5.5 Cycle Counting & Reconciliation

Inventory accuracy is not a "nice to have"; it is the mathematical foundation of your entire operation. If your system says you have 100 parts and you physically have 90, you will eventually shut down the production line. If you have 110, you are over-ordering and bleeding cash. Stop relying on the "Annual Physical Inventory"—a disruptive, expensive theater that fixes nothing for the other 364 days. You must implement a continuous Cycle Counting regime that audits the process, not just the parts.

The Cycle Count Architecture (ABC Logic)

Do not count everything with equal effort. Align your labor with your risk profile. Use the ABC stratification from Section 5.1.

Frequency Rules

• Class A (High Value/Critical): Count Monthly (12x/year). These parts move fastest and carry the highest financial risk.
• Class B (Medium): Count Quarterly (4x/year).
• Class C (Low Value/Bulk): Count Annually (1x/year) OR trigger a "Count on Zero" (count when system shows < 5 units).

Sample Size Calculation

Do not guess. Calculate the daily workload to ensure completion.

• Formula: (Total A SKUs × 12) + (Total B SKUs × 4) + (Total C SKUs × 1) / 250 Working Days = Daily Count Target.
• Execution: Warehouse staff must execute these counts as the first task of the day, before picking begins.

Operational Execution (No Shutdowns)

The warehouse must remain live. Do not freeze the entire building; freeze the Bin.

1. Blind Counts: The scanner/sheet must never show the expected system quantity. If the counter sees "100," they will count "100." Make them count what is there.
2. Bin Freeze: During the count, the specific bin is locked in the WMS. No picks/put-aways allowed until the count is posted.
3. Zero-Crossing Check: If a picker goes to a bin and finds it empty (when system says positive), this is an immediate "Emergency Count" trigger.

Discrepancy Protocol & Root Cause

When the Physical count ≠ System count, do not just "adjust it out." Follow this strict logic path to clean the data.

Step 1: The Blind Recount

• Trigger: Variance detected.
• Action: Send a different person to count the same bin immediately. Do not tell them the first result.
• Result: If Recount = System, the first counter made an error. No adjustment.

Step 2: The Transaction Audit

• Trigger: Recount confirms the variance.
• Action: Review the last 10 transactions (Receipts, Picks, Adjustments). Look for:
  • Unposted receipts (material physically there, electronically pending).
  • Open pick jobs (material allocated but not moved).
  • Unit of Measure (UOM) confusion (e.g., counted 10 packs, system expects 100 units).

Step 3: Adjustment & Categorization (RCA)

You must assign a reason code. "Unknown" is not an acceptable category for A-Items.

Code	Category	Definition	Owner
RC-RX	Receiving Error	Wrong qty/part received; Label does not match contents.	Receiving Lead
RC-PK	Picking Error	Picker pulled from wrong bin or grabbed extra units.	Warehouse Manager
RC-BM	BOM/Process	System backflushed 10, but physics required 12. (Engineering data incorrect).	Manufacturing Eng
RC-SC	Scrap Unreported	Production damaged parts but threw them in the trash without recording.	Production Lead
RC-VN	Vendor Variance	Sealed pack contained wrong quantity (Supplier Quality issue).	Quality/Purchasing

Pro-Tip: If RC-BM (BOM Error) frequency exceeds 5%, your Inventory Accuracy is impossible to fix in the warehouse. You must audit the Engineering Bill of Materials.

The Outputs

1. The Cycle Count Calendar

A dynamic schedule generated by the ERP/WMS. It pushes tasks to scanners automatically. It must track "Percentage Complete" to ensure the annual plan is not falling behind.

2. Variance KPI Dashboard

• IRA (Inventory Record Accuracy): Target > 98%.
• Absolute Variance Value: Target < 0.5% of inventory value.
• Strike Rate: % of counts that required a recount. (Measures counting proficiency).

3. Corrective Action Log

A rolling document tracking recurrent errors.

• Example: "Found consistently short on 0402 resistors. Action: Calibrate reel counters in SMT area."

Final Checklist

Control Point	Setting / Rule	Non-Negotiable
The "Trust" Rule	Verification Gate	Planners and Buyers must not trust MRP output until IRA is consistently > 95%. Before that, all critical buys require visual bin checks.
Authority	Write-off Limits	Warehouse Lead < $50; Ops Manager < $500; Finance Director > $500.
Discipline	Blind Counts	Never display system quantity on the count sheet/scanner.
Timing	Daily Routine	Counts happen Daily. If you batch them to the end of the month, you will fail.
Feedback	Loop to Eng	BOM errors found during counts must generate an automatic ticket to Engineering.