For many small and medium-sized enterprises, inventory counting requires operational downtime, is associated with overtime work and, unfortunately, often results in discrepancies between system data and actual inventory levels. This reality raises two reasonable questions:
- How can a company ensure that its inventory count is truly reliable?
- And if warehouse downtime results in additional labor costs or even lost sales, is there an alternative approach?
Annual inventory counting as a process of inventory control
In our article “How a WMS can help you with inventory counting“, we examined the definition of annual inventory counting as a process of counting and verifying a company’s physical inventory [1]. In addition, we explored how Warehouse Management System (WMS) functionalities, such as location management, scanner utilization and full transaction traceability, can significantly reduce the errors associated with manual inventory counting and facilitate the overall counting process.
The second question, however, remains: Is it necessary for businesses to wait for the annual inventory count to obtain a clear picture of their inventory levels? Even when inventory counts are conducted during the year, the process often remains labor-intensive, as it requires the commitment of significant resources, including time, personnel and operational effort.
The cycle counting approach
Cycle counting is a reliable alternative inventory counting approach in which the counting process is limited in scope rather than covering the company’s entire inventory [2][3].
More specifically, it is carried out either within specific areas, locations or warehouse zones, or on selected stock keeping units (SKUs) based on inventory-related criteria (e.g., inventory value) and is performed at regular intervals.
These limitations simultaneously reduce the resources required to complete the process and eliminate the need for a complete warehouse shutdown. Another important advantage is that more frequent execution enables earlier identification of discrepancies between physical and system-recorded inventory, thereby improving inventory data accuracy. This, in turn, provides additional benefits, such as a more accurate inventory picture, improved purchasing forecasts and more informed decision-making.
How a Warehouse Management System supports cycle counting
One of the functionalities that differentiates a WMS from other information systems is its ability to record and manage warehouse locations and zones [4]. This detailed representation enables users to know in real time which SKUs are stored in which warehouse locations, the quantities available at each location, as well as detailed inventory attributes such as receiving dates, production dates, expiration dates, serial numbers and more.
Based on this detailed information, users can create an inventory count plan. Simply put, an inventory count plan is the digital equivalent of the inventory counting sheets that were traditionally prepared in paper form, namely an organized list of the locations or SKUs that need to be counted. The advantage of this digital plan is that users can easily select specific items for counting or restrict the count to particular warehouse locations, allowing a full inventory count to be executed gradually and in stages.
Another important capability provided by a Warehouse Management System is the control of inventory transactions during the counting process. Specifically, users can predefine that the SKUs or locations included in the count will be temporarily “locked” within the system. As a result, they cannot be scanned and therefore cannot be moved, shipped, sold or otherwise processed.
In practice, this means that the system-based locking process must also be supported by the appropriate physical organization of the inventory count [5]. This helps prevent human errors and ensures that inventory remains stationary not only within the system but also in the physical warehouse environment.
In conclusion, cycle counting is not intended to replace the need for, or the obligation to perform, annual inventory counting. Instead, it complements the annual count by providing companies with an additional method for monitoring and controlling their inventory more frequently. Combined with the capabilities of a Warehouse Management System, the process can be organized, controlled and ultimately integrated into the day-to-day operation of the warehouse, delivering significant time and cost benefits.
For organizations that recognize the importance of inventory accuracy, the adoption of a WMS and the optimization of warehouse processes—including inventory counting—represent key steps toward operational excellence. Learn more about our WMS solutions here: https://www.ingenio.gr/specialized-solution/wms/
Sources:
[1] NetSuite. (2021). Physical Inventory: Steps, Best Practices & Tips. https://www.netsuite.com/portal/resource/articles/inventory-management/physical-counts-inventory.shtml
[2] Destro, I.R. et. al, “The impacts of inventory record inaccuracy and cycle counting on distribution center performance”, Production, Vol.33, 2023. https://doi.org/10.1590/0103-6513.20220077
[3] Wijfeels, L. et al., “An enhanced cycle counting approach utilising historical inventory data”, IFAC-PapersOnLine, Vol.49(12), pp.1347-1352, 2016. https://doi.org/10.1016/j.ifacol.2016.07.748
[4] Shanmugamani, K., & Mohamad, F., “The Implementation of Warehouse Management System (WMS) to Improve Warehouse Performance in Business to Business (B2B)”, Journal of Industrial Management, 1(2), pp. 31-40, 2023. https://doi.org/10.15282/ijim.17.4.2023.10091
[5] Johnson,B.W. , “An Overview of Cycle Counting”, Dannible and McKee LLP, 2018. https://www.dmcpas.com/wp-content/uploads/2018/11/Implementing-Effective-Cycle-Counting.pdf