Cycle counting is the process of verifying the on-hand quantity of a specific number of stock products every day. In previous articles, I have described how to set up and maintain an effective cycle counting program and why this process is usually better than a full physical inventory for maintaining an accurate perpetual inventory in your computer system. But verifying on-hand quantities is only one of the advantages of cycle counting. The other benefit of a cycle counting program is to improve your business processes, including:

  • Making sure that all material movement is properly recorded.
  • Ensuring that stock receipts are put away in the proper location.
  • Verifying that the right quantity of the right item is shipped on outgoing orders or is pulled from stock for an assembly.
  • Preventing shrinkage from theft and the mishandling of stocked items.

Process improvement results from carefully analyzing significant stock discrepancies. A discrepancy is the percentage difference between the actual quantity physically counted and the stock level in the computer system at the time of the count:

[Absolute Value of (Quantity Counted – Current Stock Level)] ÷ Current Stock Level

Including the “absolute value” of “Quantity Counted – Current Stock Level” in this equation signifies that a discrepancy should be analyzed if significantly more or less inventory is found during the cycle counting process. For example, assume that a distributor has a cycle count tolerance percentage of 5%.

Note: Most distributors, manufacturers, and retailers use a cycle count tolerance percentage of 2% – 5%. The percentage may vary by item. Inexpensive items that are stocked in bulk quantities should have a higher tolerance percentage than expensive items that normally have few pieces in stock.

This means that any actual count that is more than 5% greater or more than 5% less than the current stock level should be analyzed and investigated:

Many distributors will also investigate discrepancies if the difference in monetary value between the stock level and the counted quantity exceeds a certain number of dollars.

Investigating cycle count discrepancies can uncover procedural mistakes made in your warehouse, including:

  • Wrong quantity taken to fill an order.
  • Wrong product taken to fill an order.
  • Products filled from the wrong stocking location.
  • Stock put away in the wrong bin location.
  • Units of measure confused or misrepresented.
  • Data entry errors.
  • Damaged material mixed with good stock.
  • Material movement not properly recorded.

Let’s discuss some of the things that can indicate these specific reasons behind inaccurate stock levels, and actions you can take to improve material-handling policies and prevent future stock discrepancies.

Wrong Quantity Taken to Fill an Order

Indicator:

  • There is no offsetting quantity of a similar inventory item.

Actions to Take:

  • Review recent transactions. Did the order picker(s) count out the pieces to be shipped, or did he or she ship sealed cartons?
    • Are specific pickers associated with frequent discrepancies?
    • Can you detect a pattern of sealed cartons from a specific vendor not containing the proper quantity of a product?
  • Make sure employees know how to properly measure or count quantities to fill orders.
  • Allow only certain employees to fill orders for hard-to-count items.
  • “Spot check” quantities in sealed containers from questionable vendors.
  • Increase the frequency of cycle counting these items.

Wrong Product Taken to Fill an Order

Indicators:

  • There is an offsetting quantity of a similar item.
  • There is an offsetting quantity of an unrelated item in a nearby bin location.
  • There is an offsetting quantity of an item that is normally substituted for this item.

Actions to Take:

  • Monitor how often each picker makes this type of error.
  • Ensure that bin locations and/or products are clearly marked.
  • Do not store very similar items next to each other. If items have long or complicated vendor part numbers, consider adding a four-character randomly generated identification number to the description of the item and place the same number on the bin. This will help pickers verify that they are picking the right item.
  • Train employees in the differences between similar items.
  • Simplify the process of recording when one item is substituted for another.

Products Filled from the Wrong Stocking Location (in systems where quantities are maintained by bin location)

Indicator:

  • There is an offsetting quantity of the item in another location that contains the same product.

Actions to Take:

  • Emphasize the importance of filling orders from the proper bin location.
  • Increase the frequency of replenishing stock in the primary bin location from bulk storage – that is, don’t give pickers the opportunity to pick the item from the wrong location.

Stock Put Away in the Wrong Bin Location

Indicators:

  • There is an offsetting quantity of the item in another bin containing the item.
  • There is an offsetting quantity of the item in a bin assigned to another product.
  • A bin location contains a quantity of this or another item that belongs in another bin.

Actions to Take:

  • Ensure that your most experienced warehouse people are assigned to receiving, stock put-away, and verifying the accuracy of picked orders.
  • Have new employees pick orders under careful supervision.
  • Ensure that bin locations are logically assigned and well marked.
  • Establish a “no-fault” area in your warehouse. If an employee does not know where material belongs, he or she may place it in the no-fault area. Every day, an experienced warehouse person puts away any material that has been placed in the no-fault area.

Unit of Measure Confused or Misrepresented

Indicators:

  • The count quantity matches the stock level expressed in a different unit of measure.
  • The product involved is purchased in one unit of measure and is issued in a different unit of measure.

Actions to Take:

  • Instruct all employees in the difference between the purchasing and issuing units of measure.
  • Place a warning message in the bin containing the item emphasizing the proper issuing unit of measure.
  • Data Entry Errors

Indicator:

  • An actual count quantity agrees with the stock level but was incorrectly entered into the computer system.

Actions to Take:

  • Provide more training in data entry.
  • Use a method like “check digits” to verify that data is being correctly entered into the system. For example, the operator might have to compare the sum of the count quantities listed on the cycle count sheet to the sum of the quantities he or she has entered into the computer system.
  • Record material movement with bar code readers, eliminating the need for manual data entry.

Damaged Material Mixed with Good Stock

Indicator:

  • The count is accurate, but some or all of the material is not in usable condition.

Actions to Take:

  • Simplify the procedure for separating damaged material from “good” inventory.
  • Discuss with employees the importance of properly identifying and accounting for damaged stock.

Material Movement Not Properly Recorded

Indicator:

  • You have no idea why material is missing.

Actions to Take:

  • Ensure that you have documented procedures and paperwork for every type of material movement. Ask employees to think of ways material can be removed from stock without being properly recorded. And whenever possible, simplify the process of recording transactions.
  • Conduct a security check of your warehouse. Determine how easy is it for employees, customers, and/or outsiders to remove material without the proper paperwork and without being detected.
  • Establish an unbreakable policy: No material ever leaves your warehouse without the proper paperwork. Violating this policy is grounds for immediate dismissal or arrest.

It is impossible to achieve effective inventory management without accurate stock levels in your computer system. A comprehensive cycle counting program is a valuable tool for ensuring that the quantities in your computer system agree with what is physically in the warehouse. But to be certain that stock levels remain accurate over time, you must investigate significant stock discrepancies and take corrective action to prevent similar problems from reoccurring in the future – that is, you must utilize cycle counting to improve the way you run your business!

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