Cycle counting is a process where a small number of items is counted on a daily basis to maintain the accuracy of the recorded amounts on hand in the inventory system. This inventory record accuracy (IRA) is crucial to reduce inventory costs because it ensures that you do not have more inventory than you think you have. It also reduces the risk of stocking out requiring the product to be ordered with expensive emergency overnight (or worse, same-day) delivery. From a clinical standpoint, cycle counting paired with effective reorder points and reorder quantities ensures that needed products are available when the clinicians need them.

Cycle counting can be performed a number of different ways and there are several methods for selecting which items to count. My experience has repeatedly demonstrated the simultaneous daily use of the following two methods as best-practices for managing a high-performance inventory:

• Counting items that show zero on-hand in the system

• ABC (or Pareto) cycle counting

These methods are supported by most modern inventory software systems and there will be reports and utilities that will help manage these counts.

The simplest and fastest of the two recommended cycle count methods, the zero on-hand count can be performed by running a stock status report of the inventory to determine which items show zero on-hand. This stock status report is then used as a count sheet or the list of items to build into a count sheet. With this technique, many items can be quickly cycle counted since the item is either not there (indicating that the inventory record is accurate) or it is there (requiring a count and adjustment of the inventory record). Since counting zero is as legitimate as counting huge quantities, it is possible to cycle count hundreds of items in this way with minimal effort, provided there are enough items with zero on-hand.

ABC cycle counts, otherwise known as Pareto cycle counts, are built off the principle observed by the Italian economist Vilfredo Pareto (sometimes referred to as the "80-20 Rule") that the smallest portion of a population usually has the largest impact on the whole. In ABC cycle counts, the fastest moving items are counted more often than the slowest moving items.

ABC cycle counting involves dividing the inventory into three categories: A, B and C. There are many methods for allocating which percentage of the inventory to each category. My preferred allocation is the following:

• A items: The 10 percent of the inventory that moves 90 percent of either volume or dollars.

• B items: The middle 20 percent that moves 20 percent of either volume or dollars.

• C items: The bottom 70 percent that moves 10 percent of either volume or dollars.

After we have allocated items into the above ABC categories, we need to assign counting frequencies to each category. My recommendations for counting frequencies are that A items should be counted 12 times per year, B items four times per year, and C items one time per year. If you are using inventory software to manage this process, it will calculate and track which ABC category each item belongs in, how often it is being counted and when the last count took place. If you do not have inventory software to manage the process, it can fairly easily be managed with a spreadsheet application.

When the count sheet is prepared, a certain number of items of each ABC category will be selected. Table 1 demonstrates the calculations for an example inventory with 3,000 unique items (SKUs). Once we perform the calculations with the above ABC category definitions and counting frequencies, we see the number of items to be counted per day would be 10 As, 10 Bs, and 11 Cs for a total of 31 items per day. If the inventory had 10,000 SKUs, it would only require 104 items to be counted per day. This makes the process of counting inventory extremely manageable and does not require significant time on the part of the inventory staff to perform.

Additionally, once ABC cycle counting is mastered and IRA is consistently above 90 percent, most auditors will permit the inventory to discontinue the annual physical inventory counts. The benefits of eliminating annual physical inventory counts is a cost savings on labor for the huge counting effort, as well as ensuring that trained inventory staff is performing the counts rather than untrained support staff who are not familiar with the products counted.

In addition to its financial benefits, cycle counting helps improve product availability. A lot can be gained with counting just 31 items per day.