Cycle Count vs Physical Count

Cycle count vs physical count is a comparative analysis of two methods of counting inventory, and how and when they should be implemented. Precise inventory data plays a pivotal role in the success of a business as it directly impacts various aspects ranging from customer satisfaction to financial management. Inaccurate inventory counts lead to diminished service quality, decreased efficiency, and reduced profitability. Such discrepancies hinder companies’ ability to forecast effectively, often resulting in either excessive inventory orders or insufficient stock to meet customer demands.

Nevertheless, maintaining precise inventory records presents its own set of challenges. Traditionally, many businesses have relied on labor-intensive periodic physical inventory checks, which can disrupt daily operations. However, an increasing number of companies are transitioning to a more adaptable and efficient method known as cycle counting. While certain accounting standards and tax regulations necessitate annual or semi-annual physical inventories, this article examines cycle count vs physical count thoroughly, aiding in the selection and implementation of the most suitable method for individual company needs. 

What is a Physical Count?

During a traditional physical inventory check, a company allocates multiple days to tally each item in its inventory, spanning all storage facilities and other designated areas. This process yields a thorough count, serving as a vital mechanism to verify that the inventory reflected in the warehouse management system precisely matches what is physically present on the shelves.

Typically conducted on a yearly basis, physical inventory checks are primarily scheduled annually due to their significant time requirements and potential disruptions to business operations. In practice, these counts often necessitate the temporary suspension of activities such as shipping and receiving for the duration of the count. Even with the utilization of technologies like radio frequency (RF) tags or other inventory-scanning methods, physical counts remain exceedingly labor-intensive.

Historically, companies have regarded annual physical inventories as essential for commencing a new fiscal year equipped with accurate inventory data, enabling them to adjust their financial records and make informed business decisions. Entities with smaller inventory volumes often find the logistical demands of annual counts manageable and therefore see little incentive to deviate from this practice.

What is a Cycle Count?

In a cycle counting system, the company consistently conducts small-scale inventory checks, ensuring that all items are eventually accounted for within a specified timeframe. Employing sampling methodologies akin to those employed by survey researchers, companies extrapolate their findings to obtain progressively more precise insights into their overall inventory status. Upon initiating cycle counting procedures, companies might intentionally repeat counts of the same items to assess consistency among different counters. This practice aids in pinpointing and rectifying any issues in counting techniques, thereby promoting the adoption of best practices across the board and ensuring the delivery of precise inventory data.

Cycle counting is often conducted on a daily basis. For instance, if a company needs to assess 1500 SKUs within a six-week timeframe, it can achieve this by counting approximately four or five SKUs per day, thus covering its entire inventory. Some companies assign specific personnel to handle cycle counting duties, integrating it into employees’ regular job responsibilities.

To ensure the reliability and adequacy of cycle counting, companies typically collaborate with internal or external auditors. Over time, if cycle counting consistently proves accurate, auditors and accountants may deem it sufficient to replace full physical counts.

Companies have a variety of options when it comes to selecting cycle counting techniques, each with its own set of priorities dictating which items receive more frequent attention.

By sales: This method, also known as ABC Analysis, 80/20, or the Pareto Principle method, emphasizes counting items that contribute the most value to a warehouse. It follows the Pareto principle, which suggests that 20% of SKUs typically generate 80% of sales due to their high cost or frequent turnover. Companies categorize items based on their sales (A, B, or C) and conduct cycle counts accordingly, with more frequent counts for A and B items. It’s important to note that the categorization of items may change as business dynamics evolve.

By area: Another straightforward method involves organizing cycle counts based on the physical location of items. For instance, companies may count all items within a specific department, cabinet, floor area, or set of racks and bins.

By usage: This approach targets locations/SKUs that are frequently utilized that have seen movement in a specified period. 

Random counting: This method involves randomly selecting SKUs throughout the warehouse for sampling during cycle counts.

Hybrid approaches: Companies often develop customized practices by blending different methods to align with their priorities. Hybrid plans frequently combine ABC analysis with other techniques. For instance, items categorized as “A” may undergo more frequent counting, but software may randomize which ones are counted on a particular day. Alternatively, companies might prioritize specific categories or adjust cycle counts to accommodate seasonal fluctuations in the sales of certain items. 

Why Cycle Counting is Effective 

For numerous companies, cycle counting presents notable benefits compared to traditional physical inventory checks. Firstly, it poses less disruption. As only a fraction of the inventory is assessed at any given time, normal business operations can proceed uninterrupted. Cycle counting entails a smaller ongoing effort throughout the year, which is typically more manageable than a single extensive count at year-end.

With counts being conducted on a continuous basis, cycle counting can swiftly identify issues that might escalate if left unaddressed until the next comprehensive physical inventory check. Particularly in an era dominated by constant ecommerce transactions, this capability is increasingly significant. Additionally, companies can consistently monitor the accuracy of their inventory counts and refine counting methods or training protocols should any discrepancies arise.

Cycle Count vs Physical Count: What’s the Difference?

Although both cycle counting and physical counts share the common objective of ensuring accurate inventory data, they employ distinct methodologies to achieve this goal. These variances have an effect on everyday warehouse activities. Below is a comparative overview of both approaches:

Both inventory counting methodologies offer advantages for warehouse management. Annual physical counts typically involve a large-scale operation with limited flexibility and considerable short-term disruption to regular business operations. On the other hand, cycle counting is an ongoing process that seldom impedes other business activities. However, it necessitates regular attention and cannot be deferred for extended periods.

While physical counts provide certainty regarding inventory levels at the commencement of a new fiscal year, cycle counting better aligns with the needs of many businesses for enhanced flexibility, adaptability, and real-time information crucial for informed decision-making. For instance, companies conducting regular cycle counts of vital SKUs or manufacturing components can prevent unnecessary orders and allocate their financial resources more effectively.

It is vital that companies establish an approach that is disciplined and ensures adherence to schedules. Implementing cycle counting may entail coordination with accountants to guarantee the accuracy of counts, consistency in counting processes, and comprehensive coverage of inventory within the designated timelines.

Moreover, when discrepancies arise between cycle counts and physical counts, businesses have a timely opportunity to enact improvements before issues escalate. However, this opportunity is contingent on managers promptly identifying and addressing the root causes of the identified problems. For example, they may discover that certain items are more prone to loss, spoilage, or theft than initially anticipated, necessitating enhanced measures for safeguarding. Continuous improvement is facilitated through cycle counting.

Cycle Count vs Physical Count: What is the Best Way? 

With the expansion and increasing intricacy of warehouses and similar establishments, conducting annual physical inventory counts becomes progressively challenging, laborious, and expensive, thereby enhancing the comparative significance of cycle count vs physical count for businesses.

Certain companies adopt a blend of cycle counting and physical inventory checks. For instance, some retailers conduct cycle counts throughout the year, with a particular emphasis on high-demand items, followed by a comprehensive physical inventory check after the conclusion of the holiday season. Conversely, other businesses may opt for a final physical count to establish a robust baseline before transitioning to cycle counting methodologies. Deciding between cycle count vs physical count may sometimes not even be a choice. Regulatory requirements may necessitate an annual physical count. However, conducting periodic cycle counts reduce variance, i.e, the difference between book stock and actual stock, and helps complete the annual physical counts faster. 

Optimizing Your Counts with a Warehouse Management System

Implementing cycle counting is significantly simplified with a modern Warehouse Management System (WMS). Leading WMS platforms automate the cycle counting workflow, offering daily guidance to both individual counters and reviewers through user-friendly checklists and dashboards. Moreover, such software facilitates cycle counting using smartphones and other handheld devices, streamlining the process and enabling real-time updates to inventory figures.

WMS solutions streamline the identification of disparities between expected and actual counts, prompting recounts as necessary, and facilitating adjustments to the general ledger. They transform what can be a lengthy and labor-intensive procedure into a straightforward and relatively low-effort task.

By integrating intelligent cycle counting with a WMS, businesses can reduce costs, enhance customer service, optimize warehouse efficiency, and mitigate much of the traditional disruption associated with inventory management. If your company still relies solely on annual physical inventories, it is prudent to seriously consider adopting this approach.

Interested in learning more about warehousing and warehouse management systems? You can check out our previous blogs on reverse logistics, or reducing inventory write-offs.