Cycle Count or Physical Inventory?

Should I conduct 100% physical inventories or cycle count (or both)?

Taking inventory

mapodile/Getty Images

My definition of optimized supply chain management goes something like, “getting your customers what they want, when they want it—and doing it by spending as little money as possible.” A very crucial part of optimizing your supply chain includes controlling your inventory. Your inventory accuracy objective should be 100% and if you’re not consistently at greater than 99%, you need to put your desk in the middle of the warehouse until you are.

Okay, let’s assume you agree that you need to have 100% inventory accuracy. How do you measure what your inventory accuracy is right now? You need to start by counting 100% of your inventory—whether that’s 50 SKUs of 15,000 SKUs. You might think that this sounds like a painful process and if your company’s not done it (or done it well) before—it is. But like they say in tattooing, you’re not going to get your desired result without some pain.

There are two ways to count your inventory—to assess your accuracy. 

Floor-to-sheet. Count everything you have in inventory, then compare that to what your system thinks you have.

Sheet-to-floor. Take the data from your system out into the warehouse and compare it to what you find. 

Floor-to-sheet is the scarier way to go and forces you to be more diligent in your counting. I recommend starting with a floor-to-sheet count and reconciling it against a sheet-to-floor count. 

Once you complete your physical inventory, you now have a starting point. Some companies don’t count their inventory again until their next physical inventory – sometimes a year later. I do not recommend this approach.

Cycle counting helps maintain inventory accuracy throughout the year and can be handled a couple of different ways. How you handle cycle counting will depend on your number SKU’s, the value of your inventory and whether or not you have the resources to commit to inventory accuracy. 

If your company has 1200 SKU’s to manage, you could choose to cycle count 100 each month, which means counting approximately 5 SKU’s each business day. One or two people can generally do that on a part-time basis. This approach allows you to count every one of your SKU’s during the year. If managed and controlled correctly, this method of cycle counting will help next year’s physical inventory go smoothly. Some companies that employ this cycle counting methodology do it instead of an annual inventory. I recommend doing both. 

If you have more SKU’s that you can count during a year of normal cycle counting or if you don’t have the people to commit counting everything, you can choose to cycle count only your high-value SKU’s. Usually, 20% of a company’s inventory accounts for 80% of its total inventory value. (This 20% is sometimes called your “A” inventory.) If you can’t cycle count 100% of your SKUs during the year, consider cycle counting your “A” inventory. You’ll still be ahead of the game when it comes time for next year’s physical inventory.

Some key points when considering cycle counting: 

Count the SKU’s randomly. Most MRP or WMS systems (I know the S in WMS stands for “system”) have a cycle count module that provides random SKU’s on a daily basis. A random count helps prevent your warehouse folks from manipulating the SKU’s that are going to be counted. 

Keep segregation of duties in mind. Your cycle counters shouldn’t be the same folks who handle your inventory every day. This helps keep the process and the data clean. 

So, yes, to the question of cycle count or physical inventory—the answer is both. And by following the steps above, you can do that with negligible impact to your day-to-day operations. Indeed, following the steps above will improve your day-to-day operations and get you on your way to optimizing your supply chain.