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Cycle Counting, An Alternative to the Annual Physical Inventory in the Distribution Center

By Ian Hobkirk | 03/09/2015 | 11:26 AM

Woman with tablet in DCFor many supply chain professionals the annual physical inventory in the warehouse is a dreaded process. For many companies this process can span many days and involve numerous employees both in the warehouse and the office.  Every item in the warehouse is painstakingly counted, labeled and compared against the inventory of record and every discrepancy must be researched to rectify.  To say the least, the process is time consuming and labor intensive and can also be, at its worst, disruptive to the operation.


It is because of these reasons that many companies explore alternatives to conducting annual physical inventories.  For companies that possess the capabilities, incremental cycle counting is a way of eliminating the physical inventory and maintaining faster, more accurate real-time control of inventory within the four walls of the distribution center.


What is cycle counting?  Cycle counting is essentially designating a certain number of products or bins each day to be counted so that over the course of the 12 month period the entire distribution center is counted perhaps several times and errors are rectified at the time that they are identified.  There are a number of advantages to this process, not the least of which is the fact that the inventory accuracy is progressively corrected rather than having it done is one giant step once a year.  Cycle counting is also usually less labor intensive since it can be worked into the normal workflow of the distribution center.  Here are some key concepts to think about when undertaking a cycle counting program in your company.


Point #1: Consider counting by bin rather than by product

With less sophisticated inventory control systems where real-time bin-level inventory tracking does not exist, it may only be possible to cycle count by counting by product.  For example, if the same SKU exists in three different locations throughout the warehouse (two overstock locations, and one forward pick location) then all three locations must be visited and counted without any product being moved or picked from those locations during the counting period.  However, real-time warehousing systems that maintain bin-level accuracy do not require counting by product. In these instances, it may only be necessary to count by bin.  For example, if the two overstock locations of the product consist of full pallets that are stretch wrapped, it may be unlikely that the inventory is inaccurate at these locations.  However, the forward pick location that contains the same item may have loose product that has been accessed frequently. There could be a much greater likelihood that this inventory is inaccurate. Therefore it may only be necessary to trigger a cycle count at this particular bin (the forward pick bin) and count the others at a different time.  Counting by bin also makes it possible to count a series of bins in a given geographic area of the warehouse which can be done quickly and efficiently rather than traveling all over the warehouse searching for different bins that contain the same item.  Counting by bin also offers more real time capabilities since it is unlikely that the bin will be compromised by other picks or puts during the counting process.


Point #2:  Count the items most likely to be wrong

As eluded to in the previous point, the more frequently a bin is accessed by a worker, the greater the likelihood an error has been made and the inventory is not accurate (forward pick bins are usually less accurate than overstock bins).  Therefore while it is important to count all the bins in a warehouse with some level of regularity, it is very important to count the “high touch” bins more frequently than bins that are not accessed as often.  A sophisticated warehouse management software (WMS) system can manage this process.  It can identify the bins which are accessed most frequently and assign them an A priority for more frequent counting, say every three months rather than on a yearly basis.  This way it is possible to ensure the available labor is deployed in the areas where it is mostly likely to be of benefit.


Point #3: Interleaved Cycle Count

It is possible with some WMS systems to interleave cycle counting with the normal workflow of the warehouse.  For instance, if a worker has to go to a given location to pick product and the WMS knows that there are two bins that require cycle counting very close to the bin where the pick is to be performed, the picker can be instructed to temporarily stop picking the order and go and count those bins and then resume his work.  In this way, travel time in the cycle counting process is minimized.  A word of caution here, however. It is sometimes advantageous to have dedicated inventory control cycle counters in the warehouse rather than making all of the workers in the warehouse responsible for performing this task.  Accuracy and precision are most likely to suffer when cycle counting is the responsibility of a large group of people.  It should also be pointed out that many WMS systems do not have the level of sophistication required to enable interleaved cycle counting.


Point #4: Perform empty bin cycle counts

An easy way to work cycle counting into the normal workflow is empty bin cycle counting.  If a picker goes to a bin and picks the last item from the bin, depleting to a quantity of zero, then the WMS system can question the picker and ask him/her to verify that the bin is in fact empty.  A simple keystroke can confirm that the bin is or is not empty.  This form of cycle counting takes almost no additional time to perform, and for high-volume items, can satisfy the need for cycle counting that bin.


Point #5: Cycle counting on the fly

In instances where there is an unexpected shortage of product at the pick bin, some WMS systems can trigger an automatic cycle count of that bin to rectify an inventory error immediately.  Even without this capability, it is a best practice in distribution to require an immediate cycle count of a bin that the contents are known to not be accurate.


In conclusion, effective cycle counting can significantly improve inventory accuracy and reduce labor requirements.  It can eliminate the disruptive act of shutting down the warehouse for several days to count product and dealing with the resulting customer service issues.  It should be pointed out that most, if not all of the suggestions mentioned above require the use of a real-time WMS system.  Some of the more basic suggestions such as counting by bin and counting the bins with the frequent hits, are capabilities resident in mid-tier WMS systems.  Capabilities such as task interleaving often require tier one systems to be able to implement.  Another alternative which will not eliminate the physical inventory but may potentially alleviate some of the more onerous aspects of it, involves outsourcing inventory to a third party firm.  Inventory specialists can come in the distribution centers with bar code scanners and rapidly take a physical inventory with a large amount of manpower in a short period of time.  The data can then be uploaded into the company’s inventory management system and discrepancies can then be investigated.  While not inexpensive, this option can potentially complete the physical inventory in a short period of time with workers who are trained on a day-to-day basis to count product and perform inventories.  Outsourcing the physical inventory is also worth considering if cycle counting is not possible for technology or other reasons.

Related Reading: 

Selecting the Right WMS



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About Ian Hobkirk

Ian Hobkirk

Ian Hobkirk is the founder and Managing Director of Commonwealth Supply Chain Advisors. Over his 20-year career, he has helped hundreds of companies reduce their distribution labor costs, improve space utilization, and meet their customer service objectives. He has formed supply chain consulting organizations for two different systems integration firms, and managed the supply chain execution practice at The AberdeenGroup, a leading technology analyst firm.


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