Why do we cycle count? Cycle counting is the proven, accepted method of achieving high levels of inventory accuracy. Both the accounting folk who have to keep track of company assets and the material managers who have to plan product deliveries have a compelling need for truly accurate data.

What should we cycle count? Here the answers in the literature are somewhat murky. I suggest that purchased parts is a category that lends itself most to cycle counting. The balance of what follows is specific to purchased parts unless otherwise indicated. Whether subassemblies and finished goods should be cycle counted will be addressed later.

How do we differentiate between different classes of parts for cycle counting? The traditional method is to use ABC analysis and I agree with that. However, there are two caveats here:

1. ABC runs should not commingle purchased parts with subassemblies and finished goods because this will force all purchased parts down toward the "C" class, defeating the purpose of the analysis.

2. "A," "B" and "C" may not be the only classes used. You may want to include and establish tolerances for such classes as inactive parts, floor stock, samples and prototype parts, parts at suppliers, consignment parts, etc.

What tolerance levels should we apply? Here are some "typical" numbers. Are these numbers definitive? No. The only category where there is consistency in the literature is the "C" parts at 5.0 percent. The "A" numbers start at �0.0 percent and run to �1.0 percent. The "B" parts run from �1.0 percent to �3.0 percent. The key factor is not the actual percentages, but an understanding of what the numbers mean. For "C" parts, for example, if the tolerance is �5.0 percent, then the planning process must allow for the numbers to be off by 5 percent. Here is a good place for applying safety stock to cover the deviation. Perhaps a 3 percent safety stock on "C" parts, given that they represent from 5 to 10 percent of the total cost of inventory, is a small investment in ensuring a minimum of stockouts due to the "planned" discrepancy.

How often should we count? Here is a representative set of numbers gleaned from the literature:
A — Every 4 weeks
B — Quarterly
C — Annually

This works very well with items with long dwell time in the manufacturing process. These times can be adjusted up or down depending on the individual business process. However, it is important to remember that the statistical rules which guide cycle counting assume that any realistic sample will be representative of the entire part population.

What should we do with a count discrepancy? First, all counts out of tolerance should be recounted, the source of the discrepancy determined and, if warranted, the records adjusted. However, what to do with counts in tolerance? Consider this case: A part is machined to �0.005 inch tolerance in its diameter. A part is inspected and is found to be -0.002 inch from the design center dimension. Would you spend any time in reworking (or rejecting) this part? Of course not.

Now, extend this logic to cycle counting discrepancies. A "C" part with �5 percent tolerance is counted and a 2 percent difference between the "book" value and the actual count is found. Would you (a) fix the record, (b) recount and then fix the record, or (c) accept the fact that the count is within tolerance and do nothing. The gut reaction, given my informal benchmarks, is to adjust the record. However, one should consider these critical points before accepting this:

1. The part's count is within tolerance and there is no data available to indicate whether the count or the data is wrong. Discrepancies usually have a Gaussian (bell curve) distribution rather than becoming additive.
   
   
2. Since "C" parts represent the bulk of the part population, and no adjustment of the records should be made before determining the root cause and doing a recount, we are asking for a tremendous amount of non-value-added activity to adjust inventory balances for parts that are already established to be within tolerance.
   
   
3. The material planning process has used safety stock to ensure that these minor discrepancies will not interfere with the validity of the material plan.

Here are some other simple rules to help increase inventory accuracy:

• Within the cycle count plan, move all parts with zero balance up in the count sequence. It is easier to count zero than any other number.
  
  
• Any part, regardless of category, that shows a negative inventory balance should be immediately counted and the problem corrected. Negative balances are only a symptom of a deeper problem.
  
  
• If parts are counted at receiving, the package should be sealed with the count and counter name on the label. The seal should be such that one has to break the seal to remove any parts. If the seal is not broken, the parts can be put away without recounting.
  
  
• Segregate and seal in like manner all slow moving parts. There is no value added in constantly counting parts that have had no movement.
  
  
• Insist that all parts coming back from the production floor are counted, labeled and sealed before they are returned to stock.

At the beginning of this discussion, I indicated that one should separate purchased parts from the balance of the inventory population in doing ABC runs to establish both count tolerances and frequencies. I find it difficult to look at ABC tolerances for finished goods. These are the parts that have all the value added of labor and overhead, and therefore are all relatively expensive items when compared to purchased parts.

Rather than consider cycle counting these finished goods items, I would rather institute policies and procedures that ensure that all movements of finished goods into and out of the stockroom are really precise in counts. At a minimum, the tolerances for "A" parts should apply to all finished goods. The subassemblies should be separated into high-ticket items which carry the same rules as finished goods, and the balance should use "B" tolerance rules. The measure of successful management of finished goods and high-ticket subassemblies is that any spot check of inventory status should show these strict tolerances are being adhered to and therefore cycle counting need not be applied here.

In conclusion, cycle counting — with good business practice — has a real place in bringing purchased part inventory accuracy up to snuff. For finished goods and high-ticket subassemblies, higher discipline in managing "in" and "out" transactions should be the rule of the day.

Copyright © 1998 by APICS — The Educational Society for Resource Management. All rights reserved.

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