Any business, large or small, must perform some sort of count of their inventory at some point in time. There are two commonly accepted methods of counting inventory stock: stocktaking or cycle counting. The method that will best suit a particular company needs to be carefully considered as they are drastically different and can have a significant effect on company operations. This article dissects the two methods of counting inventory and explains how each method affects your business.
Conducting a stocktake is when the entire business might need to shut down or work after hours for a period of time to allow for each individual item to be physically counted. This count is then compared with data obtained from the inventory management system.
In the ideal world, these two sets of data will agree, indicating: that the inventory management system works well, that no inventory stock items have gone rogue costing the company, and that the staff, well, know how to count. Unfortunately, it is extremely easy to make mistakes when conducting a stocktake. These are often either the physical count or the fact that an error in the system that has been carried forward each stocktake.
Another negative effect of stocktaking is that the entire warehousing and manufacturing processes must be shut down for the duration of the stocktake as any extra items receipted into or removed from the warehouse can alter the count and result in errors. This shut down costs the company money both in the down time and in the staff time taken to physically count every item.
For a large business with many items of inventory, conducting a stock take once a year might be insufficient, but a small to medium-sized businesses may well be able to function quite happily stocktaking annually as the inventory stock is less in number and far easier to control accurately.
Cycle counting is where a certain proportion of inventory stock is counted in intervals. The count of this proportion is thought to be representative of the whole and likewise, if the count of this proportion is accurate, then it is assumed it can only be so if the the entire inventory is accurate.
A bonus of this method of inventory counting is that within a certain time period, perhaps a year, the entire inventory has been counted. This, of course, happens without the need for a large-scale shut down because the smaller the count is, the more controllable it is. We have already discussed the costs associated with a shut down and staff time, therefore cycle counting can be a more cost-effective option for the company.
Two assumptions must be made in cycle counting. These are that firstly, the accuracy of the counted items must represent the accuracy of the entire population (or warehouse of inventory in this instance); and secondly that any errors identified in the counted items must represent errors that exist in the population.
Due to the frequency of cycle counting, any errors that emerge can be acted upon quickly and therefore any knock-on effects can be minimised or controlled. This certainly is beneficial as errors left to multiply can quite quickly have a dramatic effect, cost the company and require a significant amount of time to correct.
Stocktaking or cycle counting are entirely individual choices to the company, however the effects of each should be carefully considered. In larger companies, it might be extremely difficult to halt warehouse operations for a period. However, smaller companies may be able to shut down with relative ease and it may also be easier to identify and rectify errors that emerge once a year.
Regardless of the method of physical counting you employ, it is imperative to have a good inventory management system in place to function collaboratively with your choice of count.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.