Most people in the Supply Chain profession understand the concept of cycle counting: the use of Pareto analysis to concentrate activities on those items that are, for cost or other reasons, strategically important to the organization.
Most people also understand the classification of items into A, B, and C items, with a rule of thumb that categorizes the top 20% as A’s, the next 30% as B’s, and the remaining 50% as C’s.
Why is it then, that in my experience in consulting and in full-time employment, that cycle counting is not executed well and does not give the coverage that is advertised? Management is often surprised that cycle counting is not giving beneficial results, and many still retain an annual physical inventory as a “safety net”.
Let us deal with the issues that need to be addressed to ensure that a Cycle Counting program is optimal:
Classifying items into A, B, and Cs
When this is done manually, or even within an ERP system, the main factors considered are the cost of the item and the throughput volume. These are then multiplied to get a cost-volume figure and then Pareto analysis is done to complete the item classification.
This is good in so far as it goes, but this approach ignores certain items that may be of strategic value to the company. There may be items that have a long lead time (and that you protect by having a level of safety stock) that should be counted with the A’s even though their cost-volume amount would have them as a B or a C.
How then could you practically add Lead Time as a factor in the Pareto analysis?
This could be accomplished by having a weighting factor of (say) 10 for Lead Times. Give every item that has a long lead time a weighting towards the top of the scale, i.e. 10, and give those other items with shorter lead times a 4 or a 5, and then those items that you can receive within a day a Factor of 1.
You would now have three columns and a cost-volume-lead time calculated figure that now may be more useful in determining which of your items should be A’s and thus counted more frequently.
Criticality is another criterion that may be regarded as important in the classification, and weighting should be in place that reflects the ease of replacement and whether a substitute is available.
- ABC classifications should look towards the future not the past
This particularly is relevant if you happen to be in a fast-moving, change-oriented environment. During my time in the DNA Testing arena, basing ABC counts on the history of (say) the last two years would not have given anything even close to an accurate classification.
Basing inventory classifications on forecasts and projections, however imperfect these may turn out to be, is still an improvement on basing them on a history that will not come close to repeating itself.
However, if you are in a mature, stable industry with history repeating itself into the future, you can keep using the history as it is a good predictor of the future.
ABC classifications should be reviewed by Management.
Whatever the results of the Pareto analysis, it should not be used for setting cycle count schedules without the review of Management. Manufacturing, Supply Chain, Finance, along with other departments such as Quality and Marketing should have the opportunity to review the classifications and ensure that items that have special significance or strategic value to the company are included in the A classification regardless of the criteria used.
Sufficient resources need to be allocated to the Cycle Count program
In my experience cycle counting is typically under-resourced, and this becomes one of the primary reasons why cycle-counting often does not produce the expected and advertised results.
Let us assume that a specific item count is accurate, i.e. that the quantity in the perpetual inventory in the ERP system is equal to the physical quantity. The process of counting, checking, and entering in the system will then take 2 minutes – use your own figures if they are different. The problem occurs when the physical is different from the ERP system, then counts have to be checked, transactions have to be reviewed, and an investigation done. Let us say this takes 30 minutes per item.
Many companies use the following for a cycle counting schedule:
| Classification | Number of counts per year |
| A’s | 4 times per year |
| B’s | 2 times per year |
| C’s | 1 time per year |
Let N be the number of items in inventory. Then:
0.2N is the number of A’s
0.3N is the number of B’s
0.5N is the number of C’s
If A’s are counted 4 times per year, there are 0.2N*4, or 0.8N counts.
If B’s are counted 2 times per year, there are 0.3N*2, or 0.6N counts.
If C’s are counted 1 time per year, there are 0.5N*1, or 0.5N counts.
Therefore the total number of counts is 0.8N+0.6N+0.5N or 1.9N. This means that whatever number of items you have in inventory you have to do 1.9 times that, or almost twice the number of items, to complete the cycle count every year.
Some public companies have A’s counted each month, B’s every 3 months, and C’s every 6 months. If this is the case, then the total number of counts is (0.2N*12) + (0.3N*4) + (0.6N*2) = 4.8N or almost 5 times the number of items in inventory.
The math now is simple. Let us assume that you have 90% inventory accuracy, then, on average, 90% of your items take 2 minutes and 10% take 30 minutes.
90% of 1.9 = 1.71 and 10% of 1.9 = 0.19
Therefore resources needed = 1.71 * 2 minutes + 0.19 * 30 minutes
This amounts to 9.12 minutes per item
Therefore if you have 2,000 items in inventory, the resources needed would be 2,000 * 9.12 = 18,240 minutes or 42 days annually. This would be one person for almost 1 day per week.
If your cycle count schedule is more demanding as it is for many public companies so that your counts completed per year are 4.8N, or if your inventory is larger, or your inventory accuracy lower, then you will need a lot more resource.
If, for example, you had 5,000 items in inventory, and your inventory accuracy is 85%.
85% of 4.8 = 4.08 and 15% of 4.8 = 0.72
Therefore the resources needed = 4.08 * 2 minutes + 0.72 * 30 minutes
This amounts to 29.76 minutes per item
With 5,000 items in inventory, the resources needed would be 5,000 * 29.76 = 148,800 minutes or 344 days annually. This would be beyond the scope of one person and would need 2 people almost continuously cycle counting.
If these resources are not in place, then management will not get the expected results, simply because the schedule cannot be adhered to and the hoped-for inventory accuracy improvement will not occur.
To get the advertised, and hoped-for, results, ensure that your ABC classifications are accurate and up-to-date, that they are reviewed, and that adequate resources are allocated to the program.
