Staying on top of inventory is an extremely important factor in keeping your manufacturing or distribution business on the right track. From holding employees accountable to put items in the correct locations, to reducing loss and theft – paying close attention definitely has its rewards. In the old days many companies would perform an inventory count once a year – completely shutting down the warehouse (or working through the weekend) in order 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, in the last decade there have been significant advances in this area namely with the adoption of cycle counting, which offers a much better and 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:
1. You are consistently more informed about your inventory.
2. You are able to quickly correct any issues that creep up before they cause larger problems.
3. You become more efficient at counting as you are doing it more often, and refining your techniques throughout the year.
Recently, we came across an article discussing the benefits of cycle counting. While we completely agree that cycle counting is a much better option than the old yearly inventory count; we are not in favor of the ABC method that is most often recommended to distributors – and was also encouraged in the article we read. We wanted to take this opportunity to discuss this method, and highlight some of the weak areas of the strategy.
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.”
When implementing the ABC style of Cycle Counting a company is directed to first break down their inventory items into 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.
…and then count them according to their category, counting ‘A’ items more often, and ‘C’ items less often. The idea behind this is that with more movement among ‘A’ items, and less movement among ‘B’ and ‘C’ items – there is a greater likelihood of unbalance within category ‘A’ than category ‘B’, and even less for those in category ‘C’, and thus ‘A’ should be counted more, and ‘B’ and ‘C’ less, often. As an example – one may count ‘A’ items once a month, ‘B’ items once a quarter, and ‘C’ items twice a year.
Tip: If you are 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 that the actual transaction volumes are different than what they instinctively believed them to be. Many times the “noisy” items are not the profitable or most frequently moving items. A brief analysis of your inventory may let 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 could save you many hundreds of hours of employee time, many thousands of inventory handling dollars and a lot of warehouse space. Ask us about the special reports we developed to help you analyze your inventory.
What’s wrong with the ABC Cycle Counting Method?
While we always love to see cycle counting in practice in a warehouse, we think that 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. However if an item that should be in ‘A’ bin was incorrectly put in ‘C’ bin – you may not find it for months! You may do an ‘A’ cycle count, and adjust inventory only to have to readjust it much later when the product is eventually found. However by this time you may have purchased additional product ‘A’ and may be overstocked, or perhaps 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 (depending on the size of your warehouse), in order to maintain the highest level of inventory count accuracy. With this model, you could completely count inventory housed within a 25,000 square foot warehouse once every quarter. (This assumes normal aisle width, not narrow or very narrow aisle configuration, counting both sides of the aisle.) This method improves inventory record accuracy, minimizes trips to wrong or empty bins, and evens out the financial impact of inventory adjustments. For those interested in streamlining this even further, we recommend implementing a warehouse management system with barcode scanning handheld devices which, depending on your product mix, can reduce count times to as little as one hour per week with large bulk items.
If you are interested in speaking with us to learn more about inventory management best practices that can improve your overall efficiency and productivity – please contact us today. We would love to hear from you.