What Is a Cycle Count? (Definition, Processes and Types)

By Indeed Editorial Team

Published 24 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Businesses that hold large amounts of inventory use different methods to ensure their physical stock matches inventory records. While companies can count inventory physically, it can be time-consuming and prone to error, which is why they also use cyclic methods. Understanding how to count inventory using cycle counting can increase productivity, reduce disruptions to business activities and enhance inventory management practices. In this article, we define what cycle counting is, explain how it's used, outline the types and discuss how it differs from physical counting inventory management methods.

What is a cycle count?

Cycle count is an inventory management practice that involves counting a small amount of inventory on a specific day, week or month, rather than an entire physical stocktaking. Depending on the type, this counting method can use the value, quantity or location of items to determine the counting cycle.

Because counting limited items takes less time, this inventory management technique offers a higher level of accuracy and allows the team to perform other functions. Cycle counting can help a business see how accurately its inventory records match the merchandise on its shelves, making it an effective strategy for meeting customer demand and reducing inventory holding costs. It can also prevent long disruptions to business operations.

Related: What Is a Periodic Inventory System? (With Example)

How to create an inventory cycle counting programme

There are different ways of using the inventory cycle counting to take stock and meet customer expectations. If you want to create such a programme, here are important factors to consider for success:

1. Determine the number of stock-keeping units (SKUs)

Before creating a cycle counting programme for inventory management, it's important to determine the number of stock-keeping units you want to count at a time. Knowing the number of SKUs you want to count can help you determine the frequency and resources required to execute this strategy successfully. For best results, give priority to high-value products and choose a reasonable count interval to achieve high accuracy and minimise holding costs.

2. Estimate counting resources

Your counting resources determine the amount of SKUs you can count and the counting intervals. Check the number of employees who are available and have the skills and experience to count stock. To ensure counting doesn't affect employees' productivity, many businesses typically schedule off-peak periods for counting. It's important to separate the people that are going to count from those responsible for checking the accuracy of the numbers. Otherwise, the workload might lead to mistakes and inaccuracies.

3. Determine counting frequency

After estimating the number of SKUs and counting resources, you're likely to have the data required to determine your counting frequency. The frequency of counting is the number of times your team counts within a specific period. For example, you can decide to count 500 SKUs per month. Then you break the task into cycles the team can complete per day or week. During this stage, you can also determine the time counters require to finish their counts and record SKUs each day or week.

4. Formulate an inventory cycle counting policy

Lastly, create a policy to encode the rules to guide the counting team. This can outline when to perform counts, and whether the count follows a random or set pattern. You can also include provisions for special audits occasionally and other requirements to ensure that the physical count matches the inventory records accurately.

Related: What Is a Merchandiser and How You Can Be One

Steps for using the inventory cycle counting system

Here are the steps for using the inventory cycle counting method:

  • Review records. The first step is to review your inventory records to ensure that it contains accurate data. Check the database to correct data entry errors on all inventory transactions.

  • Create a cycle counting report. You can print or upload the report to make it easily accessible to teams.

  • Start the count. During the counting, ensure that counters check the report for the products, quantities and the inventory locations and compare it to the physical stock on the shelf.

  • Investigate and reconcile. If you find any differences between the records and physical stock on the shelf, reconcile them with the stock manager. Check for error patterns to eliminate the root causes of issues.

  • Implement other procedures. If the programme guidelines require the execution of other inventory management procedures, implement them.

  • Adjust records. Modify the inventory record database to reflect the number of items on the shelf.

  • Audit and iterate. After the counting, reconciliation and adjustment of records, repeat the inventory audit regularly and calculate the accuracy of results to track performance and efficiency.

Related: How to Calculate Inventory Carrying Cost (With Examples)

Types of inventory cycle counting procedures

These are the major types of inventory cycle counting:

Control group cycle counting

This type of cycle counting involves counting the same items repeatedly over a short period. The repeated counting helps the counters identify errors in the count technique. This allows them to improve their methods and create a more efficient and accurate counting procedure.

Random sample cycle counting

This counting procedure involves a random selection of a certain number of items to count. This method is ideal for businesses that have a large number of similar items. Random counting allows the counters to account for a large percentage of products in the warehouse within a short period.

ABC cycle counting

This cycle counting method uses the ABC inventory management technique and the Pareto principle to classify items into A, B or C categories based on their value. It classifies the highest-value items as A, followed by B-class items and then the lowest-value items as C. Using this method, counters count A items more frequently than B, and count B more often than C items.

Read more: How to Perform an ABC Analysis for Inventory Management

Objective counting by surface area

This form of counting involves dividing the warehouse into smaller audit areas. Each auditor counts items within their allotted physical space. This type of counting doesn't prioritise the value of the stock, which makes it ideal for situations where speed is more important than accuracy.

Hybrid counting

A company can create a counting method based on its specific requirements. For example, businesses can combine elements of the control group and random cycle counts if they have large inventories in their warehouses. Organisations that have a combination of high- and low-value products can use the ABC counting method and combine it with the random sample technique if the quantity of items is high.

Related: Top 10 Logistics Manager Skills to Develop (With Career Guide)

Differences between cycle counting and physical counting

Unlike cycle counting, which involves counting a part of the total inventory, physical counting requires auditing all the items in a company's warehouse, which makes it more thorough and resource intensive. Here are some major differences between physical counting and cycle counting:

Labour and time commitment

A physical count is typically labour and time intensive because it involves counting the complete inventory in a warehouse. This takes time, more employees and other counting resources. Cycle counting involves auditing a part of the entire warehouse. It's faster, labour efficient and more precise.

Facility downtime

Because of the personnel and time resources and thoroughness of physical counts, they often require businesses to close their warehouses while counting. This leads to facility downtime, which can impair a company's ability to serve customers and earn during the period of the inventory audit. Inventory cycle counting doesn't cause operational downtimes because it's selective and requires fewer personnel and time commitments. With cycle counting, the business can schedule the audit as part of its daily operations, which limits the disruption of normal business activities.

Frequency

It's easier to schedule cycle counting compared to physical counting. Cycle counting can happen every day, especially if you have a dedicated inventory audit team and designated counting areas. Because the counting is cyclical, the small but repetitive counting adds up over time and helps improve inventory records. Conversely, physical counts typically occur once a year and often disrupt regular business activities.

Flexibility

Regardless of how you choose to conduct a physical count, the audit team is required to count every item in the warehouse. Cycle counting provides more flexibility. You can count by value, quantity, surface area, category or using a combination of counting techniques. This allows businesses to choose the most efficient counting method for their inventory management goals.

Type of company

Physical counts are more appropriate for small businesses with smaller inventories. For such businesses, it may be easier to schedule the count when business is slow, which reduces disruptions to their operations. For larger businesses with huge inventories, it's better to use cycle counting, which breaks the audits into small, continuous exercises. That way, the business can better plan for counting and avoid disrupting its regular business activities.

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