Maintaining accurate inventory is mission-critical for today’s modern supply chain. Exact on-hand quantities are needed for inventory and production planning and to execute an efficient fulfillment process. One way to maintain that accuracy is to implement a cycle count process.
What is a Cycle Count?
Cycle counting is a popular inventory management technique where a subset of inventory is counted in specific locations, on specific days, on a recurring schedule. Cycle counting programs are created to replace once-a-year physical counts or to count specific items on a more regular basis.
There are many ways to perform a cycle count. But how do you determine which items to count and at what frequency? One technique is to perform an ABC Classification of your inventory.
What is ABC Classification of Inventory?
Every product you carry in your warehouse has various costs associated to it (holding costs, carrying costs, etc.), and it also represents a percentage of your sales. Based on Pareto’s Law, ABC Classification or Analysis is an inventory categorization technique of identifying items that will have a significant impact on overall inventory cost in your organization. Doing ABC Classification of your inventory can help you in more than just cycle counting. You can use it to determine:
Engineering Priorities: The identification of A and B items help guide engineering when it seeks cost-reduction improvements on certain items. Efforts are better spent on items with high cost or usage than on items with very low value or usage.
Purchasing priorities: Purchasing activities should concentrate on high cost and high usage raw materials in much the same way that engineering priorities are determined, with the focus on A items for sourcing and negotiating.
Security: ABC analysis may be used as an indicator of which items should be more closely secured in locked storerooms to protect against loss, spoilage, or pilferage.
Replenishment systems: It is often more economical to control C items with simple replenishment systems. More sophisticated systems are generally employed for A and B items.
Investment decisions: Because A items represent a larger investment in inventory, more care should be taken when making decisions about order quantity and buffer stocks, than with B and C items. Source: Oracle
How to Apply ABC Classification to Your Inventory
Using ABC Classification, you determine the value of a group of inventory items based on your unique business valuation criteria. "ABC" refers to the rankings you assign your items as a result of this analysis. A specific group of inventory items are called an ABC Classification Set. These items are valued by taking the cost of the item multiplied by quantity and then ranked in decreasing order of their dollar value. Depending on the types of stock you carry, you may assign different criteria to different Sets. For instance, items can also be ranked by quantity or historical order value. The results of this exercise are then grouped into ABC Assignment Groups. This grouping typically consists of three classes.
A-Items: Items that are high volume or high value and don’t take up much of your warehouse space or cost. They are typically counted quarterly.
B-Items: Items that turnover regularly but may cost more than A-items. These items are typically counted twice per year.
C-Items: The rest of your inventory that is slow moving and contributes the least to your bottom line. These items are counted once per year.
For example, let’s say 10% of your items constitute 60% of the consumption, 40% of the items constitute 30% of the consumption, and the remaining 50% of the items constitutes 10% of the consumption in terms of value. The top 10% is assigned as Class A inventory and scheduled for monthly counts. The result is 99.9% accuracy on the top 10% of these items. By executing on this, you to control nearly 60% of cost in terms of holding, consumption etc.
How to Set Up Your Cycle Count Process using ABC Classification
The first step is to complete your ABC Analysis. Remember – not every product has equal value. You need to understand what is selling the best, the worst and what costs the most for you to store in the warehouse. Then you are ready to set up Cycle Counts:
Create your ABC class definitions: Valuate your items, group them and then assign them into classes. Do not define an ABC class for inventory that is non-quantity tracked.
Setup counts and approvals. Make sure you define the items and classes to be included in each count. A and B class items should be scheduled for more frequent counts, thereby ensuring accuracy of inventory. C class items are typically only counted once in a year. Make sure all items in the ABC group are cycle count enabled.
Best Practice Tip: In general, the idea of zero counts per year defies normal functionality of Cycle Counting. This can produce unusual results. Also, if there are items with no value due to (quantity * cost), and the valuation of these items is Zero, they may not be eligible for counting.
Determine Count Frequency: When attaching Classes to a Cycle count, make sure that you have entered the number of times you want the items in that class counted. This number is the MINIMUM number of times it will be counted in a calendar year. If Class counts per year is 52, then set the Count Schedules frequency is 'Weekly'. For daily counts, in general there is a working assumption that a workday calendar consists of 260 days in the year.
Best Practice Tip: In cases where you have very few items in a class and have high count frequency (ex.Daily), these items will probably be counted more frequently then specified in its class. Fix this by reducing the count frequency (ex. from 'daily' to 'weekly')
These counts should be spread thought the year with each count being small enough to be processed in the same day.
Generate Count Schedules and Count Sequences: Schedule your count reviews, make any adjustments and approve counts once complete. This should be done as soon as possible for accuracy. Best Practice Tip: In some cases, you may not be able to approve a cycle count adjustment if the quantity being adjusted has reservations or allocations against it. If you receive an error, check to see if this is the cause.
Review Your ABC Analysis: You should still review your ABC Analysis once a year to make sure inventory is still in the appropriate class. If items no longer meet Class criteria, move it to another inventory classification.
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