Cycle Counts – Listen To The Acumen Podcast
Nick and Scott discuss using Cycle Counts to improve Inventory Accuracy. They explain why so many different people in an organization care about inventory, how easy it is for the counts in the systems to become wrong and how to use cycle counting and your inventory software to better know what is really in your warehouse.
Transcript:
SDH: Why would we do a cycle count, we don’t sell bikes?
Welcome to today’s Acumen Podcast.
NJN: Today we are talking about inventory. Certainly, we know that not all businesses have inventory, but many do. When a company maintains inventory there are quite a few lines on the financial statements, both balance sheet and income statement that can be effected.
SDH: Obviously inventory sits on you balance sheet. So that can go up and down as inventory goes up and down.
NJN: You have cost of goods sold that can go up and down as you sell things.
SDH: You can have capital expenditures to build buildings warehouses, and storage facilities.
NJN: You could have other expense lines such as labor for warehouse employees
SDH: Rent for rental warehouse space
NJN: And utilities in your warehouse. Ok I think they get the point!
SDH: Since inventory affects the finances so directly, you will often have many interested parties. It’s not just the inventory manager who cares a great deal, but also, the controller, CFO, CEO, and the ownership all have a vested interested in an accurate inventory. And regardless of whether your organization is a distributor, a manufacturer, or a job shop, the people in several different departments will also be interested in having an accurate inventory.
NJN: That’s correct Scott, if you are a distributor your sales team is going to want accurate inventory so that they know what is available to sell and ship. If you are a manufacturer you production teams needs parts to make a finished product. And your sales team wants to know what they can sell and ship. If you are a job shop, equipment is arriving to be repaired and your tech’s and mechanics are counting on an accurate inventory so that they know what parts they have in order to complete a job in a timely manner and return the repaired equipment to the customer.
SDH: In all three scenarios, having accurate inventory is going to provide your company with the ability to set accurate expectations for your employees and your customers.
SDH: For an organization that carries inventory, inventory will be at the heart of everything they do. We know that nearly everyone cares and it’s easy to see why they care, but what could possibly go wrong?
NJN: Lots of things actually…
-
- When inventory arrives, the count may not be accurately typed into the system
- When inventory get used the usage may not get recorded
- SDH: Shipments
- SDH: Used on jobs
- SDH: Assemblies not entered
- SDH: Wrong part number… i.e. you ordered a widget and they sent you a thing –a-ma-bob, but no one noticed
- SDH: Returns
- Inventory could be entered into the wrong location or physically put into the wrong location
- Shrinkage or theft or damage
… just to name a key few.
SDH: The more inventory that you have, the more places that you store inventory, the more people that touch inventory… the more likely the chances of the counts you have in the system being wrong.
SDH: And the longer it has been since the last count, the more likely it is to be wrong and the greater the variance you can expect.
NJN: Ok, so let’s talk about some ways to manage inventory to keep counts as accurate as possible other than performing the dreaded annual physical count. It is very easy to calculate the opportunity cost of shutting down the company to perform counts and you would be surprised at how high these numbers can actually get. In addition to the cost factor (both opportunity and real cost), we know that most employees hate spending days at a time counting boxes.
SDH: That’s right year end physical counts can be pretty miserable but how can they be avoided if you want to make sure your inventory is accurate?
NJN: Well, you could move to a perpetual inventory system and start doing cycle counts. A cycle count allows you to count a handful of items each day or week and provides a number of benefits to the organization. First, the people who are actually doing the counting often prefer spending 20-30 minutes of each day on the count over doing the year end count for several days straight.
SDH: (or for a larger organization different inventory team members take turns on counting days)
NJN: Second, your inventory stays accurate throughout the year. Cycle counting allows you to find and correct problems faster and also allows you to notice trends in your inventory.
SDH: Not to mention with only an annual physical count, if you do find a variance you will need to take any write off in one huge chunk at the end of the year.
NJN: So let’s discuss what we mean by cycle counts.
SDH: We have already discussed that cycle counting means to count a few items each day or week, but how do you figure out which items. Do you count your favorite items today? Or just the blue ones? Or the biggest ones?
NJN: Well you could go with one of those methods, but we like to use the system to suggest which items to count to make sure that all items are counted at least once during the year. We have seen organizations come at cycle counts a few different ways, but we suggest separating your inventory into some basic categories based on their rank. The “A” items are the top 10% of the rank, the “B” items are the next “10”, the “C” are the 10% after that and the “D” items are the rest.
SDH: There are a few different ways that you could rank them, but there are two ways that we like the based.
SDH: The first is to rank based on usage. Sometimes we here this called hits, or simply transactions. This is not the quantity of items sold, but rather the number of transactions that include this item for a selected period of time. In other words, you sell 3 today and 5 tomorrow, you would have 2 hits. The idea behind this is that the items that you touch the most are the most likely to be wrong. If you get something from the warehouse to use it on 10 different days, even if you are only taking one at a time, you are more likely to have mistake that if you go get 10 of an item, one time.
NJN: One of the side benefits, which could be a fairly significant benefit depending on the size of your warehouse, is that the hits rank allows you to organize your warehouse so that the items that you are working with the most are the items that are most readily available.
NJN: For example, that reminds me of the work gloves at a large client of ours. Every morning, the techs that are going to work on jobs, come to get gloves along with the parts that they will need for the day. The gloves are far from the most expensive items, but they are far and away the most used items and the inventory manager wants to have them right up front because that saves time, and time is money. So by ranking your items and changing your warehouse you can increase your bottom line.
SDH: The other main way that we see ranking done is by dollar value. The more expensive the items, the bigger the effect that an adjustment of an item will have on the bottom line. The idea is not to waste time counting washers that cost pennies more than once a year, but count plates of steel that could be worth hundreds of thousands of dollars at least every quarter.
NJN: The one other special case is criticalities. For example, if there is an item that you may only have one of and you may only use once a year, but if you don’t have it, the entire organization shuts down, then that needs to be an “A” item.
SDH: An example of that could be a part to repair an important piece of equipment. It may be as simple as a belt. If the belt breaks on the big crane, everything may be down until the belt is replaced. Even a day could be a long time to wait. The spare belt that you keep in inventory, may only turn over once a year, you may one keep one, and it is a low dollar value, but even so, having it is critically important and it needs to be an “A” item. You will want to check on it a few times as year.
NJN: It will be up to the inventory manager to determine how often A, B, C and D items get counted. It really is a balance between available man hours and the number of items, but at a minimum all items must need to be counted once per year.
NJN: We would suggest, A items 4 times a year, B items 3 times a year, and C items twice. The more often that you can count through your items, the more timely and accurate you numbers will be.
SDH: The idea is that some items are counted every day. You will want to configure the system, to kick out a report each day of what items to count. Those items are essentially on hold from transactions in the system for the day. At the end of the day, the counts are entered and required adjustments are made. You could be counting as few as a 5 or 6 items a day or as many as 40 or 50. It really depends on your organization.
NJN: For Scott Halliday, I’m Nick Nabozny and we’d like to say thanks for listening and as always we’d love to hear from you. Please feel free to leave us some feedback in the comments section or give us a call at 407-965-2411 to discuss your situation.
SDH: You can also find us on the web at www.AcumenFL.com or follow us on Facebook and Twitter
