Cycle Counting

1. Cycle Counting Prepared By: Jaime Johnson Boise State University Spring Semester 2003

2. Training Overview • What is Cycle Counting? • Advantages • Methods • Learning the Concepts • Can it Work for You? • Exercise Problem • A Real World Example • Wrapping it Up

3. What is Cycle Counting? • Definition: • “a method for auditing inventory accuracy and reconciles errors on a cyclical schedule rather than once a year.” • A dynamic inventory audit that allows for real time accuracy of inventory items.

4. Advantages • Accurate Inventory Records • Errors and their Causes can be Identified quickly and Corrective Measures can be Implemented • Good Bye Annual Inventory • Allows for Continuation of Business and Production

5. Methods • The Geographic or Block Method • The Ranking Method • Random Sample Cycle Counting

6. Geographic or Block Method(1 of 2) • Identified by physical space • By Shelf, By Bin, etc. • Assists in the discovery of misplaced or lost items • Recommended to count entire inventory 4 times per year

7. Geographic or Block Method (2 of 2) • Calculating the Determined Number of Items • Example: • 10,000 items in inventory / 250 (# of days in operation per year) = 40 counts • 40 counts x 4 time per year = 160 products counted per day.

8. The Ranking Method(1 of 5) • Also known as, ABC Cycle Counting • Counting the faster-moving / high $ items more frequently than the slower-moving items • Based on “Pareto’s Law” • 80/20 Rule

9. The Ranking Method (2 of 5) • Items are ranked using ABC Analysis • “A” Rank Items (top 80%) • “B” Rank Items (next 15%) • “C” Rank Items (next 4%) • “D” Rank Items (last 1%)

10. The Ranking Method(3 of 5) • Recommended Count Schedule • “A” Rank Items 4 – 6 x per year • “B” Rank Items 3 x per year • “C” Rank Items 2 x per year • “D” Rank Items 1 per year

11. Jan. “A” Items Feb. “B” Items Mar. “A” Items Apr. “C” Items May “A” Items June “B” Items July “A” Items Aug. “C” Items Sep. “A” Items Oct. “D” Items Nov. “B” Items Dec. “A” Items The Ranking Method(4 of 5) Scheduling Example:

12. The Ranking Method(5 of 5) • Calculating the Count Size • 10,000 Items Total • 2,000 “A” Items x 6 = 12,000 count • 3,000 “B” Items x 3 = 9,000 count • 4,000 “C” Items x 2 = 8,000 count • 1,000 “D” Items x 1 = 1,000 count • 30,000 counts / 250 days = 120 • 120 Items counted per day

13. Random Sample Cycle Counting • Statistical Technique • Constant Population Counting • Diminishing Population Counting • Not Recommended if Inventory Accuracy is Poor • Only Establishes Conformance to Expectations

14. Learning the Concepts • Inventory = CA$H • Improved Accuracy • Control Over Inventory = Control Over Costs • Costs Include: • Lost Sales Due to Stock Outs • Lost Customers • Inefficient Operations

15. Learning the Concepts • Identifying Errors • Shipping & Receiving • Purchasing • Sales • Billing & Credit • Take Corrective Measures • Train on Procedures • Train on Inventory Accuracy

16. Learning the Concepts • Never Stop Looking at The Process • The Method • The Schedule • The Size of the Counts • Tracking Accuracy • Continual Training

17. Can It Work for You? • How can cycle counting enhance our current system? • Which Method? • Who would be responsible?

18. Exercise Problem • The company is not sure if it wants to use The Block Method or The Ranking Method, what is the daily count for each method and based on the least number of items counted per day which method would the company choose if they had 12,000 total items, 2,400 “A”, 3,600 “B”, 4,800 “C”, and 1,200 “D” ?

19. A Real World Example(1 of 2) • Cascade Wholesale Hardware Inc. • In an article they recently posted on their web site they claim cycle counting helped them find “holes” in their system they never would have found otherwise • (WWW.Cascade.com/cycle.htm)

20. A Real World Example(2 of 2) • Some Problems Identified • Receiving would sometimes not report overages • Not accounting for pending returns before making adjustments • Picking errors cause by too similar part numbered items next to each other

21. Wrapping it Up! • Cycle Counting has Several Advantages • Methods Include • The Geographic or Block Method • The Ranking Method • Random Sample Cycle Counting

22. Wrapping it Up! • Cycle Counting can Assist in Avoiding Costly Mistakes • Cycle Counting Never Stops

23. References Cascade Wholesale Hardware Inc. www.cascade.com/cycle.htm. “Cycle Counting.” May 1, 2003. www.smfcpa.net/cycle.htm. “Cycle Counting Can Eliminate Your Annual Physical Inventory! (Part 1) & (Part 2).” May 1, 2003. www.effectiveinventory.com.

24. References Graham, Gordon. Automated Inventory Management For the Distributor. CBI Publishing Co. Inc., 1980. “Inventory Record Counting Accuracy, Cycle Counting’s Role.” July 29, 2002. www.maskell.com/stahl1.htm. Johnson, R. John. “Stepping it Up.” Supply Chain Management Review. Sep. 1, 2002.

25. References Min, Hokey. “A World-Class Supplier Quality Control Program.” Praxis, Best Practices in Purchasing & Supply Chain Management. Mar. 1998 v1 Iss3. Piasecki, Dave. Inventory Accuracy: People, Processes, & Technology. Ops Publishing, March 2003. Russell, S. Roberta & Taylor III, W. Bernard. Operations Management Fourth Edition. Prentice Hall, 2003.