The Ins and Outs of Physical and Cycle Counts

Physical inventory counts are never any fun for those involved. Physical counts, typically done annually, require every item of inventory to be manually counted and — particularly for those relying on paper and pencil, or even spreadsheets — this can be a very manual, time-consuming and error-prone process.

While there are ways to ease the pain of the physical count process, most product companies will have all hands on deck for the physical inventory count. If resources are tied up in counting, they are not doing their usual jobs, which can ultimately result in lost sales or lost opportunities.

It can be a significant burden.

The Problems with Physical Counts

In order to conduct that physical inventory count, businesses need to make sure the inventory is locked down and that there are no transactions in the system between the time the count is performed and the time it is approved, or the count results are posted. This disruption in operations is not only costly, it can also affect a company’s ability to provide the expected level of customer service.

Also, counting inventory is a specific skill set that employees from other departments may not have. It requires an understanding of the layout of the warehouse or the shop floor, as well as the nature of the inventory itself. Consider how an item is packaged and palletized in addition to the different units of measure. Good counters know the product, know how to count, measure and maybe even weigh the inventory. It is difficult to take someone without regular inventory and counting responsibilities and expect the level of accuracy required, as they are unfamiliar with the nuances that need to be considered when counting inventory.

And don’t forget the dreaded recount! Inevitably, during a physical inventory count, organizations find some type of large discrepancy which needs to be reconciled — it can take a lot of time and effort to go back and figure out what happened. Most likely, while all of this research and reconciling is going on, the entire team is sitting around waiting to see how much of the inventory they are going to need to go back and recount.

The one thing we can be sure of with an annual physical inventory count is that it isn’t the most accurate, or effective, way to count inventory.  Unfortunately, they are a necessity for almost any product company and are critical to ensuring accurate inventory records and financial statements.

So what can businesses do to make the physical count process more manageable?

The best way to improve the physical count is implementing regular cycle counting. Cycle counting is the process of counting a few items each day, with the goal of counting all your inventory over a specified period. Cycle counting can be incorporated into staff’s daily tasks so that you’re not relying on overtime or temporary staff to do it.

The Premise of Cycle Counting

According to the Association for Supply Chain Management (ASCM), there are five major elements to ensure a successful cycle counting process:

A Dedicated, Regular Team. The concept of cycle counting is that you have a dedicated team or individual who is trained as a cycle counter. These people should be familiar with the inventory and the transactions that cause the inventory to move.

A Regular Schedule. A cycle counting program needs to be based on a regular schedule. If you want an auditor to excuse the need for an annual physical count, then you will want to have proof of regular cycle counting activity and document your process.

Frequency-Based Methods. Items should be categorized using something like ABC Analysis and then establish a frequency for how often each category will be counted.

Results-Oriented. Establish how you plan to measure success. There are many ways to track inventory accuracy, but you should agree on a metric that is easy to track and can be reported on regularly. This will be an important KPI when it comes to providing auditors with comfort that inventory is accurate.

Variance Research. Lastly and most important, the intent of cycle counting is not to simply fix inventory errors. Although truing up the inventory is a by-product of the process, the dedicated team should be focused on eliminating the cause of any discrepancies. A good cycle counting program should drive continuous improvement throughout the operation, by identifying those root causes and working with the right co-workers to fix the process so that errors don’t persist.

This article was originally posted on NetSuite.com and written by Abby Jenkins, NetSuite Product Marketing Manager