How to get rid of yearly stocktakes by properly setting up cycle count

Every warehouse is required to do some kind of stock count. The frequency and depth of the count are determined by national law and accounting standards.

Cycle counting (or perpetual inventory counts) have become more popular in recent years as an alternative to the annual count (or stocktake) of all items in the warehouse. A big disadvantage of a stocktake is that the warehouse will typically need to be shutdown for the duration of the count. Next to this, stocktakes can lead to additional difficulties in resolving count mismatches since the mismatch could have happened a year ago.

Auditors have in some circumstances agreed that if each stock line is counted and audited at least once per year, it will be sufficient for the company to only conduct cycle counts if it can prove those to be accurate. The year-end stock data will then be collected from the WMS.

Many warehouses are working to replace their yearly stocktake with more frequent cycle counts

Setting up your counting process

It is best practice to use an ABC analysis for setting-up your cycle count processes to make sure that your fast-moving, high-value goods are counted more frequently than your slow-moving, low-value items. Fast-moving inventory has a higher chance of mispicks, and expensive items have a higher risk of shrinkage.

Therefore, it is advised that high-value and quickly moving inventory is counted every month (A), medium sellers are counted every three months (B), and slowly moving items are counted once or twice a year (C). The frequency will also depend on the accuracy of your inventory. Until accuracy improves, a high error rate should lead to more frequent counts. Each disparity must be looked into, and steps must be taken to prevent a recurrence of the issue.

ABC analysis

It is often possible to retrieve an ABC categorization from the WMS. According to sales volume or profitability, "Class A" items are the most crucial SKUs, followed by "Class B" and "Class C" products. Some businesses might opt for a classification scheme that divides goods into more than just those three categories.

The Pareto principle states that for many outcomes, roughly 80 percent of consequences come from 20 percent of causes. ABC analysis determines that 20 percent of inventory that provides about 80 percent of the value. As a result, the majority of warehouses have a small number of "A" products, a somewhat bigger group of B goods, and the largest number of C goods. It's possible that the Pareto Principle isn't always accurate. Analysis, however, reveals that valued goods do lean toward the 80/20 distribution. ABC analysis quickly and easily pinpoints the "sweet spot" where the majority of a company's revenue originates.

For an ABC inventory analysis, use this formula: (Number of sold items per year) x (Item cost) = (Annual usage value per product)

How good is your stock management?

You can rapidly ascertain how well you're managing your stock by conducting your ABC analysis. Calculating the so-called stock turn is a quick and simple approach to determine whether there is an excess of slow-moving stock in the warehouse:

Stock turn = (The difference between the average cost of goods kept and the cost of items sold) OR (Average number of units held in stock divided by annual throughput in units)

The following are typical examples of stock turns within businesses:

  • Best in class warehouses: >150
  • Cold chain: >120
  • Retail: >18
  • Manufacturing in developed countries: 10 to 30:
  • Maintenance warehouses: 3

The higher the number, the better the warehouse is doing at managing its inventory. Because inventory must be kept on hand in case of breakdown, maintenance warehouses will always have low stock turnover.

Organizing the count

Every stock count needs to be organized. You need to be aware of who will perform the stock count, what you'll be counting, when you'll do it, the tools and equipment you'll need, and the time frame permitted. You must also protect the warehouse staff's safety if you are counting from a height. A adequate safety cage must be offered if forklifts are being used. The use of cages on forklift trucks is prohibited by several health and safety laws and corporate policies, necessitating the use of specialized equipment such as raised work platforms.

Make sure that everything is stored properly before the count begins, and try to send out as many products as possible before starting a stocktake. Second, make sure all outdated units are disposed of before the count begins. Stock that shouldn't be in the warehouse should not be counted.

During each year's stocktake, some warehouses will apply coloured labels to each pallet. Spotting labels from last year’s stocktake is a great way to discover non-moving or slowly moving items. It is not unusual to find pallets or cartons that have been counted numerous times but never transported.

If your system is paper-based, it is typical to include a counter and a checker moving through their area together. One person should be adequate if you are scanning each item and location. During an official audit, the counter and checker are often accompanied by an auditor to conduct sporadic site inspections to ensure the count is accurate.

Disadvantages of manually counting stock and counting only once per year

Companies will inevitably hire staff who are inexperienced with the products in order to accomplish a full stock count in the shortest possible period to minimize disruption to sales. Their motivation to complete a thorough job may also be questioned given that these counts typically occur on weekends or during the holidays around Christmas and New Year's.

It is possible that additional employees from agencies may need to be hired to help with the count if there are a lot of locations, open cartons, and specific goods that need to be tallied in order to make sure it is finished on time. Conducting recounts to solve discrepancies can take days to address, thus timely completion is uncommon. For these reasons, operations is often resumed during a stocktake to avoid disappointing consumers, although this usually makes the issues worse. This is why more and more warehouses are switching from (yearly) stocktakes to cycle counts.

Any inconsistencies between the “system count” and the “count figures” should be investigated immediately by a supervisor, and this should be repeated until two matching figures are obtained. If a warehouse is only conducting a yearly count, chances of discovering the causes of a disparity are slim. Since the underlying source of the disparity is rarely identified, it cannot be removed and can therefore lead to new discrepancies in the future.

When using a paper system, it's normal to give workers information about locations and product codes (or SKUs) without the expected quantities. Quantities, changes to SKUs, and additional remarks like product damage are written on the sheet. As the administrative staff needs to read each person's writing before entering it into the system, this could result in additional errors.


Counting inventory is part of running a best practice warehouse operation. In order to this efficiently and effectively, proper planning is required. This all starts with knowing your stock and categorizing it (ABC) to focus your counting efforts on those goods that are most prone to errors and could lead to significant losses to your business in case of discrepancies.

We’ve also seen that counting infrequently can lead to many issues. For that reason, many warehouses are working to replace their yearly stocktake with more frequent cycle counts. A perquisite for a warehouse to abolish the annual count is a high inventory accuracy level. This means moving away from paper based processes or processes that require other manual, or error prone, processes. This also includes the use of barcode scanners. Although customary in a large share of warehouses, barcode scanners still require warehouse personnel to manually count inventory. While people are often considered to be the “gold standard” in counting inventory, many warehouse managers don’t realize that the average accuracy of a person counting inventory ranges from just 90% to 97%.

Warehouse managers often don’t realize that the average accuracy of a person counting inventory ranges from 90% to 97%.

At Powerhouse AI, we automate this whole process to eliminate human error by making cycle count as simple as taking pictures: automating counting, reading of labels and administration. In case you want to know how this technology can help your warehouse processes, feel free to get in touch.

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