As we have already covered in the Craftybase blog, Cycle Counting your inventory is a great alternative to the time consuming, tedious and error-prone task of counting your entire inventory each time you stocktake.
For a quick background on Cycle Counting, it is essentially a method of inventory stocktaking that allows you to instead select “samples” of your stock to count at regular intervals - this is in contrast to the usual method of waiting until a certain time in your calendar (usually end of year for tax purposes) to count everything you have on hand.
Once you have decided that the Cycle Counting technique is a better fit for your business than EOY counts, you’ll want to figure out how best to select your samples. There are a couple of methods that can be used and the right one will depend on the types of materials you hold in stock, your manufacturing activity and how large your inventory is.
There are three main methods you can use to select your samples: Random, Control Group and ABC Analysis.
Control Group Cycle Counts
This method is mainly used when first starting out with Cycle Counts and is typically abandoned in favor of one of the other two methods when the control group has been fully counted and tested. This method involves selecting a control group of materials to count - this control group should be deliberately selected as a cross section of your total inventory. You’ll want to keep doing the count at a specified interval until you have a good level of accuracy. The main goal of this approach is to find any issues with the counting and auditing techniques so that they can be improved before cycle counting begins in earnest.
Random Sampling Cycle Counts
This, as its name implies, is done by selecting a group of your materials completely at random. There are two main sub-methods for the random approach, called Constant Population Counting and Diminished Population Counting.
Constant Population Counting is where you select a completely random sample each time, regardless of what has previously been counted. The disadvantage to this approach is that you’ll be sometimes counting the same materials more than once in a period and others may be missed for a significant period of time. It is however the easiest technique to use as you can just randomly take materials from your shelves to count without keeping records of prior counts.
Diminished Population Counting is an improvement on the Constant count technique - as soon as a material has been counted, it is then excluded from future counts until all items have been counted. For this technique, you’ll need to keep records of your counts to ensure you are aware of which ones you have already counted.
ABC Cycle Counting
ABC is the most technical of the approaches to cycle counting as it involves categorising your materials into the groups: A, B and C.
The groups are determined by how often they are used in your production processes and are calculated using the Pareto principle. This principle essentially states that about 80% of the effects come from 20% of the causes - in inventory management this translates into a theory that 80% of your manufacturing involves only 20% of your material parts. Therefore, this approach ensures that you focus on this 20% in your cycle counting, with the other 80% being counted less intensively.
Your “A” items should be the materials that are involved in 80% of your manufactures. “B” items are then 30% of your material inventory which will account for 15% of your manufactures. “C” items are then 50% of your material inventory and 5% of your total manufactures.
Before you can begin using this cycle count approach, every material in your inventory will need to be identified as a A,B or C. Once assigned a category, the number of times that this category needs to be counted needs to be determined - for example, you might choose to count your A materials once a week, your B materials each month and your C materials each quarter.
This approach can have a couple of disadvantages - depending on your C cycle period, these materials may be counted very infrequently which can lead to inaccuracies with your inventory. If your particular manufacturing process doesn’t resemble the pareto rule above (i.e. customised products, OOAK) then you will find it difficult to calculate categories and assign cycle count schedules - in this case, it may be better to use the randomised process detailed above instead.
