Physical Inventory or Cycle counting is used to streamline the inventory of the items within warehouse and the inventory shown in the sytem ( that is to tally the actual inventory and the on hand showing in the system).
A physical inventory is done once a year to check and correct the accuracy of your inventory. Often used by banks to audit their investment into your company or to simply reset your stock levels so that inventory is correct and customer service is not impacted by wrong information.
A cycle counts purpose is to find systemic problems, it is NOT intended to ensure your inventory accuracy or fix your on hand quantities. Those are mere bi-products of a cycle
count.
All inventories will have different classification of products called A,B,C,D classification. These classes are defined by the importance and movement of a product where an A item is high dollar / high mover, and a D item is something that is identified by the dust it has on the
shelf.
A cycle count filters through your inventory over a course of a year. A company may choose to count all their A items 4 times a year, B items 3 times a year, C items twice, and D once.
The theory behind the Cycle Count is to monitor yours systems (processes and procedures). Are you pulling parts correctly, are they marked correctly, is paperwork being processed, is the receiving dept. counting items on the inbound, are product bar coded correctly, is a bill of
material correct, theft, and a hundred other things that could possibly cause your inventory to go out of balance.
A cycle count finds those flaws and offers you a chance to
correct them.
The reason an A item is counted more often than a D is not
because of Value $$, yet because it is subjected to your
processes a lot more. Assuming you have a very solid
system/process, you constantly test it (via Cycle Counts),
and you apply that same exact process to an A item as you
do a D, there is a very high probablility that your
inventory accuracy on the D item will be as accurate as
your A, even though you only counted it once in a years
span.
Lastly, a good cycle count has a Hit of Miss criteria.
There are always going to be acceptable levels of
tolerance. Simply put, do we really care if we are off by
1 or 2 pcs. of a $0.01 part that we stock THOUSANDS of?
NO! So we identify those tolerances. If your counts fall
with in those tolerances, you have a HIT (good thing). IF
they fall outside of the tolerance you have a MISS (bad
thing).
Misses are investigated. Problems researched and solutions
secured. THEN as a final measure you would schedule the
MISS for a future cycle count, say in a couple of weeks to
ensure the fix worked, the process is functioning and the
system is good.
Some differences of the CC and physical inventory is as follows
1)cycle counting can be done on specific items or selective items
But in physical inventory we have to count all items.
2)cycle counting can be done multiple time in an year , like monthly or quarterly for high value items but physical count is done once an year or at the most twice for all the items.
3)Cycle Count : We can schedule the count
Physical Inventory : We cannot schedule this.
4)Cycle Count : We cannot have a snap shot
Physical Inventory : We can have a snap shot
5)Cycle Count : We can view the qty in the system
Physical Inventory : We can not view the qty in system
6)Cycle Count : We cane select the items using ABC analysis.
Physical Inventory : It is done for all the items.
7)Cycle Count : We need not to freeze inventory transactions.
Physical Inventory : Need to freeze inventory transactions.
8)Cycle Count : Recount is possible
Physical Inventory : Recount is not possible.
9)Cycle Count : We can maintain recount history.
Physical Inventory : No recount, hence no history.
10)Cycle Count : Adjustments can be procesed on approval.
Physical Inventory : Can be done using adjustment concurrent program
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