Jon Schreibfeder, STAFDA Inventory Consultant: Cycle Counting, Part 2

Setting up your cycle counting program.

Editor's Note: Part 1 of this article ran in the February/March 2012 edition of Contractor Supply. Click here to read part 1.
Jon Schreibfeder, president, Effective Inventory Management, Inc.

Counting inventory in your warehouse is neither a pleasant, nor an easy task. Last month, we looked at implementing a cycle counting program as an alternative to an annual physical inventory. While we discussed the advantages of cycle counting, we didn’t have enough time to completely describe how to set up a cycle counting program.

In this article we’ll look at determining when to count items as well as how to resolve discrepancies caused by “floating” paperwork. We’ll also explore the advantages of using bar-code equipment to facilitate the counting process.  

Develop Your Count Schedule
On what specific days should each product be
counted? In the last article, we described two methods
for cycle counting: the geographic method and the ranking method. The geographic method is a wall-to-wall count in which each product is counted four times per year. The ranking method counts those items with the most dollars moving through inventory more often than slower moving items.

To develop a count schedule for a geographic program, first calculate the number of products you will have to count each day. We will use an example of a company with 10,000 products in its warehouse:

  • 10,000 items counted four times per year = 40,000 counts
  • 40,000 counts ÷ 250 counting days = 160 products counted per day

Start at one end of your warehouse, assign the first 160 products to “Day 1”, the next 160 products to “Day 2”, and so on until the last 80 products on the list, along with the first 80 products are counted on “Day 63.” On the next day, products 81-240 are counted and the process continues. Cycle counting is one job in your company that should never be completed. There will always be products to count tomorrow!  

Please note that unless you have a computer system that can maintain multiple on-hand quantities for an item (i.e. the quantity in each of several bin locations), you should count all locations for an item on the day that item is scheduled to be counted. So, when you count the primary location for a product, be sure to count all surplus and bulk storage locations as well. If your system supports multiple on-hand quantities, treat each location as though it were a separate part, and make sure you accurately record how much of the item is in each bin.

What happens if there is a situation one day which prevents you from counting all of the scheduled items? Well, you need to count more items on the next day in order to “catch up” to where you should be in the schedule. Catching up may require you to have one or two people work some additional overtime. But, this is a small price to pay to ensure that the inventory availability information in your computer is accurate.

It is a bit more complicated to establish a count schedule for a rank based cycle counting program than the geographic method, but it’s certainly possible. Keep in mind that in order for a rank based cycle count program to be successful and more accurate than a geographic count, it is imperative that all items are assigned to the proper rank. So be sure that your stocked products are re-ranked (based on annual cost of goods sold) on a regular basis. Many distributors assign ranks according to the following criteria after the items have been sorted in descending cost of goods sold order:

A: Items responsible for the first 80% of sales
B: Items responsible for the next 15% of sales
C: Items responsible for the next 4% of sales 
D: Items responsible for the last 1% of sales

The old Pareto principle, that approximately 20% of inventory items account for 80% of sales, applies to most distributors’ inventories. Let’s look at a sample
rank-based count schedule. Once more there are 10,000 items in his warehouse:

  • 2,000 “A” items counted six times per year = 12,000 counts
  • 3,000 “B” items counted three times per year = 9,000 counts
  • 4,000 “C” items counted twice per year = 8,000 counts
  • 1,000 “D” items counted once per year = 1,000 counts

Total of 30,000 counts ÷ 250 counting days = 120 products counted per day

Here is a rank-based cycle counting schedule for the distributor that will attain the desired number of counts for each product. Note that on some “transition days” items from two groups will be counted:    

As with the geographic method, when you get to Day 250, go back to the beginning. It’s like painting the Golden Gate Bridge — the work is never completed!

Reconciling Cycle Counts
As we discussed last month, cycle counting should be performed by knowledgeable, experienced warehouse people, during “off-hours” when material is not moving. But unless you have installed a radio frequency (“RF”)
bar coding system (discussed in the next section), your counting process may be hampered by paper work or material in process.  

While it is important to process all sales orders, stock receipts and customer returns in a timely manner, it is
not always possible to complete all paperwork before starting the cycle count for the day. For this reason, the shelf count must sometimes be adjusted before it is
compared to the on-hand quantity in the computer. While the specific adjustments will vary depending on when quantities are updated in your computer, there are some general rules to follow, and some situations to look for:

• Sales orders that have been filled, but have not been confirmed in the computer. The confirmation process reduces the on-hand quantity in the computer by the quantity shipped on the sales order. If a customer order or outgoing transfer has been filled but not confirmed, the quantity shipped of the item must added to the quantity physically counted before that amount is compared to the on-hand figure in the computer.

• Stock receipts entered in the system, but not yet placed in the proper bin location. Again the quantities on these stock receipts must be added to the counted quantity before being compared to the on-hand amount in the computer.

• Stock receipts placed in the proper bin location, but not yet entered in the system. These amounts must be subtracted from the counted quantity before that amount is compared to the on-hand quantity in the computer.

“Floating” paperwork is the most common reason for cycle count discrepancies. To facilitate the count process, it is a good idea for counters to receive a list of open transactions for the items being counted each day.

Advantages of Bar Coding Equipment
Bar coding equipment speeds up the both physical inventories and cycle counting. There are two basic types of bar coding equipment, standard equipment where count information is temporarily stored in the bar code reader/collection device, and radio frequency or “RF” devices which immediately transmit data to your computer as it is entered.

When using bar code equipment, the counter simply scans the bar code label on the shelf, and keys in the on-hand quantity. Note that in the hard-goods distribution industry, shelves or bins are usually bar coded, not the individual pieces or boxes of each product.  

At first glance, bar coding may seem like nifty new technology, but hardly worth the cost of the necessary equipment and computer software. However, the implementation of bar coding can lead to major savings of time and money! In addition to faster counting, benefits result from the fact that count quantities do not have to be manually re-entered into the computer. Instead, the count information is electronically downloaded from the bar coding device into your computer system and your inventory records are automatically updated. Not only does bar coding speed up the counting process, but it eliminates the possibility of human data entry errors as the information is loaded into the computer.

In fact, when radio frequency bar coding equipment is implemented throughout a distributor’s order filling and stock receipts processes, cycle counts can usually be conducted anytime — even in the middle of your business day! How is this possible?

When every warehouse person has a RF bar code reader, all material movement is instantaneously transmitted to the computer. It is possible to maintain an accurate shelf count quantity in the computer, in addition to the traditional on-hand amount. Whenever a new shipment is placed on the shelf, the computer is immediately notified. And, as material is removed to fill an order, the shelf quantity in the computer is reduced.
As a result, when cycle counting takes place, the computer knows exactly what to expect to find on the shelf. No paperwork reconciliation is necessary.

Although RF equipment still represents a sizable investment, it is becoming an option for more and more distributors. If you are in the process of looking for a new computer system, be sure it has the capability work with RF bar code equipment.

Well, with these four articles, you now have the knowledge necessary to conduct physical inventory and cycle counting programs to maintain accurate stock balance information in your computer. If you think cycle counting is not worth the trouble, you need to reflect on the value you place on your stock inventory. After all, some people feel that it’s actually worth some money . . .  CS

Jon Schreibfeder is president of Effective Inventory Management, Inc. (EIM) of Coppell, TX. Author of the Effective Inventory Management Guide series, Jon offers seminars on inventory management and works with individual distributors throughout North America. He is STAFDA's designated Inventory Consultant. More information can be obtained from the EIM Web site: or by calling Jon at (972) 304-3325 or fax (972) 393-1310.