Parts Inventory Management: Implementing a Cycle Count System

Cycle Count is an inventory control strategy that identifies and rectifies inventory discrepancies between your system of record and physical stock. Many businesses complete this process every year.

Statistics show that those who implemented and followed a cycle count system had more accurate inventory records and saw more significant profits, had they not completed the cycle count process.

A 2019 study by the ECR, a retailer and manufacturers working group fund, found 60% of all retailer's inventory records are inaccurate. The IDS Integrated Dealer Systems’ Dealership Industry Insights Report says the average dealership employee spends 1.5 hours daily looking for parts. Industry Expects state yearly shrinkage of inventory is about 1.4%.

Studies show that following a cycle count can decrease that by half.

A cycle count strategy can improve quality assurance and customer satisfaction rates within any inventory-based business. Effects can include reducing inventory loss and eliminating unexpected out-of-stock and obsolete inventory. Doing so may directly result in lost revenue and unhappy customers.

Planning Tips

Map out your actual areas. Label your receiving area, bins, etc. Make it clear what the areas are. Large vendors such as NFP may be willing to come out and assist with mapping out your store and back areas. They can create what is known as a Planogram or layout for your store and storage areas. Ensure areas stay clean and organized.
Organize and categorize parts within bins. Many recommend having bins assigned based on manufacturer and then by type of part. Keep in mind, do what makes sense for your business.
You can separate your parts, to easily complete more frequent cycle counts on high-volume parts.
The average RV dealership plans a complete cycle count over 12 weeks, moving from bin-to-bin during the process. Completing smaller set inventory counts allows for minimal disruption to regular business. This schedule is typically followed on a calendar application.

Take into account the process of delivering parts to the service department. You can drastically influence their productivity and efficiency, based on where parts are and how they get them. Setting guidelines to acquire parts, to be used in the service department, can minimize discrepancies in inventory count and save time. The fewer people with direct access to your parts inventory, the better.

Cycle Count Order / Priority

Separating your surplus and slow-moving items in a single bin may be beneficial. That way, you can complete this cycle count first and start planning on how to unload the dead or overstock items.

Stay away from surplus. Having an overstock of items is not a cost-effective practice. It is good practice not to bring anything officially into inventory unless you have received three orders or requests for it within the past 70 days.

These items cost money to store and manage. You should be creative in your sales approach to avoid going into the negative on these items. This includes bundling parts that don't sell as well with better-selling inventory or checking to see if your vendor has a buyback program. Finally, you can try to sell on other platforms like Marketplace, Shopify, or eBay. It might take some effort, but you could still be quite profitable getting the parts on a more visible platform.

Your best sellers would be the next bin or group of parts to run through the cycle count. Many sources state that these are usually the items with the most inaccuracies. You should have accurate counts on your most profitable and fastest-moving inventory to avoid disappointing customers.

Ranking Method in Cycle Counts

Your top-performing parts could fall into the 80/20 rule. They may account for 80% of your sales but only 20% of your total inventory.

Ranking Method – Cycle count based on the 80/20 Rule.

Items with 80% sales, count 6x per year.
Items with 15% of sales count 3x per year.
Items with 4% of sales count 2x per year.
Items with 1% of sales count 1x per year.

Seasonal Indices Analysis

These calculations can assist with finding the optimal quantity of a part during a particular time of year. You can then use EverLogic to ensure the ordering is set to not go over or under that number during that time of year.

Organize data into quarter or 3-month blocks
Calculate season totals & season average
Sum of Q1 for years 2015 through 2020 = 457892
Divide by 6 = 76315.33 = is the average dollar amount for inventory in Q1
They can be grand totals but are more useful to calculate on the part level.
Calculate Grand Average = Sum of Q1 through Q4 divided by 4
Calculate season index = (seasonal average / grand average) multiplied by 100

Min Max Inventory Control

This strategy aims to improve turnover and reduce stockouts and overstock.

Minimum = Safety Stock + (Daily Run Rate * Lead Time)

Minimum = Average Daily Demand * Average Time to Sell

Reorder Point = Average Demand per day * # of days it takes to get a new shipment

Minimum level of stock = reorder level - (average rate of consumption * average reorder period)
Reorder level = Max rate of consumption * max reorder period

Safety stock + lead time consumption
Lead time consumption = Annual Consumption – 360 x lead time

Measuring it All

Supply chain Management includes striving for precise lead times and optimal supplier service levels. Cycle count brings you closer to inventory accuracy. This can be measured in:

Inventory Record Accuracy (IRA) = Matched inventory / # of items counted

IRA = [1-the sum of absolute variance] / # of total inventory
If the physical count = 354 and the system count is 375, then[1-(21/375)x100] / 100 =94.4%

Inventory Turn = # of times inventory is refilled in a year.

Divide the annual cost of goods sold by the average inventory level. Example: COGS = an average inventory is $50,000, then inventory turn is 3, meaning merchandise has been sold and replaced 3x this year.

Average turnover = (Begin inventory + Ending inventory) / 2. Keeping this @ a consistent level avoids stockouts.
RV Dealers' average inventory turnover is around 2.4, per a study completed in 2019 by the Retail Owners Institute.

How do we know if a specific item is making money, Gross Margin Return on Investment (GMROI)? A formula that can be applied to a wide variety of circumstances, including if cycle count itself, is a profitable move. Gross Margin / Average Inventory Cost = GMROI

Lead Time = how long it takes for a customer to receive an item after an order is placed. Order process time + production lead time + delivery lead time
Safety Stock = reserve inventory = (max # of units sold in a day multiple by max lead time for stock replenishment) – (average daily usage multiple by average lead time in days)

Additional Tips

Document your processes – Having your process documented can help facilitate growth. Everyone completes the task in the same fashion promoting accurate data and overall accountability.
Optimize Purchasing Processes
Create and manage relationships with your vendors and your suppliers. Attempt to negotiate to buy-back dead stock, get regular updates on lead times, and ask if they do planograms.

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Post by Kelly McParland
August 28, 2023