Is Cycle Counting Right for Your Company?
As another year end is fast approaching, does your stomach start to turn at the idea of shutting down your facility for days at a time to perform an annual physical of your inventory? Does the thought of re-training new staff to count product that they are not familiar with make your head spin? Do you want to crawl under your desk at the thought of the countless hours that will be spent investigating discrepancies? What about the unrest you may feel not knowing just how big the year-end adjustment may be to “that number” on your balance sheet that drives so many decisions for your company? As you dust off the physical inventory manual and prepare for the daunting task ahead, maybe it is time to consider if Cycle Counting your inventory is a better approach for your company.
It is common business practice, if not a required audit procedure, to perform at least an annual count of your inventory in order to ensure the accuracy of your inventory. In order to optimize business operations managing inventory is key. The goal is to find the most cost effective and efficient manner to get the data you need to manage customer expectations and analyze key business indicators to make future business decisions.
Physical inventory is the process of counting 100% of your inventory at one point in time and reconciling to the perpetual inventory counts in the system. Typically most companies will perform their fiscal inventory counts toward the end of the year to verify the accuracy of the on-hand quantities for financial statement reporting requirements.
Cycle Counting is the periodic counting of all individual inventory items throughout the course of the year. Inventory is broken down into “classes” based on value or number of inventory turns. Items considered more critical are counted more frequently throughout the year. Typically counts are done daily to weekly at a minimum. Variances are investigated based on thresholds determined by the company.
When looking to make a decision about which method is the best for your company, one would want to consider the following:
1. Is your current accounting systems capable of running a cycle count process (selection of samples, analysis of discrepancies)?
2. Do you experience a high degree of accuracy in your inventory with minimal errors?
3. Will more frequent measures of inventory help you better manage inventory levels and meet customer demand? AND, better your cash flow position?
4. Is shutting down once a year affecting your customer service /delivery; in effect costing you money?
5. Do you have confidence that adequate controls can be designed and implemented to ensure the validity of
i. Test counts?
ii. Classification of items?
iii. Investigation of variance and recounts?
iv. Sample selection?
The upfront costs to change to a cycle counting method can be an expensive process. However, in many cases, the benefits of cycle counting outweigh the costs of performing an annual physical inventory. The first step in determining this is to come up with a measurement tool to help your company decide if a change in methods will be worth the investment.
No matter what method of inventory tracking you consider, one thing that remains consistent is that the key to a reliable and efficient inventory count involves proper planning, documented procedures, adequate training of employees, and persistent follow-up for discrepancies.