Inventory control is an essential to any successful business, but it can be tricky to manage properly. Especially when you consider that the future of inventory management systems is constantly evolving.
"Effectively, ecommerce has gone from being this inventory-heavy, 'Let me store the packages, put them in a box, put a label on them, and send them to customers' to 'Let me watch the numbers move around on a screen.' It's just mind-boggling how that's all evolved," says Parag Mamnani, CEO and founder of Webgility.
If that's not enough, some reports suggest almost half of small businesses don't track their inventory. And the majority (37%) of the ones that do say stock issues are their biggest challenge, according to 2023 inventory management statistics.
And that's not surprising, given that issues like stockouts cost US retailers around $4.6 billion in 2021. These figures prove the importance of establishing efficient and accurate inventory strategies.
So if you haven't committed to a way to manage your entire inventory, consider adopting an inventory cycle count into your workflow.
Explore our comprehensive inventory cycle count guide to understand what that is, its benefits, and how to perform it.
What is a cycle inventory count?
In terms of inventory management, a cycle count is when a business counts its inventory at regular intervals. As a result, the company can accurately keep track of its stock and remain compliant with any applicable laws or regulations.
Most businesses build an inventory management plan to prepare for a cycle count. This plan includes setting up a schedule and figuring out what they should count and when. Once staff know what items to count, they can begin counting at scheduled intervals.
The frequency of cycle counts will vary depending on the business's specific needs. However, teams can do it weekly, monthly, quarterly, or yearly.
Why is cycle counting important?
Cycle counting is an important tool for accuracy. By regularly taking stock of your inventory, you can identify differences between the physical and digital records and take action to correct them.
A cycle count system can also help businesses understand what their customers are interested in for a given period, which can benefit a business just starting out.
"It's very prudent for newer businesses to be thoughtful about not overextending themselves, waiting for the demand to come in, and understanding what that change in consumer behavior is before starting to pile up," Mamnani says.
Additionally, cycle counts ensure that you will have enough stock when customers order products. As a result, you maintain customer satisfaction, reduce shrinkage due to expired or damaged products, and save money by only producing or ordering what they need.
How accurate are cycle counts?
Cycle count accuracy depends on the quality and consistency of your method of cycle counting. A well-executed count should provide an accurate picture of your inventory. But it's important to understand that there may be discrepancies between the physical and digital records.
For the most accurate results, sellers must have reliable processes for counting and recording their inventory. The easiest way is to set up a system to track your inventory in real time as it moves through your warehouse or facility.
This system allows you to count and record your products quickly and accurately when you receive and ship them.
How do I perform inventory cycle counts effectively?
The first step to creating an effective cycle counting process is determining the frequency of the counts. Depending on your business needs, this can range from daily cycle counts to annual counts.
You should also decide on a method for counting your inventory, such as random selection or ABC analysis. A record-keeping system allows you to identify discrepancies between physical and digital records easily.
Once your cycle counting process is in place, regularly review your results and take any corrective action. This action includes updating your digital records, implementing a restocking system, or investigating discrepancies and errors further.
Cycle counts vs. physical counts
While physical counting has been the standard for inventory accuracy, cycle counting offers a more cost-effective and efficient alternative. More businesses want a more agile and flexible approach to inventory management. That makes cycle counting the preferred method for many sellers.
It is important to understand the differences between cycle counts and physical counts. Knowing which method is the right fit for your business will help you determine the best approach to inventory accuracy.
Physical inventory count
A conventional physical inventory count involves a business setting aside several days to manually count all of its inventory, which can be time-consuming, resource-heavy, and labor-intensive.
But the accuracy of a physical count is generally very high, as it allows staff to get an up-close-and-personal view of each item and take accurate stock of their inventory. However, this method can be costly and disruptive as it typically requires an operational shutdown.
Full cycle counts involve regularly taking smaller samples of inventory, which can provide a more accurate picture of your stock over time. There are many different cycle count methods, including random selection and ABC analysis.
Businesses can complete cycle counts during normal business hours weekly, monthly, quarterly, and even yearly. The frequency of the counts will depend on your specific business needs.
Overall, cycle counting at regular intervals is typically the preferred approach for maintaining accuracy and compliance.
6 cycle count methods
Cycle counting comes in many forms. The right method will depend on your business needs, warehouse, and the type of inventory you deal with.
A good rule of thumb is to select the method that requires minimal disruption to operations and allows you to gain the most accurate picture of your inventory.
1. ABC analysis
ABC analysis is the most popular counting technique among sellers who manage sale items in-house. It involves grouping items by the value they provide to your business.
"A" items typically receive more frequent counts than "B" and "C" items. ABC analysis uses the Pareto Principle (or 80-20 rule), where a small percentage of items comprise the majority of inventory value.
"A" items, for instance, account for 20% of your inventory but make up 80% of your sales. Meanwhile, "B" items may take up 30% of your inventory but only 15% of your sales, while "C" items make up 50% and 5% or less in sales.
2. Bin sequence counting
Bin sequence counting is another type of cycle count and involves dividing your space into sections and counting them sequentially. As a best practice, randomize the order in which teams count bins so that all products are counted with equal frequency and accuracy.
Bin sequence counting works best when you have clearly defined and organized sections in your warehouse.
3. Random sample counting
Random sample cycle counting involves randomly selecting a sample of products from your inventory and counting them. Use this method when you have many items in your inventory, as it eliminates the need to count every single one.
4. Control group counting
Use the control group counting method to count a small group of products you monitor constantly. Focus on counting control groups multiple times for the greatest accuracy.
This method is useful for tracking trends in your inventory and understanding how market or product demand changes affect your inventory levels.
5. Opportunity-based counting
Opportunity-based counting is a method that uses specific events or opportunities to count inventory. For example, staff can conduct a count when they ship or receive products. This method works for businesses with limited staff or resources, as teams can conduct counts in conjunction with other activities.
6. High-use inventory counts
Lastly, businesses with large inventories can choose to count only high-use items. This method focuses only on the most frequently used items, as they are most likely to show discrepancies in the records.
How to complete a cycle count for inventory management
The steps for completing a cycle count will vary depending on your chosen method. But there are six general guidelines you can follow.
1. Create a detailed plan
Don't count inventory without a plan. Establish clear procedures and designations for who will be responsible for counting each item, group of items, and locations.
2. Review your database
Start with an accurate and up-to-date inventory database. Reviewing a database can ensure that the results of your count are consistent with existing records.
3. Establish a reliable system
Determine the best method for securely storing and tracking your counted inventory. This step helps create a reliable system you can use for future counts.
4. Count and record
Now it's time to begin counting and recording your results. Make sure that all staff involved in the count understand their role and responsibilities.
5. Verify for accuracy
Once your team completes the count, verify that teammates have accurately recorded all results and addressed any discrepancies.
6. Adjust and repeat
Once you've completed the cycle count, adjust your inventory records as needed and repeat the process regularly.
Mamnani agrees that understanding the different inventory management strategies and methods can make a huge difference.
"If anything, sellers today need to understand the different techniques and get smarter about inventory management strategies," Mamnani says. "Fortunately, lots of great inventory management solutions can give you some guidance. But this is where analytics becomes critical."
Inventory cycle count procedures sample
If you're conducting your first cycle count (or experimenting with a new counting technique), follow this procedure sample.
The sample is a starting point for handling regularly scheduled cycle counts with indicators for what to do when you complete each step or encounter an error.
1. Decide where you’re tracking your physical count, digitally or on paper.
2. Distribute your means of counting to your team via printout, tablet, or scanner.
3. Begin the initial count.
4. Enter the initial count into your system.
5. Report any discrepancies in your count.
5a. If you don’t encounter discrepancies, submit your count and complete the cycle.
5b. If teammates encounter discrepancies, distribute recount documents to them.
6. Repeat the recount process until teammates can clear up discrepancies
7. Submit the count and complete the cycle.
Benefits and purpose of cycle counting
While keeping accurate inventory records is essential for any business, there are five major benefits of a cycle count:
- Saving money by improving inventory accuracy and forecasting.
- Reducing inventory shrinkage due to expired and damaged products.
- Providing data to inform purchasing decisions.
- Reducing costs associated with over-ordering and under-stocking.
- Improving customer satisfaction by avoiding out-of-stock situations.
How beneficial cycle counts can be will depend on the specific needs of your business. However, they are valuable for maintaining accurate inventory records and customer satisfaction.
Inventory cycle count best practices
Cycle counting isn't just about knowing how much you have of each item. Keep these best practices in mind to obtain accurate and reliable results:
- Establish a method for counting your inventory and create a plan for when and how your team counts.
- Put a dedicated team member in charge of the process.
- Track and record all results to identify any discrepancies.
- Take corrective action as needed to address any issues.
- Regularly review your cycle count results and adjust as needed.
Remember that cycle counting is an ongoing process and requires regular maintenance. Your team members must know their roles and responsibilities and follow the established procedures.
Automating your cycle count
Webgility's multichannel inventory sync software can help streamline and automate the counting process by connecting your online stores and POS to QuickBooks. Instantly track and sync orders, inventory quantities, and prices across all stores, marketplaces, and big-box trading partners.
Never lose track of items available. Each time a customer places an order, the software updates each item's count in every connected store or sales channel, alerting you when items are low so that you always have popular items.
Automating your inventory can save time and improve accuracy for when it's time to conduct a physical or cycle count. By understanding the importance of cycle counting and implementing an effective process, you can keep your inventory accuracy high and your customers happy.