Cycle Counts by Frequency
Beyond Paretto’s Rule
It is well understood that cycle counting is a key component of keeping an accurate count of your inventory. However, the latest innovation in inventory management is “cycle counting by frequency.” Until now, most people relied on Pareto’s rule of “80/20” – 20% of the inventory will likely represent 80% of the inventory’s value. While most accountants will be happy with this way of cycle counting, it is very inefficient in the supply chain.
For instance, if you are a manufacturer of mahogany desks, it would make sense to keep an accurate count of the mahogany wood as this is the most expensive piece in your inventory. But if you don’t have the nuts, bolts, and screws to put the desks together, your entire production line could shut down for a day or two while those items are being ordered. Under Pareto’s way of cycle counting, you would never take into account the nuts, bolts, and screws in your inventory.
Count the Most Frequently Used Items
The new method of frequency counting would have you counting the inventory that is most frequently used. This method works on the principle that the items that are most frequently touched have a higher probability of being inaccurate. If you have a bin of bolts that is accessed once a day by one person there is one chance each day for the inventory to be off by the end of the day, however if that bin is accessed twice a day by five people there are ten chances that the inventory will be off by the end of the day. Even though these bolts may be worth fifty cents a piece and you have electronic components that are worth five thousand dollars each, if they are only accessed once a week they have a much less chance of having their inventory count off at the end of each work day.
Set Up Inventory Zones
To perform a cycle count by frequency you first need to set up your inventory by zones. These zones could be set as finished goods, raw materials, subassemblies, miscellaneous items, or you can set them up by locations as in racks, cabinets, palettes, and bulk storage. Once you have the zones set-up, you need to take count of the inventory in each zone and do a little research in to how often these items were accessed in a given time, usually 90 days; each transaction in or out counts as one.
Once the research for each zone is complete the zone gets assigned a frequency number. This is done by taking the amount of times the zone was accessed and dividing by the number of items in that zone and multiplying by six, this is to make sure that all items are counted at least once every six months.
By tweaking your software program a little bit (Barcoding’s internal software services group can help you here very easily) when each item in a zone hits their frequency number a cycle count card is printed and that item is counted.
This method ensures that the most frequently used items are counted most often as they have the highest probability of being less accurate in their levels than areas in your facility that are less frequently used.