2021 Action Items: Inventory Cycle Counts

April 27, 2021

Continuing our discussion on distribution business planning, let’s bring attention to a common audit that all modern distributors carry out. No, not an audit against your bookkeeping, but an audit of your inventory.

While it goes without saying that inventory counts are sometimes tedious, they are also a necessary and regular task of successful distributors. The value of this process cannot be overstated as it directly affects your daily operations and bottom line. While some smaller distributors may find it feasible to complete physical counts, the next series of articles will highlight the metrics, methodology, and other best practices for modern growing distributors who aim to use cycle counts with the help of technology.

If you are new to cycle counting or considering a change from physical counting, let’s get you up to speed. Just like physical counts, your goal is to confirm your physical inventory to your inventory records. Instead of doing this all at once for all products, your team performs regularly scheduled counts of specific products and records this. When routinely done over the course of a calendar year, all of your products will have been counted at some point with some actually counted multiple times. Distributors with high inventory volume tend to prefer regular cycle counts as they no longer need to halt the full operations of the business just to complete the physical inventory. Cycle counts also allow distributors to keep tabs on their best-selling products more frequently.

So now that we understand the general concept behind cycle counts, what metrics are we ultimately aiming to hit? Your goal from this process is simply to find and fix discrepancies found in your records versus what is counted. But to measure a level of performance or accuracy, you can understand this through a basic calculation: Matched Inventory / # items counted = Inventory Record Accuracy (IRA).

If we adjust the formula for units, it could look like the following example:
IRA = [1 – sum of the absolute variance / # the sum of total inventory] x 100

If your physical count returns as 250, but your system count turns out to be 275, the formula would look like:
= [1 – (25/275)] x 100
= 91%

As your team continues to cycle count and you return more metrics each time, you’ll want to determine if the accuracy over time is staying the same, improving, or getting worse. Obviously, the closer to 100% accuracy the better, but that likely isn’t going to happen with the element of human error. The important takeaway is recognizing whether your processes are getting better, and if not, what plans can be created to ensure higher accuracy moving forward.

Taking control of your inventory is a critical part of driving the business forward for distributors. Without accurate knowledge on this performance, your team will run into more inventory issues of the item they need and perhaps will be holding onto unwanted stock. Be sure to stay tuned as continue the discussion on cycle counts. If you’re ready to learn how ERP-ONE+ can help your inventory needs, contact our team today.

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