inventory management

How to Cycle Count your Inventory (and avoid the dreaded EOY count!)

Cycle counting is a way of stocktaking regularly through the year. We show you how to implement this inventory stocktaking technique into your small business.

Stock counting is the act of checking each of the materials and products you have on the shelf to ensure that your inventory tallies are correct.

This is also known as “stocktaking” or “inventory checking”.

This big, time consuming, usually-at-end-of-year-when-everything-is-already-busy, stock count understandably fills most small businesses with dread and anxiety.

In this article, we are going to show you a much better way and introduce you to the “Cycle Count”. You can use this counting technique to make your stock counting faster, more accurate and far less stress-inducing.

Intrigued? Good! Let’s get started.

The Old Way of Stock Counting

Stock counting traditionally involves counting each and every item, then comparing the count you have to the number you have previously entered in your spreadsheet or inventory system.

If the numbers are the same, then all is well and nothing needs to be done. If the numbers are different, then you’ll update your quantity on hand in your books and then move on to the next one to count.

Given small manufacturers have a LOT of material stock on hand at any moment, stock counting your whole inventory in one go is a huge task.

It can take a long time to account for every button, clasp and sq inch of fabric.

For many small self-employed businesses, this means closing their business during the end of year stock count time. This can obviously be a huge burden on any small business and impact on your manufacturing schedules and customer delivery dates.

What if I told you there is an easier way of stock counting that meant that you didn’t have to dedicate huge amounts of time and lose money during the process?

So, What is a Cycle Count?

Cycle counting is a way of counting small amounts of your stock throughout the year: spreading out your stocktaking into manageable chunks that can work around the usual day to day operations of your business.

How often you choose to cycle count is completely up to you: in large scale manufacturing it is typical to do daily counts, however for smaller operations it may be a case of bi-weekly or monthly.

The only requirement is that it needs to be regular enough to reliably cover the majority of the materials you work with during the year.

Keeping additional records of your cycle counts is a good idea if you use a bookkeeper or accountant, as it will give them confidence in your tracking accuracy.

If you do find a large discrepancy between your actual count and your recorded stock on hand, it’s wise to investigate the cause of this rather than just make a manual adjustment to your records: is it due to your manufacture usage records being over or under estimated, or are you not measuring wastage correctly? Once you have identified the issue, you can then amend the original manufacture records and recipes so that working forward your counts will be more accurate.

Once you are at a stage where your cycle counts are returning accurate numbers, you can then decide to decrease the number of counts you do during the year if you feel that the system is now accurately handling your stock usage for you. If you find the opposite, doing more frequent counts until the cause of the issue is found is often a good strategy.

Cycle Count Sampling Methods

The sample you select for your cycle count could be a completely random set of materials, or you might like to prioritise materials with high usage / cost.

Alternatively, physical locations may work best if you have your stock arranged in an orderly way - you could work from top to bottom of your storage cabinet, for example. We cover the sampling methods you can use for cycle counting here.

Whichever selection method you choose, the goal is to work regularly through small groupings of your entire stock during the year so that a big one-off count is not necessary at end of year.

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.

How to handle discrepancies in your stock count

So what do you do if you find from one of your stocktakes that your actual count is different to the stock level being calculated in your inventory system?

Firstly, don’t panic! Slight differences are a completely normal and expected part of perpetual inventory tracking, especially when running businesses that manufacture products.

Treat any difference you find as a way of learning more about your manufacturing and costing process: the more you learn about the way you work and the materials you use, the more opportunity you have to improve your processes and products…and therefore your bottom line.

So, where do we start once we have found a discrepancy? You’ll firstly need to figure out if your numbers are more or less than the actual count as this will often point you in the right direction of the cause.

If your numbers in Craftybase are showing a number higher than your actual count, then you’ll be looking for reasons why you are missing stock. If your numbers are lower in Craftybase, then you’ll be wanting to find out how you have ended up with more stock.

Less stock on hand could mean:

  • Your manufacture amounts are being underestimated
  • Actual amounts provided by vendors could be less than listed on purchase orders
  • You have a “hidden process” that results in loss or wastage
  • You have more loss in damaged materials than you are currently aware of

More stock on hand could mean:

  • Your manufactures amounts are overestimated
  • Actual amounts provided by vendors could be more than listed on purchase orders
  • Materials attributed to scrap in one manufacture are being re-used an returned to the system.

A good idea is to write up a quick list of reasons for your particular situation so that you know what you should be looking out for.

Remeasure and recalibrate

If you suspect your counts are out due to your manufactures being over- or under-estimated, you’ll be wanting to pay a little more attention to the measurements on your next couple of manufactures and then comparing these to your current recipe (or past manufactures, if you aren’t using recipes). This reason is often one of the most common, especially for those starting out with this form of inventory tracking.

An important thing to note here: unless your product changes substantially each time you create it, you won’t be needing to measure each time, you’ll only be wanting to do this only when its clear that your estimates are out by a good margin.

Once you have recalibrated, it’s often a good idea at this point to also spend a little time reassessing your pricing to ensure that you are still making your desired margins given your material costings will change based on your new found knowledge about your production process.

Is your Vendor shortchanging you?

If you suspect the difference may be due to certain vendors providing more or less than the agreed amount then it’s wise to start doing some quick mini counts when you receive your next shipments and log them into inventory.

When a difference is discovered, you can either add in a manual adjustment or amend the actual amount received on the expense itself.

Some types of materials will always suffer from miscount and inaccuracy where it’s not always possible to guarantee delivering an exact amount to the customer: beads and buttons are good examples of this.

However, depending on the type of material, you may decide to take this up with the vendor to see if they can start providing more accurate amounts to you in future: not only so that you can better rely on this part of your process for your quantities on hand, but also so that you can ensure that your own margins are not affected by any shortchanging that may be occurring.

Watch out for hidden processes

A good example of a hidden process that makes stock “magically disappear” is the shrinkage of fabric that occurs after washing. A significant amount of loss can occur in this process depending on the type of fabric being used so this is something to track closely.

Once you have identified the process, you can now look into ways of estimating this anticipated loss more accurately: using our washing shrinkage scenario above, a first good step is to start measuring your fabrics after washing to find out their shrinkage rates and then apply these calculations to your recipe amounts so that your manufactures now allow for the extra quantity loss.

Another option would be to make regular manual adjustments for the shrinkage and note as such: in this way, you’ll be able to look back over your records and see exactly how much you “lost” via shrinkage. You can then use these adjustments to calculate your average shrinkage rates and then adjust your recipes going forward.

Again, try to spend some time in reassessing your pricing once you have found a hidden process: if you are using more materials than you thought your margins will have decreased so it may be time to bump up those prices a little to compensate.

Why accuracy is a Good Thing

There are many reasons for wanting to maintain accurate stock counts: doing it for the taxman for end of year reporting is only one of them.

It’s important to realise that the more accurate your manufacture records are in terms of material usage, the more accurate your pricing and profit estimating becomes as you now have much better awareness of your true costs.

You’ll want to aim for the situation where you have a minimal difference each time you do a manual count as this shows you that you are on top of your material usage and costs - this can take a while to get to this point depending on the complexity of your processes and it can be a frustrating journey at times. Be patient and hang in there - it’s completely worth it in the end for the benefits it can bring to your business.

Tips for successfully cycle counting your inventory

  • Set a calendar alert or reminder at a specific time each week or month and make sure this time is reserved.
  • Start your cycle counts by choosing small samples, if you feel you can handle more build up from there so it doesn’t feel daunting.
  • Choose a typically quiet time where distraction is at a minimum - e.g. the end or start of the day can work well.
  • Find another friendly crafter to use as a “stocktake buddy” - set up a regular Zoom call and do the mini-count at the same time to both keep you in the habit.
Nicole Pascoe Nicole Pascoe - Profile

Written by Nicole Pascoe

Nicole is the co-founder of Craftybase, inventory and manufacturing software designed for small manufacturers. She has been working with, and writing articles for, small manufacturing businesses for the last 12 years. Her passion is to help makers to become more successful with their online endeavors by empowering them with the knowledge they need to take their business to the next level.

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