Inventory is the lifeblood of your company. It costs money every day that it sits in your warehouse, so it’s important to know exactly what you have. So many aspects of your business rely on accurate inventory, including shipping orders and purchasing new inventory. Get those wrong and every department can be negatively impacted and overall growth for your business will stall. Luckily there’s a more efficient way to ensure accurate inventory that this writer finds underrated: Cycle Counts. To get a better understanding, we’ll compare several different widely-used methods (ABC, Pareto ABC, and Location-based) so that you can make an informed decision about how to count your inventory.
Physical Inventory Counts
Physical Inventory Counts are typically an annual occurrence that happen after hours and often while employees are on overtime. For an effective count, inventory-related business must stop, and all open transactions must be completed. The purpose of this count is to identify any discrepancies between what you physically have and what your system says you should have. But even if you find something odd, doing only physical inventory counts annually makes it difficult to identify the reasons for the discrepancy. You’ll have to unpack your records and dive into details from the past year to understand the issue.
Physically counting your inventory, after hours, with potential overtime labor, is time and resource intensive. Frankly, not all small– and medium–sized businesses can afford to do an annual count, and it’s an even bigger hassle for bigger businesses. That’s where the advantage of Cycle Counting comes in.
Cycle Counting in NAV/BC
Cycle Counting in NAV/BC ensures that inventory is counted multiple times a year as opposed to once a year. It can be done during business hours so you’re not paying employees overtime or shutting down to halt transactions. Because you’re counting items more frequently, it’s easier to spot discrepancies and piece together a clearer audit trail.
Most importantly, Cycle Counting will reduce write-offs for inaccurate inventory. When you perform an annual Physical Inventory, you could have write-offs in the millions, with no clear reason or audit trail. But because Cycle Counting ensures Inventory is counted multiple times a year, you will have fewer and smaller write-offs throughout – a huge saving in time and resources.
“…because Cycle Counting ensures Inventory is counted multiple times a year, you will have fewer and smaller write-offs throughout – a huge saving in time and resources.”
There are a lot of different methods of Cycle Counting in NAV/BC, so as you consider your options, this is the perfect time to bring in your NAV/BC partner.
ABC Cycle Counting
ABC Cycle Counting in NAV/BC is based on classifying items as A, B, or C. Classifying the items is up to you. In a typical ABC Cycle Count set up, your faster moving items belong in Class A, the next fastest moving items in Class B, and so on. Class A items, because they move quickly, will be counted more than Class B, which will be counted more than Class C. This method is typically used in medium to larger companies that need more oversight on the fastest moving items in their warehouse.
Classes are set up in “Physical Inventory Counting Periods”. When you set up your classes, you will assign a number for “Count Frequency per Year”. In the below screenshot, Class A is set up to be counted once per month, Class B once per quarter, and Class C once per year.
Classes are assigned to Items using the “Phys Invt Counting Period Code” on the Item Card under the Warehouse Fast Tab.
Business Central assigns the Next Count Starting and Ending dates when the Phys Invt Counting Period Code is set. Business Central sets the dates based on the count frequency associated with the code that has been assigned.
After you assign Class Codes to your Items, you are ready to run the Physical Inventory Journal. In the Physical Inventory Journal select Actions, Functions, Calculate Counting Periods.
You will get a list of all items that are due to be counted based on your count frequency number assigned to the Class Codes. Click OK.
Select your Posting Date and click OK.
This calculates the current inventory of the Items selected and populates them into the Physical Inventory Journal. Now you can enter the physically counted quantity in “Qty (Phys Invt)” and Post when finished.
You can open the Item Card to see that the dates for the next scheduled counting period have updated after posting the journal.
Pareto ABC is like ABC, but incorporates the Pareto Rule, which states that 80% of issues are caused by 20% of the inventory. Unlike typical ABC which focuses on the fastest moving items, Pareto ABC focuses on the 20% of the slower moving items in your inventory. Since these items are touched less frequently, some companies find they tend to cause more issues than the faster moving items. If you have many SKUs with a broad mix of fast- and slow-moving items, you might want to consider Pareto ABC.
Pareto ABC is set up to run using the same functions in Business Central as ABC. The only difference is, instead of assigning classes to items based on the fastest movers, you assign classes based on slowest movers or items with the most issues. Once the Classes are set up the way you want, you can run your Physical Inventory Journal just like you would for ABC Class.
Location–based Cycle Counting in NAV/BC allows you to run Cycle Counts by location. With Location-based Cycle Counting, there is no Class setup or item setup. Simply run the Physical Inventory Journal and select Actions, Functions, and “Calculate Inventory”.
Select your Posting Date, enter a Document No., and under Filter by Totals, select a Location.
Now you have a list of all items with inventory in the BLUE Location and you can enter the counted amount in Qty (Phys. Inventory) and Post when finished.
*Although we typically recommend Location-based physical inventory counts for smaller companies, it’s possible to implement ABC, Pareto ABC, or an even a hybrid of the methods depending on company needs. A small company, for example, with high variability in movement between items, might find themselves in greater need of using ABC, or Pareto ABC Cycle Counts.
Depending on your existing environment, each method listed above may have a different level of setup/maintenance associated. It is up to you, the customer, to determine the value of the up-front time and resources you spend to reduce long-term costs, such as inventory errors.
If you are looking to introduce cycle counting to your process, then we usually recommend engaging your partner to help facilitate this. However, if you decide to move forward without partner input, here are some tips:
- If you use ABC or Pareto ABC, do not forget about your slower moving items, as they still need to be counted.
- If you use Location–based Cycle Counting, create a schedule so that locations are not missed throughout the year.
Managing your inventory well is critical to your business success, and your NAV/BC partner should be prepared to help. The goal for your chosen method(s) for counting inventory should include: maintaining accurate records of your inventory, ensuring accuracy of inventory-related financial information, and getting the most value out of your labor and dollar investments in inventory management over time.
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