There are many different ways to count inventory, but the right way for your retail business will depend on a number of factors. One popular method that’s less disruptive to everyday operations is cycle counts.
In this article, you’ll learn the benefits of cycle counting, the types of inventory cycle counts, and how to get started with cycle counting in your store.
Table of Contents
What is a cycle count?
Inventory cycle counts involve counting a small group of products at a specific time without having to disrupt business operations.
Cycle counts are a process retailers use to count specific groups of products on a regular basis to increase inventory accuracy and uncover and solve discrepancies in less time than a full physical inventory count.
By doing frequent cycle counts you can identify the causes of inventory errors and make a plan to resolve them. And over time, you will have counted all your stock without disrupting your retail store operations.
Physical counting vs. cycle counting
Physical counting involves counting all your inventory at once a few times a year. Cycle counting involves counting a small amount of inventory in phases, on a regular basis (sometimes daily).
Physical inventory counts are more disruptive, making it a better choice if you have fewer products and can count all your stock without closing your store for the day. But it’s also not as accurate as cycle counts because you’re not auditing inventory on a regular basis.
Cycle counting is generally more accurate because you’re constantly reviewing your inventory, reconciling differences, and resolving issues as they come up. It’s also less time-consuming—rather than counting all your stock at once, cycle counting lets you count inventory in batches over time.
If you’re constantly running into discrepancies during cycle counts, you may want to consider doing a full physical count for reconciliation and then resume cycle counting.
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Types of cycle counting
- ABC cycle counting
- Random sample cycle counting
- Control group cycle counting
Here are some tips for each of these cycle count techniques.
ABC cycle counting
The ABC cycle counting method uses the Pareto principle, also known as the 80/20 rule—80% of your results come from counting 20% of your products.
Focus on the products providing most of your results by separating inventory into A, B, and C categories.
- High profit margin or high sales volume products.
- Accounts for roughly 80% of revenue and 20% of total inventory.
- Counted monthly.
- Average to high-profit margin or sales volume products.
- Accounts for roughly 15% of revenue and 10% of total inventory.
- Counted quarterly.
- Low-value and low-demand products.
- Accounts for 5% of revenue, but roughly 70% of total inventory.
- Counted once or twice a year.
To boost accuracy, count category A products frequently, and category B and C products periodically.
Potential disadvantages of ABC cycle counts:
- If you have many unique products (with low inventory), you might count them too often.
- Products in group C may not get counted often enough for an accurate inventory count.
But if you’re aware of these downsides, you can mitigate them by planning your ABC counts accordingly.
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Random sample cycle counting
If your products are similar, random sample cycle counting is a good option. With this method, you can choose a random number of products to count during each cycle count.
The advantage is fewer disruptions to your warehouse or retail store, as random cycle counts can happen during normal business hours.
Random sample counting has two approaches:
- Constant population counting. The same number of products are counted every time. Some products may not be counted at all, while others are counted frequently due to a random selection process.
- Diminished population counting. Once products are counted, they are excluded from future cycle counts until all inventory has been counted. Then the process begins again.
Both techniques are effective, so choose the one that works best for your business.
Control group cycle counting
This cycle count process repeatedly counts a small group of products in a short period of time.
Creating a control group uncovers errors in your counting technique, so you can fix them before counting larger groups of products.
This cycle count method lets you practice and refine your process before you apply it on a bigger scale.
💡 PRO TIP: Shopify POS comes with tools to help you control and manage your inventory across multiple store locations, your online store, and your warehouse. Forecast demand, set low-stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.
How to do a cycle count
- Review inventory records
- Set accuracy level targets
- Start count
- Reconcile differences
- Implement necessary procedures
- Adjust inventory records
- Calculate inventory accuracy levels
- Repeat cycle
Once you’ve assigned dedicated store staff to cycle counting, make a plan to document the cycle counting process, and close out all transactions before you start counting.
Then you can begin the cycle count process.
Review inventory records
To start out on the right foot with counting cycles, it’s important to make sure the inventory quantities in your POS system are up to date and any outstanding discrepancies are reconciled.
Set accuracy level targets
You’ll want to aim for 100% inventory accuracy, but that’s not always possible. Generally, 90% accuracy or higher is a good goal. To determine inventory record accuracy (IRA), use the inventory cycle count accuracy formula.
IRA = 1 - (the sum of the discrepancy / # the sum of the total inventory) x 100
For example, if your inventory management system is showing you have 150 units of a particular product and you count 148 units, there is a two-unit discrepancy, and your IRA is 98.7%.
Here’s the math:
98.7% = 1 - (2 / 150) x 100
Use this KPI to set, track, and improve your inventory accuracy levels.
Whether it’s you or a dedicated counter, review the inventory descriptions, locations, and quantities from your records (or inventory report) and then compare them to what’s physically on your sales floor and in your stock room and/or warehouse.
- Close out all transactions before counting.
- Count categories one by one to increase efficiency and avoid errors.
- Vary your counting schedule to prevent employees from manipulating the system.
- Consider the seasonality of categories, so you’re counting products when they’re in demand and you can fix discrepancies quickly.
- Do cycle counts frequently and always double-check them.
Pinpoint the inventory differences found during cycle counts and reconcile them in your system and with your staff that manages inventory. It’s vital to recognize if there are patterns in inventory discrepancies.
Implement necessary procedures
If the same issues keep coming up regularly, you may need to set up new inventory counting processes or fix the holes in your approach. And if it’s not your cycle counting procedure that’s at fault, what else can you fix?
Are you losing inventory due to shopper or employee theft? If so, you could hire more security personnel or install surveillance cameras to mitigate these issues.
Adjust inventory records
Once you’ve completed cycle counts, include a step in your process to update your inventory management system to reflect your physical inventory.
Calculate inventory accuracy levels
Use the formula given above to calculate your inventory accuracy levels. If it’s coming up below 90% most of the time, you’ll want to implement strategies to improve accuracy.
Repeat the cycle counting process on a regular basis. Depending on your business, you may choose to do it daily, weekly, monthly, or quarterly. However, cycle counts are generally more accurate the more often you do them.
💡 PRO TIP: When you use different platforms to run your online and retail stores, inventory discrepancies are more likely to happen. This can lead to more frequent inventory counts to reconcile differences and ensure stock levels are accurate.
Cycle count best practices
Whichever cycle count type you choose, you need to make sure it aligns with the key inventory management. That’s why it’s always a good idea to follow these best practices to get the most accurate results.
- Decide what to count in advance. You may want to count some products weekly, others quarterly, and the majority once per year, or you might count random samples monthly. Whatever you choose, decide in advance.
- Count everything. Unless you’re using the constant population counting method, you need to make sure you count everything in your inventory within a set time.
- Finalize transactions before counting. If you don’t, your count could change by the time you get to the end.
- Use the inventory cycle count accuracy formula. This shows inventory changes over time.
- Choose staff wisely. Make sure they can count quickly and accurately.
- Use zero counts. If your system says there’s no stock after an item has been picked, you need to physically confirm for accuracy. This is called a zero count.
- Investigate. If there are errors or inconsistencies, find out why.
- Keep track. Make notes on everything you do so you can see what works well and what doesn’t.
Benefits of cycle counting
There are three main benefits of inventory cycle counting:
- Identifying inventory discrepancies
- Making inventory counting more manageable
- More accurate inventory data
Identifying inventory discrepancies
Regularly counting batches of stock will help you pinpoint errors in your inventory counts and resolve them faster than only doing physical counts once or twice a year.
Making inventory counting more manageable
Counting smaller amounts of inventory more frequently makes the counting process easier and less time-consuming, and doesn’t disturb your retail operations. This way, you’ll maintain inventory accuracy without having to close your doors and miss out on potential sales.
More accurate inventory data
Routine counts lead to more accurate numbers and the ability to quickly identify theft or other issues causing discrepancies in your inventory. More accurate inventory data can help prevent you from over- or under-buying stock.
Cycle count challenges
However you check your inventory, whether it’s the traditional periodic count or cycle counts, you’ll encounter challenges. Here are a few of the most common ones:
- Operational disruptions. A cycle count can cause interruptions in the day-to-day operations of your retail store, as it’s usually performed within business hours. But those disruptions are minimal and you don’t have to close for a whole day like you sometimes do with traditional counts.
- Inaccurate counts. If any corners are cut or a process isn’t followed properly (for example, if transactions aren’t closed out), cycle counts can be inaccurate. Following the best practices above makes that a lot less likely.
- Multiple locations. If you have multiple locations, you need to know the count for each location and all the locations combined. That takes extra coordination and planning.
Streamline cycle counts with Shopify
Cycle counting makes inventory management and reconciliation less of an undertaking since you can focus on smaller chunks of product, spend less time doing it, and avoid having to close your shop doors (and potentially miss out on sales). And with a POS system like Shopify’s, your inventory is always synced across sales channels (online and off) so you can avoid inventory discrepancies and ensure accurate stock levels.
Manage inventory from one back office
Shopify POS comes with tools to help you manage warehouse and store inventory in one place. Forecast demand, set low stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.