By Randy Goldbeck, Fullscope Director of Services
Cycle counting is a specific and practical way to measure inventory by selecting a sample of your items every day and recording the actual on-hand quantities. A good cycle count program also identifies errors in inventory balances and corrects them, so the actual count agrees with what is in the system. The objective is to measure and correct inventory errors on a continual basis. The cause of the problem should be investigated and corrective action taken to fix the root cause.
Guidelines for Cycle Counting Programs
The following are some guidelines to a good cycle count program:
- Every item number should be counted over a planned time period.
- Some item numbers may be counted more frequently than others depending on their value and usage.
- Inventory is material, piece parts, sub-assemblies, and products waiting to be used in production or to be sold to customers.
- Inventory is identified by item number carried in warehouses, in inventory locations and by production orders for work-in-process.
- Inventory accuracy relies on timely processing of transactions in the Dynamics AX system.
- An initial goal should be to have inventory be at a 90% accuracy level. Over time, this goal should ultimately reach 99% accuracy.
What Makes Up Accurate Inventory?
In the following table is item number 5140 really accurate? Actually, No. When using locations, the actual quantity on hand in each location should agree with the system quantity.
Error tolerances can be used to accommodate counting errors on small non-critical, inexpensive items. These tolerances represent the acceptable differences when or when not to post cycle count transactions. If a low cost item is within its acceptable tolerance, then the cycle count will not be posted. The table below illustrates an example of a low cost item that might have a procedural tolerance and therefore would not be considered to be inaccurate.The following table represents a suggested policy for acceptable tolerances according to ABC classifications (Described later)
An assumption based on Pareto’s law suggests 20% of the parts represent 80% of the inventory value. The “ABC” classification method classifies items according to certain characteristics, like historical usage in costs for the last 6 to 12 months. Pareto’s law suggests that 80% of any characteristic is represented by approximately 20% of the items in that characteristic. Applying that to inventory, 80% of the total dollar value is represented by 20% of the item numbers. Therefore, a suggested approach to determining ABC percentages might be:
- A Items = 20%
- B Items = 30%
- C Items = 50%
Sample Cycle Count Plan
Because of personnel time constraints, every item cannot be counted every day. In order to accommodate this, the frequency of counting an item should be set up according to the example in the table below.
Based on the plan you could expect to make the following counts. By doing this ahead of time you can evaluate the feasibility of the cycle count.
Setting Up a 30-Day Control Group
The 30-day control group is a proven method to begin a cycle count program. To begin select 20 -30 item numbers that are used most frequently to manufacture products. These items should represent a cross section of the typical item numbers used in your company. These items are going to be your audit base. Remember, the goal is to identify and correct reasons for inventory in-accuracies.
- Determine the target item numbers and establish those items as an inventory control group.
- On the first cycle count select only this control group and cycle count each item number.
- Compare the cycle count values to the perpetual inventory values in the system and determine if each item number is accurate.
- For those items that are not accurate, make an inventory adjustment and make a note of your overall inventory accuracy.
- Count the same 20-30 item numbers. The number of item numbers with errors should be dramatically reduced.
- The item numbers that have in-accuracies were caused by errors in yesterday’s transactions. Finding the cause of errors is a simple activity of looking at yesterday’s transactions.
Next 30 Days
Count these same 20-30 items for the next 30 days. When an inaccuracy is found, it’s always a result of an error caused by yesterday’s transactions. The objective is to find the cause and correct it as quickly as possible.The purpose of the 30-day control group audit is to find and repair the most frequently caused transaction errors. It also provides a fast start with quick results to begin a cycle count program. By the end of the 30 days, the most frequently occurring errors are usually identified and repaired.
The purpose of the 30 day control group audit is to find and repair the most frequently caused transaction errors. It also provides a fast start with quick results to begin a cycle count program. By the end of the 30 days, the most frequently occurring errors are usually identified and repaired.
Cycle Count Considerations
The following are normal considerations to allow for when setting up your cycle count program:
- If you have 10,000 items in the system only 7,500 may have inventory balances.
- Usually inventory is stored in two locations.
- One partially dedicated person (2 hours per day) can usually count 15,000 items a year or 60 counts per day.
Cycle Count Cut-off
In order to minimize disruptions, specific times for completing the cycle count should be followed. In addition, you should verify that all transactions have been submitted and processed before beginning the cycle count. We recommend that you count during low production activity times and complete counts and reconciliation as soon as possible
Cycle Count Analyst
In order to ensure a sound cycle count program, you should identify a cycle count analyst. Usually this person will spend about 90 minutes a day counting and processing adjustments to inventory.
Stay tuned … In the next Cycle Count blog, we will show you how to setup and manage a cycle count program in Microsoft Dynamics AX.