The Modern Manufacturer – Cycle Count Management in D365 Finance and Supply Chain

By Lynn Litzau | October 27, 2020

The success of any manufacturing operation depends, in large part, on its inventory. Inventory is crucial to the modern manufacturer — having your products and materials in stock when you need them. Preventing stockout and managing your inventory count help to keep your operation running smoothly.

If you’re a Microsoft Dynamics user, there are some great out-of-the-box tools to manage your cycle counting program. Cycle counting is an inventory management method where you count subsets of your inventory in specific locations. This allows you to measure real-time stock levels against your system’s perceived count. If there are any discrepancies, you can more quickly detect errors through cycle counting than with other methods.

We’ll keep this high level. There’s a wealth of information on advanced cycle count management, but it could quickly fill a book. This blog will teach you how to use cycle counts to manage your inventory levels using Dynamics 365 Finance and Supply Chain Management’s (F&SCM) out-of-the-box functionality.

What is Cycle Counting?

As we’ve said, cycle counting is essentially a way to manage inventory by counting subsets of your stock across your warehouse(s). How you set up your cycle counting program and how granular you wish to get is entirely configurable within Dynamics 365 F&SCM.

Cycle counting programs enable your team to count inventory on specific days in an organized, recurring fashion. These recurring intervals can be daily, weekly, monthly, or even quarterly. This choice is entirely up to your organization and how you wish to set up your program.

How do you start a cycle counting program? We’ve found that the best way to begin is by familiarizing your team with a set schedule of account management. Cycle counting is meant to be a part of your daily operations. If you set things up properly, it’s highly manageable.

You shouldn’t have to shut down an entire warehouse to execute a count. If done right, your cycle counting program can actually replace the need for a full, physical inventory at year-end. Therefore, it’s important that you set your program up correctly.

What are the Benefits of Cycle Counting?

So, what are the benefits? The most obvious advantage is improved inventory accuracy. When you count your items more frequently, you have better accuracy. And if your inventory is more accurate, you’re going to have better operational efficiency.

When your inventory matches your system’s data, you won’t have workers going back and forth, searching for inventory that may or may not exist in the warehouse. By cycle counting on a regular basis, you set your team up for greater success.

Furthermore, more accurate inventory means you can sell more inventory. This is great for your business, and it also bolsters your customer service. When you reduce the chance of a stockout, your customers won’t be faced with long wait times for their orders. All of these things all go hand in hand and are great benefits of putting in a cycle count program.

You’ll also benefit from a reduction in errors. By counting on a regular basis, you’ll be able to catch inventory errors more quickly than if you weren’t keeping close tabs on your count.

Think of it this way: if you only have a regular, once-a-year physical inventory and find that a user made an error six months ago, it’s harder to recoup that and to let that user know that error. If, on the other hand, you’re on top of things with cycle counting, you can address those errors quickly, notify the user, and put a plan of action into place to correct their behavior.

Last, but not least, cycle counting decreases your inventory write-offs.

Cycle Counting Best Practices

How can you ensure the success of your cycle counting program? First and foremost, commit. You have to commit to putting this program in place and making it a regular part of your daily operations.

It may be nerve-wracking for companies to put this in place, but if you start small and work your way up to a more comprehensive program, it’s not as difficult as it seems.

You’ll also need a dedicated team of employees who are properly trained. These people will need to understand the cycle counting software, what they’re doing within the software, and why it operates the way it does. You’ll all need to be on the same page, so it’s critical to build a team of employees who will back you in this process.

Another key to the successful implementation of your cycle counting program is to ensure that everything is well thought out and properly documented. Employees should have sufficient reference material. Create good training instructions so that your users know how to do everything. If you have mobile barcode solutions, you might use scan guns during your counts. Others might wish to rely on printouts. Regardless of the direction you choose, make sure you have adequate documentation for your users. Trust us, it’ll make the process much easier.

Here’s another cycle counting best practice: perform your counts at the beginning of the day. We can’t stress this one enough. If you start off with small batches in the morning, make your count something that’s attainable to your workers. It should be the first task they complete in their workday. Why? Microsoft Dynamics locks your inventory while you count, so until the counting is complete, you won’t be able to post a sales order packing slip or picking list. Therefore, you want to get in the habit of counting small batches of your inventory first thing in the morning before your operations start and things get moving.

If you perform your cycle counts on a daily basis (in small batches as frequently as possible), your program will be positioned nicely to decrease inventory write-offs.

As we’ve mentioned, to avoid any errors, your system automatically stalls all transactions that involve those items which you’re in the process of counting. You will not be able to process them during the cycle count program. Keep this in mind as you set up your program. If you do find that a particular user constantly writes something in (or out) incorrectly, this is a great way to track their actions and put a corrective plan in place.

Lastly, make sure you have some metrics to track. Set up metrics so that you can track your inventory. For example, you may wish to track which users perform the counts, what inventory goes up, what goes down, etc. All of these reporting capabilities are available in the Dynamics system and are readily accessible.

How to Classify Your Inventory for Counting

Now that we’ve explored the best practices for a successful cycle counting program, let’s talk about the two ways in which you can classify your inventory for counting. Neither of these classifications are required in Dynamics. They are, however, available and can make the process run more smoothly.

ABC Classification

The first classification model that we’ll look at is ABC classification. The concept is similar to the 80/20 rule. There’s a saying in the industry that 80 percent of your sales are comprised of 20 percent of your items. With the ABC classification, your organization has the flexibility to categorize your items into A, B, and C buckets by any of these four different values:

  • Value
  • Carrying cost
  • Revenue, or
  • Margin

These values are held on the item record, and there are four fields for each of these ABC values. Think of it as a grade: an “A” is the best — top of the class.

Your A-level category includes inventory items that are typically the highest moving items, the highest value items, and have high turnover in your organization. These are the items that you’ll likely want to count the most frequently.

B-level items are those items that are significant to your operations, but not as frequently used as A items. They won’t need to be counted as often, though they need to be counted somewhat frequently, so you’ll classify these as your B items.

Your C-level items will include your inventory that has less movement. These items carry a lower value. Think of it as your “slow-moving” list. You might even wish to count these items only at your year-end count (if you still have that once you put your cycle counting program in place), or you may prefer to count them twice a year.

Counting Groups

Counting groups are another method of inventory classification. You can use counting groups from which to query and filter.

There’s the option for a Manual group. For this, you assign items to a manual group whenever you wish to manually pull them.

A Period group will display items assigned to a specific number of days. If you run a counting journal today and choose a “Period 30” counting group, it will evaluate all items you’ve assigned to be counted every 30 days. Be careful here: if you run the same journal tomorrow, none of yesterday’s items will appear, as they’ve been counted now within 30 days.

The Zero in Stock group generates lines only when on-hand inventory reaches zero. If you were to set up a counting group and assign items to it, the items would only be pulled when the inventory has hit zero in stock.

A Minimum group displays inventory items that reach a certain level before they’ve dropped to zero. We see more value in this counting group than the Zero in Stock group. Let’s say you have an item in your inventory that has a safety stock level set to five pieces. When that item reaches (or falls below) the five-piece minimum, your counting journal will pull it.

As you can see, counting groups are quite flexible and are a great way to group your inventory. You can set up as many counting groups as you’d like, and have the option to customize them in as many ways as you’d like.

Cycle Count Configuration and Planning

Cycle Count Configuration in Dynamics

Let’s talk next about the cycle count configuration in Dynamics. You have the ability to assign your counting groups at an item level (in the Manage Inventory fast tab). It’s a one-to-one ratio, unfortunately. This means you can’t have more than one counting group assigned to a single item.

When you set up a brand new item, Dynamics automatically sets the Warehouse Value to “ALL.” If you store an item in more than one warehouse and would prefer to count independently in multiple warehouses without locking the other systems up, you need to supply a record for each warehouse on the item record. The following video walks you through this configuration:

Tip: If your warehouse item setting is missing and you perform a count in one warehouse, it will lock all other warehouses and prevent any sales orders or picking orders from being fulfilled until the count is complete. If this becomes cumbersome, don’t worry: you can turn off this global setting. In Inventory Management, you have journal names under the setup area. You’ll see a counting registration policy. On the counting journal, it’s the only editable one. If you disable that counting registration policy, you won’t have to maintain your Warehouse Items table. The flexibility is there, so it ultimately depends upon how many warehouses you have, how to spread out you are geographically, and whether you use that Warehouse Items table or not.

Cycle Count Journal Types

There are two types of cycle counting journals.

The first is your counting journal. Counting journals let you count and correct the current on-hand inventory that is registered for items or groups of items. After performing your physical count, you can make adjustments to reconcile any difference.

Tag counting journals are used to assign a numbered tag to a lot. The tag should contain a tag number, item number, and quantity. This journal type is typically used for companies that wish to count during business operations without locking up inventory. To ensure no errors are made, every item number should have a unique set of tags with its own number sequence. This way, each tag is used only once. If, for example, you issue five tag numbers for a specific item and only use two of the tags, the remaining three must be voided within your journal.


The last element we’ll touch on is your system’s available reporting features. Dynamics provides a counting history report which will show, record by record, what adjustments have been made. This report gives you an overview of your on-hand items and how much of them you’ve counted.

You also have the ability to print your journal, remove the journal-specific filter to show all the counts for a specific item number, and view the cost price and other information within the counting lines report.

Cycle Counting Summary

As you can see, Dynamics offers some great out-of-the-box tools to help you stay on top of your inventory counts. By following this guide, you can build a successful cycle counting program to manage your inventory levels and more quickly detect any discrepancies between your system and your shelves.

If you’re interested in learning more about Dynamics 365 for your manufacturing business, feel free to subscribe to our blog. We share tips, tricks, and manufacturing best practices with our readers on a weekly basis. You can also reach out to us directly with any questions.

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