Inventory Cycle Counting

Inventory Record Accuracy comes out as the result of comparing the physical amount of an item (or lot number if the item is lot controlled) at a particular location, with the balance stated in the computer record for that same item and location combination. In normal circumstances, discrepancies only arise due to errors in the inventory transaction processing. Therefore, a "Quality" inventory transaction processing system should aim at eliminating the errors that produce these differences. To monitor how well this process is working, one should continuously sample a group of transactions in order to measure if the process is still under control or if corrective actions should be taken.

Ideally, a sample of transactions (the size of the sample depends on the actual level of variation in the process) should be reviewed on a daily basis to detect new sources of errors. In theory, this sampling procedure should provide a good measurement of the IRA of the whole inventory.

In real terms, this means going back to each inventory location to confirm that the balance in the record still matches the physical quantity recorded. This procedure, however, also breeds waste in the same way and for the same reasons discussed for ABC Cycle Counting.

As was discussed before, since the only way in which an inventory record error can happen is if there is an inventory transaction, the cycle counting process should be related to the activity taking place in the warehouse. Other kinds of situations can also lead to inventory record errors, but they are usually the result of events that are independent of the inventory transaction processing system. These will be discussed briefly below.

Therefore, the question of what to count should be answered by selecting all items for which a transaction has been posted. When to count should be defined in terms of the most practical moment in time that results in minimum waste and maximum labor productivity. If we take advantage of the next trip made to the warehouse location and do a physical count before moving material (pickup or receipt), we are in fact auditing the last transaction recorded for that particular item and location combination. Just counting a random group of locations will provide us with a representative sample of the most recent transactions, if not the last transaction posted.

By doing it this way, a significant amount of waste has been eliminated. The time spent going to a warehouse location is primarily devoted to moving material and a marginal effort is devoted to the cycle count itself. If bar coding is used, the added cost of counting becomes even smaller, as the time to record data speeds up. On the other hand, the detective work has been tremendously reduced because, in all likelihood, the number of transactions between hits (instances when physical and book balances match after a transaction is processed) for a particular item are minimized by the same nature of the selection process.

Under this kind of scenario, a Cycle Counter is no longer necessary, since most of the work of cycle counting can be handled by regular warehouse personnel. By contrast, the area of auditing should be reinforced to better identify causes of error and come up with better preventive solutions in the direction of continuous improvement.

Many companies have good reasons to adopt different kinds of cycle counting methodologies, but these should be selected according to the kind of problems that need to be eliminated. For instance, if a company suspects goods are being stolen from a warehouse, special control procedures as well as special cycle counting methods should be applied. Whenever a situation is

detected that allows differences in the inventory records to happen that are not attributable to the inventory transaction processing system itself, specific cycle counting methods are appropriated.

When implementing a cycle counting program, careful consideration should be given to the methodology selected. This should take into consideration the direct costs of the program itself along with the associated costs of waste, lost productivity, etc. A great deal of the costs implicit in methodologies like ABC Cycle Counting stem from the fact that the cycle counting process attempts to measure the accuracy of the results, rather than the capability of the inventory transaction process. Financial, accounting and auditing professionals should participate more closely in the process of review and selection of the appropriate methodology, and also in defining specifications for computer software development and/or modification. In general, a back-to-basics approach is appropriate. Total Quality principles and techniques should be applied in this area of inventory accuracy.

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