Cycle Counting to Improve Your Bottom Line
An inventory count is an annual rite for many manufacturers, but others have replaced that ritual with an ongoing cycle count - and improved operations at the same time. Cycle counting is the process of counting some stock items or warehouse locations every day.
What and how often to count
A successful cycle counting program should be ongoing to provide you with a perpetual, accurate picture of your inventory. You may decide to count certain units 10 times a year and other units five times a year, or to divide the counts among raw materials, finished products or work in progress.
In addition, you may want to count some critical raw materials every day or once a week; other slow-moving finished goods may need to be counted only once or twice a year. Regardless, cycle counting should become an accepted and routine part of your continuous improvement process.
To decide how often to count items, establish their importance to your operations. Classify inventory items as A, B or C according to their rank by annual usage in dollars.
If your orders (not actual deliveries) for a certain item represent $15,000 in annual usage, for example, that item will rank higher than an item with only $5,000 in annual usage. Class A items are those in the top 80% of total value, while the next 15% will be Class B items, and the remaining 5% will be C items. The items you categorize as Class A may change according to usage, but the percentage of Class A items should remain constant.
When you've ranked your inventory items, decide how often to count them. You may decide to count your A items every month, B items every quarter and C items annually. That doesn't mean you count all the A items on the same day every month. Rather, you count some A items every day of the month. Let's say, for example, you have 1,000 A items to count each month. Over the course of a year, that translates to 12,000 counts. If you work 240 days a year, you'll need to count 50 A items per day.
If you also have 1,500 B items to count every three months, that translates to another 6,000 counts per year, or 25 per day. Thus, every day you'll count 75 items - plus however many C items are required to ensure that every C item is counted once a year.
Reliable inventory records
Cycle counting can eliminate many of the errors associated with annual counts, and you can rely on your inventory records. If a customer wants 500 of a certain item in three days, you know at a glance whether you have it in stock. And improved customer service translates to increased revenues.
In addition, it costs less to maintain accurate records than it does to find and correct errors in existing records. If you want to discuss the potential benefits of cycle counting, contact Mike Ziembo at mziembo@badencpa.com or 260-969-2528.
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Mike joined Baden, Gage & Schroeder in 1995. He provides clients with audit, accounting, income tax, budgeting and cash flow projections, merger and acquisition, technology enhancement and profit improvement services. He is a member of the firm's Manufacturing Services Group and provides services to manufacturing, distribution and service industry clients.
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