Cycle counting is a proactive and dynamic approach that allows retailers to maintain precise inventory records, identify discrepancies, and drive continuous improvement—key components of effective inventory management—without disrupting daily operations.
In this post you’ll learn the importance of cycle counting for retail, how it can help your retail business, and how to do it in your store.
What Is a Cycle Count in Retail?
A cycle count in retail is an inventory management method that involves counting a subset of inventory items regularly, often on a recurring schedule. Instead of conducting a full physical inventory count of all items at once (which can be time-consuming and disruptive), cycle counting involves more frequently counting smaller portions of inventory—one specific product category, department, or location at once.
The goal of an inventory cycle count is to maintain accurate inventory records, identify shrinkage and any discrepancies between recorded and actual inventory levels, and minimize disruptions to daily operations.
By systematically counting a portion of the inventory on a regular basis, retailers can catch and address issues early on, mitigating large errors that accumulate over time.
Cycle Count vs Physical Count
Cycle and physical counts are two different approaches to inventory counting, each with advantages and disadvantages. While physical counts offer a comprehensive view of inventory, they can be disruptive and less adaptable to changing business conditions. On the other hand, cycle counting provides a more continuous and less disruptive approach, allowing for consistent monitoring and correction of inventory levels over time.
Physical Count | Cycle Count | |
|---|---|---|
Frequency | Infrequently; once or twice a year | Complete inventory count (all items) |
Inventory Counted | Frequently; daily or weekly for some items | Selected inventory items or categories |
The best method depends on your business’s specific needs, resources, and operational dynamics. Many companies use a combination of methods to optimize their inventory management processes.
Related: Perpetual vs Periodic Inventory Systems: Differences & Which Is Best
How to Conduct a Cycle Count
Proper inventory cycle counting is a proactive and ongoing process. It involves the following steps:
Step 1: Conduct an ABC Analysis
An ABC inventory analysis allows you to categorize products:
- A: Most important products to count most frequently
- B: Products of average importance to count less frequently than A but more frequently than C
- C: Least important products to count least frequently
First, categorize items based on their importance, value, criticality, or turnover rate. This step is important because you’ll want to count high-value items more frequently than lower-value or less important items. This will depend on the metric that works best for your store. Annual sales value, profit margin, and demand frequency are common metrics you can consider.
Then, calculate the value for each of your inventory items based on the metric you chose (such as sales value or profit margin).
Rank your inventory items in descending order based on your chosen metric and determine percentage thresholds for each class. Your top-ranking items will be class A, the middle ones will be class B, and the bottom will be class C.
The specific percentage thresholds you choose are completely up to you, but it is typical to only have between 20%–40% of your inventory in classes A and B, and the remaining 60%–80% in class C. After all, most sales and profit typically come from a small subset of products, so those are the most important ones to focus on.
See this guide on ABC inventory for a more comprehensive breakdown of this part.
Step 2: Set Cycle Count Frequencies
Establish a regular and consistent cycle counting schedule. Determine how often to do cycle counts for different categories of items. Remember, you should count high-value (class A) more frequently than low-value items (class C).
For example, you might want to count class A items on a weekly or monthly basis, class B items on a monthly or quarterly basis, and class C on a quarterly, semiannually, or annual basis.
Step 3: Create a Cycle Count Calendar
Once you have your item classes and count frequencies, create a calendar that maps out your specific count dates and product categories or departments. Having everything mapped out ahead of time will ensure none of your products fall through the cracks and you will have ample time to plan the shifts and scheduling for each count. Ideally, they will happen outside business hours or during a particularly slow time of day.
Tip: Keep your cycle count calendar private to prevent manipulation of the counts or internal theft. Though you will schedule employees to work the counts beforehand, you don’t need to divulge which products will be counted.
Step 4: Count & Record
Before implementing, make sure your entire staff is trained on the cycle counting procedure.
When it is time for the first count, physically count the selected items and compare the counts with your recorded inventory levels. Any discrepancies should be investigated and corrected.
Leverage technology such as barcode scanners and inventory management software to streamline the cycle counting process. Implement systems that can automatically update inventory records based on cycle count results.
You’ll also want to cross-verify cycle count results with other inventory management metrics. To identify discrepancies, compare cycle count results with sales data, purchase orders, and other relevant information.
This is where the inventory accuracy rate comes in, which we cover more in the section below.
Step 5: Analyze & Adjust
Regularly analyze cycle count results to identify trends, patterns, or recurring issues. Adjust inventory records as needed based on the actual counts. Develop corrective action plans for addressing those discrepancies, and then implement changes to prevent similar issues in the future.
Related:
Retail Metrics: How to Drive Sales in Your Small Business
Retail Inventory Management: Definition & 5 Best Practices
Helpful Formulas for Cycle Counting
Here are a few key formulas related to cycle counting that should help you maintain and track inventory accurately:
Cycle Count Frequency Formula
The cycle count frequency formula helps you determine how often to conduct cycle counts for each category of items. The formula may depend on factors such as item value, criticality, and turnover rate.
Adjust the frequency based on how critical each item is—high-value products, products with high sell-through rates, or items with high profit margins require more frequent counting.
This formula could be helpful when creating your initial calendar. If you know how many days you can perform a count each week or each month, you can work backward to then determine how many products you need to count during each session.
Inventory Accuracy Rate
The accuracy rate assesses the effectiveness of cycle counting. This formula gives you the percentage of accurately counted items. A higher accuracy rate indicates a more effective cycle counting process.
You may have noticed that this accuracy formula is a little different than the one you may be familiar with: Inventory Accuracy = (counted items / items on record) * 100. This more common formula measures the accuracy of your inventory, whereas the one above measures the accuracy of your cycle counts.
Counting Efficiency
This formula measures the efficiency of the cycle counting process by calculating the counting efficiency. Counting efficiency considers the time spent counting versus the value of the items counted.
There is no target or benchmark number to aim for with counting efficiency. However, a higher counting efficiency suggests a more productive cycle counting process.
Best Practices for Cycle Counting
Implementing effective cycle counting practices helps maintain accurate inventory records and streamline operations. Here are some best practices for cycle counting to keep in mind:
Clearly document cycle counting procedures and guidelines. Maintain accurate records of cycle count results, the person performing each count, and any adjustments made to inventory levels.
Create audit trails that track changes made during and after cycle counts. This helps in tracking adjustments and understanding the reasons behind discrepancies.
Involve employees from different departments in the cycle counting process. Cross-functional involvement can provide a broader perspective and enhance accuracy. Foster regular communication between the inventory management team and other departments, and keep all relevant stakeholders informed about cycle counting schedules and results.
It’s helpful to establish a feedback mechanism for employees involved in cycle counting. This encourages open communication to address any challenges or improvements in the process.
Don’t forget to provide training to employees involved in cycle counting to ensure accurate counting and recording. Educate staff on the importance of cycle counting and its impact on inventory accuracy.
Be flexible and adapt the cycle counting process based on changing business needs. Adjust the cycle count frequency or procedures as the business evolves.
Pros & Cons of Cycle Counting
Cycle counting is a common practice amongst retailers because of its many benefits. (Source: Leanafy)
Cycle counting offers several advantages, including:
On the other hand, there are some downsides to cycle counting:
Frequently Asked Questions (FAQs)
Here are some questions we often encounter about inventory cycle counts. Click through the questions to learn more.
An example of a cycle count involves regularly selecting and counting a subset of inventory items rather than conducting a full inventory count. For example, a small business may choose to cycle count a specific category of products, such as electronics, every week, ensuring that over time, all items are systematically counted. This method helps maintain accurate inventory records without the need for disruptive full counts.
How often you should do cycle counts depends on a variety of factors, including the type of items, their value, and their importance to your business. A common approach is to perform cycle counts on a regular schedule, such as weekly, monthly, or quarterly. High-value or critical items may be counted more frequently than lower-value ones. ABC analysis is often employed to determine the appropriate frequency for different categories of inventory.
The cycle count rule refers to the criteria used to determine which items are selected for counting during a cycle count. Common rules include random sampling, ABC analysis, or a combination of both. Random sampling ensures an unbiased selection of items, while ABC analysis categorizes items based on value and importance. The rule helps in systematically choosing items for counting, contributing to the accuracy of the inventory management process.
A cycle counter conducts regular inventory counts as part of a cycle counting program. They select items for counting based on established rules, physically count the selected items, and reconcile the counts with the recorded inventory levels.
Bottom Line
Cycle counting is a helpful inventory management process. By implementing best practices, embracing flexibility, and leveraging technology, you can navigate the complexities of cycle counting to optimize operations. Mastering the art of cycle counting isn’t just about counting items—it’s about counting on the success of your business.
