
Top 3 cycle count methods
1- ABC Analysis:
ABC analysis is a cycle counting method in which a business categorizes items based on their value.
A – High-value
B – Mid-value
C – Low-value items
Business mostly prioritizes high-value items over the other two categories and allocates budget based on that. The major budget goes to A items while the remaining goes to B and C (enough to fulfil customer demands). When it comes to counting, it again goes from A to B and C. Business mostly counts high-value A items weekly, B monthly, and C annually.
| Item Type | Frequency | Team |
| High-value (A) | Weekly | Dedicated team |
| Medium (B) | Monthly | Rotating staff |
| Low (C) | Biannually/Quarterly | Temp staff |
2- Random Sampling:
As its name suggests, this method involves randomly choosing a certain section to count or counting random SKUs daily. It is considered the easiest method for large warehouses and businesses with big inventories that are difficult to count using other methods.
3- Control Group Counting
In this method, businesses count a small group of inventory. They then repeatedly count and audit the same group until they are sure there is no flaw in the counting.
4- Opportunity cycle count
In this method, an inventory count is done after specific trigger events. For example, when you receive a shipment, you count; when you get orders, you count; or when you relocate a warehouse, you count. These are the trigger events or opportunities to make sure your inventory is accurate.
The 7-step cycle count process
1- Clean up your records first
Start by cleaning your inventory and fixing any errors you find. This means updating SKUs (Stock Keeping Units), correcting item locations, and removing irrelevant items.
2- Build your cycle count report
Create a report that includes all relevant information. You should have the SKU, item location, expected quantity, and a place to write the actual count. If you want to make your life easier, consider using tools that automatically generate these reports, save time, and reduce errors.
3- Count like a pro
When it comes to counting, double-check your work. Scan each item twice to prevent mistakes like “I guess I counted that.” Warehouse managers often suggest counting high-value items first. These items are more likely to be lost or stolen, so it’s smart to check them thoroughly.
4- Solve the mystery of missing stock
If you notice discrepancies, there could be several reasons. Common problems include:
Theft: Review your security footage, especially for items that are often stolen.
Data entry errors: It’s easy to mistype quantities, such as entering “10” instead of “100.”
Supplier issues: Double-check for short shipments or if items have been delivered twice.
5- Fix the root cause
Take a closer look at why errors happen. For example, one clothing store found that 20% of their jeans sizes were incorrect. They retrained their staff on how to label SKUs correctly. As a result, errors dropped to just 2% within three months.
6- Update your records
Remember this golden rule: only make adjustments after you’ve investigated the problem. Making blind updates can hide deeper issues in your inventory system.
7- Measure and repeat
Keep track of your improvement. Calculate your inventory accuracy rate using this formula: (Correct counts / Total counts) x 100.
Aim for an accuracy rate of 95% or higher. If you’re scoring below 90%, it’s time to audit your counting process and make necessary changes.
Metrics that matter in the cycle count
1- Inventory record accuracy (IRA):
IRA is a percentage of a business’s physical inventory and its recorded inventory. This metric highlights the accuracy of the counting method.
IRA = [1 – (Total discrepancies / Total inventory)] × 100
For example, if you find 10 errors in 500 counted items, IRA = 98%
1- Variance Rate
The variance rate shows how frequently your physical counts differ from recorded data. A variance greater than 5% means your counting process is broken. Even a small error can lead to discrepancies that can impact overall inventory accuracy and financial reports. Therefore, if you want to maintain a smooth inventory flow, try to keep the variance rate below 5%.
2- Count frequency per item
Different items require different counting frequencies based on their value:
A-items (high value): High-value items are important for your business’s profitability. Therefore, you must keep track of these items on a weekly basis – regular checks help prevent any potential losses.
C-items (low value): These are low-value items, and you can count them every quarter rather than being more frequent. This way, you can check how much of your budget you should allocate for them to fulfill customer needs without stockouts.
3- Time per count
The ideal time spent counting should be between 2 and 4 hours. If your counting takes longer than this, it may be time to simplify your categories or improve your counting procedures. It’s important to minimize downtime and maximize productivity.
How to 2x your cycle count?
Small businesses often do cycle counting manually. But when it comes to large wholesale businesses and warehouses with a large number of SKUs, businesses prefer a system that helps them with fast inventory counts with maximum accuracy. This can be done using inventory management software. With this software, you get custom reports more quickly that help you with financial reporting and tracking.
Conclusion
For every business, a clean and well-managed inventory is a dream. And with inventory cycle counting, you can turn it into a reality. If you already have a warehouse with a lot of inventory, and you are stuck on where to start. Then start small, count sections, and within 6 months you’ll see fewer stockouts, happier customers, and a CFO who stops yelling about “missing inventory.”
FAQs
What is inventory cycle count?
The inventory counting cycle is the process of counting a single batch or section of inventory over time rather than the whole at once.
How can you calculate cycle count in inventory?
Select a section of the warehouse and start counting. Just like this, complete one side section by section, and then move on to the second. Divide the warehouse based on your team members. You can repeat this after a specific interval: weeks or days, depending on your team members and inventory.
What is stock cycle counting?
It’s a method in which you regularly count your physical inventory and check it against inventory records. This way, you can track and balance which items need restocking or which are dead.
How to count inventory fast without errors?
Businesses have reduced 43.5% of human error by using a barcode system. To make your inventory count faster, integrate a barcode system and scan SKUs to create an easily trackable and countable product library.
Why does my inventory count always differ?
If your inventory count is always different, then your inventory cycle count is flawed. Either you are facing manual errors, or your team is untrained to perform the counting properly. To prevent this, use a control group counting method and audit regularly to check whether the inventory count is accurate or not.
