- Author, Ron Ketterling
Staying on top of inventory is an extremely important factor in keeping your manufacturing or distribution business on track. Establishing systems to increase employees ability to put items in the correct locations has its rewards. If you use the ABC Cycle Counting method, we have a few tips you can use to increase effectiveness.
In the old days many companies would perform an inventory count once a year. They would completely shut down the warehouse to determine the true balance of goods vs. what the software system showed. While this allowed companies to maintain some level of accuracy – it was not the most effective solution. Thankfully there have been significant advances in this area. The adoption of cycle counting offers a much more effective way to manage stock levels on an ongoing basis.
What is Cycle Counting?
Cycle counting is a process by which your organization counts and verifies inventory on an ongoing basis throughout the year. This offers several benefits:
- Consistently more informed about your inventory.
- Quickly correct any issues that creep up before they cause larger problems.
- Increased efficiency at counting as you are doing it more often and refining your techniques throughout the year.
We completely agree that cycle counting is a much better option than the old yearly inventory count. However, we want to highlight some of the weak areas of the strategy and offer an alternative.
What is the ABC Cycle Counting Method?
The ABC Method is based on Pareto’s Principle which concludes that 80% of the results of any process are produced by 20% of the contributing factors. This translates in the distribution industry to say: “20% of your inventory items are responsible for 80% of your sales.”
The ABC style of Cycle Counting directs a company to first break down their inventory items into the following three categories:
- A – High Volume/Turnover/Sales which should equal around 20% of goods
- B – Mid Volume/Turnover/Sales which should equal around 60% of goods
- C – Low Volume/Turnover/Sales which should equal around 20% of goods
Once the items have been assigned a category, you then count them as often as needed based on their level of turnover; counting “A” items more often, and “C” items less often. The idea behind this method is that “A” items move more so there is a higher chance of unbalance. With less movement among “B” and “C” items—there is less chance for unbalance. Thus “A” should be counted more, and “B” and “C” less, often. For example—one may count “A” items monthly, “B” items quarterly, and “C” items twice a year.
Tip:
Like many distributors and manufacturers you may find that less than 5% of your items account for 70% to 75% transactions or dollar volume. Many distributors and manufacturers find their actual transaction volumes are different than what they believed them to be. Many times, the “noisy” items are not the profitable or most frequently moving items. A brief analysis of your inventory lets you focus on a much smaller number of items than the traditional Pareto 80/20 rule. You may also find that returns or warranty problems dramatically affect your number of transactions. An hour or two of analysis can show you how to save thousands of inventory handling dollars and warehouse space. We have developed special reports to help you analyze your inventory and are happy to help you implement these reports in your inventory system.
What’s wrong with the ABC Cycle Counting Method?
We love to see cycle counting in practice in a warehouse. However, the ABC method falls short because it does not count every bin in the warehouse. It only counts the products in the bins that you know the product should be in. If an item that should be in “A” bin was put in “C” bin—you may not find it for months! You may do an “A” cycle count and adjust inventory only to readjust it later when the product is found. By this time you purchased additional product “A” and may be overstocked, or the product is now dated and/or expired.
At Business Automation Specialists, we absolutely recommend cycle counting but prefer to have our clients count one aisle of inventory per day or week, in order to achieve the highest level of inventory count accuracy.
With this model, you could completely count the inventory in a 25,000 square foot warehouse once a quarter. (Considering the aisles are normal width and counting both sides of the aisle.) This method improves accuracy, minimizes trips to wrong or empty bins, and evens out the financial impact of inventory adjustments. If you’re interested in streamlining this even further, we recommend using a warehouse management system with barcode scanning handheld devices. Depending on your product mix, barcode scanning can reduce count times to as little as one hour per week.
If you would like to learn more about inventory management best practices that can improve your efficiency and productivity—please contact us today. We would love to hear from you.