Introduction to Cycle Counting
Cycle counting is a periodic analysis of inventory in a storage location which is conducted through the counting of samples instead of physically counting the entire inventory available, so as to quickly have an accurate estimate of the inventory available without causing a stop to the day to day working as is the case with physically counting every unit.
Explanation of Cycle Counting
There are broadly two methods of keeping track on inventory, perpetual inventory system, and periodic inventory system. Under a perpetual inventory system, every inflow and outflow is recorded in real time as it happens and therefore proper bookkeeping is maintained for this process.
Whereas, in the case of periodic inventory management, according to the need of the company, at periodic intervals, the inventory is calculated and tallied with sales and purchase records to get the stock of the goods. This process is a tedious and time consuming one and therefore many organizations implement the Cycle counting procedures, where they implement the sampling method instead of counting each unit.
Types of Cycle Counting
There are several types of cycle counting process as described below:
This method is applied in the initial phases of cycle counting because this is the time when a proper counting methodology is being formulated for the specific organization under analysis. Here the same groups of items are counted several times during a short period of time to understand the in and out movements of these items and then coming up with an optimum counting technique and eliminating the counting errors that are being committed over time.
This practice is useful when the storage has several items of one kind stored here. If at a time there are several units of one kind available then the organization gets a fair idea of how much stock it has and therefore they can pre-empt shortage and ordering requirements based on the periodic cycle counts.
Under this company, specific categories are formulated and items are put under these categories. Generally, 3 categories are formulated, category A items are counted more frequently and generally comprise fast-moving items. Category B items are counted less frequently and category C items are counted even less frequently. There can be more categories as per the need, size, and variety of the inventory, however, this format of counting is generically termed as ABC analysis.
Cycle Counting Procedure
Having understood the concept of cycle counting, the natural question that follows is that if we are sampling inventory then what should be the basis of doing so and how frequently should we conduct the counting exercise to have a true and fair idea of the stock without compromising the day to day working, which is the basic premise of why cycle counting is being conducted. For these reasons, there are various techniques that have been formulated over time:
1. Pareto Method
In this method, those items which cost more and are used up more frequently are counted more often than others. For this purpose, the consumption is valued by multiplying the items used in a given period of time with the cost of each item if so available or an average cost of the items that can be derived from past purchase records. Those items which have higher value are counted more frequently and therefore this method essentially bifurcates the inventory into two categories if high value and low-value items.
2. Frequency Based Counting
In this method, those items which are used up more frequently are counted more often without paying attention to the value of these items. It is a more prudent approach which doesn’t distinguish between high value and low-value items and works on the philosophy that each time inventory is purchased or sold, there could be a possibility of error in recording and therefore those which have greater possibility of such error, are overseen with greater frequency.
3. Combination or Hybrid Counting
This is a combination of Pareto technique and the ABC counting method, where the first level of bifurcation is made based on the value of the items while the second level of categorization is made based on ABC counting wherein, further sub-categorization is made based on several criteria such as high demand item or seasonal items or low shelf life items or even based on customer urgency requirement and so on. Such categorization can’t be completely automated and requires human intervention because several items might fall in more than one category and therefore require a specific counting frequency.
4. Surface Area Based Counting
At times it is also known as objective counting because here we only look at the empty spaces which need to be filled and in doing so we aim at quickly filling these empty spaces. Such a method might be more suitable in a supermarket which is properly mapped out and is methodically arranged.
Example of Cycle Counting
Let’s take the example of a supermarket. There are various kinds of items which are divided into the following categories:
- Daily items: Dairy, eggs, bread, etc.
- Perishable items: Vegetables
- Durable items: Grains, pulses, flour, etc.
The supermarket wants to have an inventory management system in place so that it reorders quantities optimally. So the store manager has come up with the following categories and inventory management technique:
This is quicker as compared to the physical counting of all items each day.
Difference Between Cycle Counting and Physical Inventory in Oracle Apps
- Scheduling: Scheduling cycle counting is possible while scheduling physical inventory is not possible
- Disruption: During counting the stack is visible in the system if the cycle counting is implemented but it is not the case when implementing physical counting
- Transaction Freezing: Inventory undercounting can be transacted upon in cycle counting while this is not the case with physical counting
- Record: Previous counting records are available in cycle counting method but not in physical inventory method
- Quick: In organizations that can’t manage perpetual inventory, the periodic system is followed, however, it is highly time-consuming, therefore, Cycle counting speeds up the process.
- Cost-Effective: As a perpetual inventory system requires proper accounting and bookkeeping, therefore, the method is very costly as it requires a skilled workforce and also expensive software. On the other hand, the cycle counting approach can be achieved through a lesser costly workforce by providing proper training.
- Doesn’t Cause Disruption: In the case of periodic inventory management, the daily working is stopped during the period when counting takes place. This doesn’t happen in case of cycle counting as the process is broken into parts and conducted department wise and not for all the inventory together.
- Less Accurate: As this method relies on sampling, it is not completely accurate and before achieving the desired level of accuracy, several iterations of counting are required, which might not give the required result on completion.
- Procedure to Be Followed: Initially, when the cycle counting is implemented, the beta and pilot testing needs to be thorough and rigorous so that proper sampling technique is defined because if this is flawed, cycle counting will not give proper results.
Overall, Cycle counting is an attempt to reduce the effort of physical counting under the periodic inventory method without disrupting the day to day operations using the appropriate sampling technique as per the requirement of the organization under consideration. It is helpful in the case of those organizations which don’t have the resources to maintain the perpetual inventory system however, there are chances of lack of accuracy in this method if the sampling technique is erroneous.
This is a guide to Cycle Counting. Here we also discuss the introduction and several types of cycle counting process along with benefits and disadvantages. You may also have a look at the following articles to learn more –