Although the costs of an inaccurate inventory can be immense, they are also difficult to quantify. And in all too many cases, making the effort of cycle counting can seem like putting lipstick on a pig. The best cycle-counting program in the world can't make up for a casual or undisciplined approach to inventory accuracy in everyday operations.

There are two obvious and enormously powerful benefits to cycle counting. One is to ensure the ongoing accuracy of the book inventory records. The second is the opportunity to eliminate one of the biggest hassles in the distribution world: physical inventories. Jon White, VP of operations at online music supply company Musician's Friend, says that cycle counting is no longer optional.

In the face of day-to-day operations, cycle counting is among the first tasks to be put aside when things get hectic. Ironically, that is exactly when keeping track of inventory is more important than ever. The likelihood of inventory being misplaced or mislabeled is exponentially higher during peak periods than when business is slow.

There are several options for establishing a cycle-counting schedule (see table on page 12). The most common by far is some sort of ABC ranking based on item activity that counts the busiest items the most frequently. A typical cycle-counting schedule based on activity would schedule A items four to six times per year, B items three or four times per year, and C items once a year. Some companies count A items as often as once per month.

While this is the right place to start, there are inherent dangers in cycle counting solely by product. For one thing, product ranking will change throughout a season, invalidating the previously established schedule. But the bigger problem with scheduling cycle counts by item is that in most warehouses, the stock for any given item is located in several places throughout the warehouse. These counts are taken by checking all the locations where the system shows that product is located. So by definition, the counters are looking only where the system expects the stock to be.

But your mission is to correct the system. If you are looking only where the system directs, then you are not looking in other places where the item in question could quite possibly be inadvertently located. It's an incomplete exercise, since the most common error found in cycle counts is an item in the wrong location.

The best basis for a cycle-counting program, therefore, is to include counts by both item and location. If I had to pick only one basis for a cycle-count schedule, it would probably be location. Although this does not address item velocity, it is the most accurate, most easily controlled, and most quickly executed method. Some operations can do a location cycle count of the entire facility in as few as one-week rotations.

The easiest part of any inventory is counting. Anybody can do that. You won't be off by a more than a few pieces. By far the most mistakes are made when the product has not been properly identified, located, and prepared for the inventory. You should precede every cycle count with appropriate notices, housekeeping, and a walk-through by the inventory supervisor. This prep should include verification of the following:

• All picking tickets accounted for and shipped
• Pick location organized
• Stock moves complete
• Cases sealed and marked
• Receiving and returns putaway
• Visual inspection of assigned and adjacent locations

A typical result of a cycle count is to find more stock on the shelves than the system expects. The most common explanation for this is that clerks are quick to make negative adjustments when stock cannot be found by pickers, stock handlers, or cycle counters. Unfortunately, they often make these adjustments before the shortage has been researched, and the goods are more than likely somewhere else in the building, waiting to be found in subsequent location cycle counts or physical inventories.

Keep Count

Program Factor	Description
ABC demand ranking	Items ranked by sales activity Most popular items counted most frequently
Location	Counts scheduled by location ranges, not by item Usually whole rows or sections
Exception spot checks	Locations automatically flagged by system based on low stock, backorders, not-in-location errors, etc.
Verification request	Spot check requested by product manager, inventory control, or customer service

Many operations, with the best of intentions, enter corrections as quickly as possible. However, several of the top distribution managers we work with report that as much as 95% of their initial cycle-counting discrepancies are accounted for within two to four weeks by a corresponding mismatch in a subsequent count.

To address this problem, these firms are extremely careful about what corrections they make at the time of the cycle count. Rather than immediately entering the stock adjustments to the inventory balance, the quantity or carton in question is transferred to an imaginary, non-allocatable location in the system. The stock in question still reflects on the books, but cannot be used to fill orders.

The first place to look when a discrepancy appears in a location count is in the active picking location — cartons may have been moved to picking that were never adjusted out of reserve. The next place to look is in nearby locations in the reserve area — it is quite common for a stock handler to move one box while retrieving another, but never return the first. Also, a carton may have been listed and adjusted for a stock move, but never actually moved. And in manual operations, the data entry process is prone to delayed, lost, or inaccurate entries.

When reporting inventory accuracy or variance many companies talk about the net results of the actual physical inventory against the book balance; in other words, the net sum of all the overstocks and shortages. Typically, this varies by 0.5% to 1.5%. While this may be acceptable for financial purposes, it is not acceptable for managing inventory. Under these rules, one SKU could have an overage of 100 pieces while another has a shortage of 100, but the net result would be perfect.

To get an accurate number, you should also track the absolute or gross variances of the count. The true variance is the absolute value of the discrepancy. In the example above, the total variance would actually be 200 pieces, not 0. Many companies don't even look at the gross variance, because it can be scary. It is not unusual to have net results of a cycle count in the 1% range, while the gross variances are in the 10% range or higher.

Effective inventory management depends on how tight your overall operating process and environment is. John Hecker, distribution manager for Somerville, NJ-based optics distributor Viva International, says that the biggest result to come out of that company's cycle-counting program is an awareness of training issues. The types of discrepancies found are almost always attributable to shortcuts, carelessness, or lack of process knowledge by stock handlers and pickers. As Viva increases its training for the basic stock-handling functions, the cycle counts are reflecting a more accurate inventory.