Counters And Managers

     During my days with Quantum, I remember hearing talk about the concept of little "c" and Big "C". This is the idea that there exists two conceptions of who the client is an inventory audit. On one hand you have Big “C” who represents the top level or corporate interests in the audit, and on the other hand you have little “c” who represent the store level or district level management who usually are the subjects of an audit. This idea seems to exist for practically any company, the notion that you have a set of corporate officers with goals and desires, making decisions about the company that have an impact on the workers who represent the company at the ground level. This concept certainly exists for inventory services as well. It's not hard to see the corporate desires of a company like RGIS. Their desires cascade down through the levels of middle management so well intact, that they can effect the way people literally count the merchandise and perform their job. In this case small “i” can represent not just counters, but anybody in an organizational unit (district or division) responsible for doing the work required for the client. The responsibility of “C” seems to be to make sure that “c” is doing their best to meet their corporate needs (in most cases that means generating profits). In order to do this “C” are required to analyze the performance of “c” to ensure that these corporate needs are being meet, and will continue to be meet in the future. A part of their analysis includes performing inventory audits on the stores managed by “c”, and this is where “I”, and “i” come into play.


     In cases where bad audits occur, the person responsible is ultimately going to be “c”. While "C" may be tasked with making sure little "c" is meeting their goals, an inventory audit is ultimately about "c", whatever happens at the store, the local manager is responsible. It is the goal than of c to keep their corporate counterparts happy and content with their work, and to hopefully avoid any negative attention from "C" something a bad audit would likely bring. Similarly “i” also wants to keep “I” happy as well. Thus you have a environment where all “c” wants to do is to be on C’s good side by generating profits, performing well, and by having good audits, and all “i” wants to do is to generate profits for “I”, by posting good averages, and keeping costs down. The aims of c and “i” are definitely not mutually exclusive, in fact in many cases they can both be simultaneously achieved very easily. When we look an inventory audit perhaps it would be interesting to analyze the roles and parts that each of the participants plays namely, “I”, “i”, C and c.

     You may read about all types of stories of audit fraud from Jack Henry or from anti-RGIS blogs and after awhile you have to start to wonder how some of these people are able to get away with some of this stuff. How are people able to get away with just counting one shelf, or one checkout stand and estimating the rest? How are people able to get away with all sort of counting shortcuts, and with systematic padding of inventories that occurs over a period of time? The easy answer is that they are allowed to get away with it. I spent a year and a half working internally for a convenience store company traveling all over Illinois during inventory audits at their stores. The one thing I noticed was how important shrink numbers meant to the managers I worked alongside. My goal with this position was to do high quality work, to be extremely accurate, and through, and to perform my duties with some integrity, (something some of my predecessors did not have much of). While I’m sure the managers did respect the way I performed my job, and the effort I put into it, at the end of the audit, only one thing mattered and that was the shrink percentage. The company goal was to have audits under 1%, and one manager summed up it best, he said in regards to the shrink percentage, “As long as the first number is 0, I’m happy”. (Note that shrink percentages were expressed to 2 decimal places, ex: -0.74%) To illustrate how important these numbers meant, one day I tallied the shrink percentage that was less than 1%, and this caused the manager to literally throw her arms around me and give me a bear hug saying “Thank you”. On the flip side of this, I once tallied a shrink number so bad, it brought another manager to tears. Another great story involved a district manager; I had done 2 of his stores on 2 consecutive days. The audit on the first day was over 2% which was not very good, I was on the phone with the DM on the next day, telling him that day’s audit was under 1%, which made him happy, he said to me “Greg, have I ever told you how good of a job you do?”. Half-joking I replied, “Well you didn’t say that to me yesterday”. Such is the life of an inventory counter, the court of public opinion will rise and fall with those shrink numbers. There are probably some managers out there who believe that any bad audit they get is the result of bad counters, (regardless of the validity of such a claim). A lot of managers will still dread an inventory audit, and there are a lot that don't care for inventory counters and what they do. Still others may turn towards a counter for some help, a little boost here and there to help make their audit look a little better. At the root of a lot of collusion cases is the desire for the manager to make themselves look good for corporate, and when the inventory counter has a similiar aim in mind, that's when you have the recipe for collusion.

     What c wants out of an inventory audit more than any other thing is a good shrink number. Granted this is not to say that c doesn’t care completely about inventory counting accuracy or inventory counting integrity. The thing is when there's an audit with a bad shrink number, this is usually the time when a manager will question the accuracy of the count. A manager questioning a counter’s accuracy when the shrink number is good, is rare, and I mean really rare. Confronted with a good audit, most managers will not think too hard about how an auditor actually counts certain things in a store, or about how good the counts really are. A good audit means they will escape the scrutiny of corporate, and live to see another day. Why would any manager argue that a count should actually be worse than it actually is? And just as there will be counters who try to cheat a little to boost their average and make their performance look better for corporate, don’t think that there don’t exist managers who try to tip the scales in their favor during an audit. I’ve seen managers move stuff around during an audit, keep invoices off the book before an audit, post date invoices, attempt to get credit for writing off merchandise multiple times, all sorts of wonderful things. One of my favorites was this one manager, who had received a bad audit in his eyes, and asked for another count. In both instances the manager knew the date and time of the count, and before the second count he went around his store and priced everything up to absolutely ridiculous levels. I think an 8.3oz can of Red Bull got marked at like $3.99. The audit crew at this store didn’t believe some of these prices and were scanning the product with a price gun much to the manager’s dismay. When the crew leader called me to tell me what had happened, I instructed her to take the price off the gun. I’ve also have heard plenty of stories of “off the book transfers” of merchandise between stores when there’s audits taking place, one time I even witnessed a manager from another store drive up to an audit that was taking place and dump 4 totes of merchandise for us to count saying that this stuff had already been transferred and that we needed to count it. Another story involved a grocery store chain, that we counted during my days with RGIS. For this client we would do numberous recounts for practically every store that we did. At each store we would hand our recounts to a DM, who would go through and choose which count to take. Every single time the DM would circle the higher number. It didn't matter to him wheather the higher number came on the recount (which would indicate growing shelf stock) or on the original count, all that mattered to him was getting the higher number. There are a lot of situations where managers need higher numbers, and they will do a little more than nudge counters citing mantras like "count it high or go home". Perhaps though for inventory counters higher numbers aren't necessarily a bad thing either.

     Counters are trained, and for the most part conditioned, by audit companies to be above all else fast. This training includes not just being able to handkey and cut a few corners here and there, but also having a quick wrap up to end the count. And this will include avioding conflicts with managers and avoiding trouble that could arise from miscounts and bad variances. Even though counters are supposed to be neutral and indifferent to the shrink percentages, it’s hard not to want good numbers to come about. No matter how long one spends doing audits, seeing someone get hit with bad audit is something you never get used to, nor is it something you can ever really enjoy. You might as well tell people that they have cancer (in a figurative sense that may be close to the truth at times). A bad shrink result can be very emotional, it can cause a lot of grief and headaches for the manager, but more than that it leads to the concept of further analysis. For the counter this may include recounts, and time spent researching why there exists such a variance. These types of things can bring down the productivity of a counter. A good shrink number conversely will be very agreeable for the manager, and can lead to a quick wrap up of the count. In these cases there's very little for anyone to complain about. A good shrink number makes everyone look good, both the manager and the counter, and everybody is happy. But from the counter's standpoint a good shrink number will be more productive because less time is spent researching possible mistakes, with either the count or with the book values. A counter has some reason to favor a good audit over a bad audit, other than favoring hugs over tears. While counters may be somewhat neutral or possibly indifferent to the shrink number, they may not go out of their way to nail a manager with bad shrink. A smart manager can use this idea to their advantage. One of easiest ways a manger can cheat on their inventory counts is to utilize pre-count sheets, either pre-listed or pre-counted figures that represent actual merchandise stored somewhere in a store. An honest counter in theory would check the accuracy of such sheets before including these data figures into their count. A productivity-conscious counter will not. In some companies I’ve worked for, it’s quite common to input pre-count sheets without giving any thought at all about the accuracy of the numbers on the list, or if the sheets even represent any real merchandise at all. A lot of counters will just view it as something else to “do” to complete a count. Merchandise stored in cases could also give the manager an opportunity for a small boost on his audit. With merchandise packed away in boxes that are out of sight, a manager can make things seem fuller and more dense than they actually are. It would make sense to assume that the cases on the bottom of a stack are full right? Well from my experience that's not always true. A supervisor I once worked for had a term called "fake outs". He used this for anything in a store that looked like it contained more merchandise than it actually did. The productivity-conscious counter is not going to tear down the stacks of Gatorade or cases of beer to make sure that they are all full, they generally won't move much product about in order to actually “count it”, there not going to grind it out for better accuracy, for them if a case looks full it is full. In fact the general way the manager maintains the merchandise in a store can be to his advantage as well. The things I hear audit companies and counters complain about more than anything is the disorganized, messy way in which some stores stock is maintained, especially in backrooms and storage areas. Audit companies talk a lot about having stores clean and organized, and well prepped for their arrival, in order for them to do their jobs easier and better. And I’m sure that to some extent an audit is more accurate the more organized a store is, but the thing is a more accurate audit, isn’t necessarily a better one in terms of the shrink percentage. During the time I spent working internally I produced plenty of evidence of this notion over and over again. There exists too many factors that go into a shrink percentage that a counter simply can’t control regardless of how they go about counting the merchandise. The counter’s main job really is not to control or even reduce shrink, it’s to measure it. A more disorganized store may increase the overall error of this measure. A measurement error that benefits the manager are exactly what they would want, given that they are not too excessive to the point, where it would eventually bounce back. Another way to cheat if you’re a manager is with the price gun. While most counters will raise an eyebrow at an 8.3 can of Red Bull marked at $4, few might bat an eyelash if something were inflated by smaller amounts of money say 10, 25, maybe 50 cents. If the price seems reasonable enough, the productivity-conscious counter will count items the way they are marked, and for items that aren’t marked, the productivity-conscious counter is trained to use “standard-industry pricing”. In other words they take a stab at it based on their counting experience, some people invariably are better at this then others. Of course the use of barcode scanning in inventories will pretty much eliminate this type of measurement error.

     The other player in this drama is big “C”. And with ”C”, we get the concept of the client in this process. Some would say that the client is both “C” and “c”, and in some ways a store manager can reap some benefit by the results of an inventory audit, either good or bad. An inventory audit is an opportunity to learn about things that may be taking place at a store, it offers a manager a chance to determine what needs to change about the way things are run. But ultimately a manager is the subject of an inventory audit, they are the ones being measured. In a larger sense the true recipents of this measure is “C” the corporate management, most notably the accounting and loss prevention departments. "C" is the entity that commissions an audit, and what they want out of an audit can differ drastically from that of a manager. To illustrate what “C” wants out of an audit I turn to Jack Henry for this exert:



“…I was told that at the end of their last inventory cycle, one store needed to be recounted. When the crew arrived for the second count, the crew chief asked, “How much difference are you looking for?” The loss-prevention manager replied, “That’s none of your business.” Rephrasing his question, the crew chief asked, “Then what should the last count have been?” Again, the loss-prevention manager said, “I told you that’s none of your business. All I want from you is an accurate count!” The loss-prevention manager told me, “When the crew chief learned that I was not the store manager, that I was from corporate, you should have seen his face….”


     This exert brings to light two points. One is that it’s “C” that most needs accuracy from an inventory count. This is no more true then it is for Loss Prevention. From a Loss Prevention perspective the inventory audit is done to determine if there’s any theft taking place. This is one of the biggest reasons that audits get done in the first place. I can’t forget spending a weekend at Quantum's headquarters and hearing some corporate officer ask why we do this, why are we in this business, only to exclaim “Because people steal!” I also can’t forget when I worked internally, hearing my boss actually confess that I really work for LP more than anyone else at our company. My old boss was right, inventory counters are doing work that most serves LP. The ‘data’ that inventory counts collect helps LP determine if they need to investigate a store more, or spend their time on more pressing issues elsewhere. Inaccurate counts, can make things tough for LP in their quest, which is to ultimately save the company they work for money. An inaccurate count could either give a signal to non-existent trouble where there may be no theft issues at all, or more dangerously mask or conceal issues that don't appear in the shrink results. It’s easy working internally to see the deeper impact and the importance of inventory counting on the other people who work for the company; decisions get made based on inventory counts. Yet the idea of how important an inventory count is for "C" doesn't get across very well for people who work externally. Part of the reason, likely is the interference that comes from “I”, who desires for an inventory count differ a lot from “C”. The other point made by the exert from above, is that “C” is not much of a presence for most inventory counters during an inventory count. Most members of “i” aren’t aware of “C”, or what they want. Apparently “C” at times takes on such a ghostly force that “i” doesn’t even realize when they are talking to them. For the average member of “i” they interact with their own co-workers, agents of “I” (usually their superiors), not to mention store associates and members of store management, interactions with people above the store level, like LP are rare. When “C” does show up for an audit, “i” probably doesn’t even notice, nor would the two ever really be formally introduced. The whole audit process starts with “C” coming to “I” wanting counts to be done in order to accumulate information about their own company, but eventually the actual act of performing inventory counts comes down to a process being acted out through “c” and “i”, with little oversight from their corporate counterparts. When you consider this scenario it’s not hard to understand how fraud can occur in inventory counting. What’s also worth noting is the different forces at work for an inventory counter stuck in the middle of all this. “C” needs “i” to produce high quality work, that’s accurate and though and complete, but “c” needs “i” to produce work that will reflect well on themselves and their store, while “I” needs “i” to produce work that’s efficient and productive, and most notably profitable for their company. These 3 aims for “i”, do not mix very well, often the needs of those closest to “i” will win out, the loser in this battle most of the time is “C”, their influence on "i" is the least direct. Take accuracy for example, the LP manager wants a highly accurate count that essentially reflects exactly what is in a store at a given time, but the store manager only wants a count to be accurate in so much as to not affect them negatively, while the auditing company wants the counters to be accurate to a point not to affect the profitability of the process. With this in mind consider how much the counters who work for an auditing company worry about accuracy, and then ask yourself who's winning this battle? But what about “i”? What exactly is their aim in all of this? Do they have any interests in regards to an audit? Or are they just pawns in this game, mere counters who show up and count according to the way people want them to. In many cases they are there to provide a “service” for many different sets of people. But if the needs of “C”, “c”, and “I” are in conflict whose needs should “i” give preference to? Who’s service is of the greatest importance dictating how counters should count. This could be a gigantic area for disagreement.

The Auditing Company

      I want to share with you a comment that was posted on the Misfit's blog titled "Tales Of A RGIS Auditor". The Misfit and his responders do a very good job of capturing what it's like to work for RGIS. I've spent time working for RGIS myself, and I have absolutely no difficulty believing anything that's been written on that site. I did run across one comment, that for me is essentially inventory counting in a nutshell. I'll post a portion of it here:



".... He then led me to a rounder of woman's clothes where he stayed with me for about 15 minutes and showed me what I needed to key in. (I started with RGIS about 14 years ago, when 60% of inventories didn't use a scanner).

I was being soooooooooo careful to make sure I keyed in the right department and sku and price on every single tag. Anyway on the way up to the store one name that kept coming up in conversation was this man Jeff. They had made him sound like a monster. In fact I was thinking that I really didn't want to work when Jeff was running a store. Well sure enough here on my 1st inventory I am trying my best and all of a sudden this guy in a suit is standing next to me watching me count. I looked at him and he said "You are not making me any fu------ money counting like that!" And then before I could even respond he disappeard[sic]. I later found out that this was the infamous Jeff."


     An inventory service is above all else a business, and like any other business the main objective is to bring in money. We wouldn't expect any inventory service to operate at a loss, but at what lenghts would an inventory service go to in order to churn out a profit? To answer this, let's first examine the business of inventory counting.

     What an inventory service is basically selling to it's clients is the 'service' of having people come to a store to perform an inventory count. There are a myriad of different clients varying in store types and sizes out there, as is there are a numberous inventory services that differ in size and specialization. The size of the client's store can determine the options available in regards to inventory counting. Large-scale clients like big-box retailers Wal-Mart, Target, or Home Depot don't have many options at there disposal when choosing an inventory service. Counting their stores (at least in a timely manner) requires a lot of manpower, and they need an inventory service that can provide that manpower. Usually that means either RGIS or Washington, the 2 biggest inventory services in the world. Other types of large-scale stores like department stores (JCPenneys or Sears) or large grocery store chains may also fall into the RGIS/ Washington recourse. I don't know of any other inventory service that can compete with these 2 on sheer available manpower alone. As the stores get smaller, there exists more options available for businesses to turn to for inventory counting needs. There is an organization called NAAIS (North American Assiocation of Inventory Services) that is home to dozens of small to medium sized inventory services. A lot of these comapanies can service smaller grocery stores, truck stops, pharmacies, liqour stores, card stores, and stores which you'd find at the bottom of the size scale, convenience stores (or C-stores as they're affectionally called). Some of these companies will even specialize in doing only certain types of stores, most notably is Quantum Services, a national chain that specializes in servicing C-Stores. C-Stores probably have the most number of options to choose from when selecting an inventory service because the job itself doesn't require a great deal of manpower or technology to do. The options they have include the aforementioned RGIS, Washington, and Quantum, other NAAIS companies, non-NAAIS outfits they may consist of nothing more then two guys with ICALs, and internal counters (still a viable options for these types of stores). With more competition and lower costs to perform a count, c-stores can get a pretty low rate from a service. An inventory service that offers an exurborent rate for a C-store will probably price themselves out of a client. In many cases, the rate that a service gives a c-store is designed to obtain a client.

     But when an inventory service charges a low rate, and lands a contract to count a store, the task then becomes trying to turn a profit off of this. Thus we have to consider what does it cost to do an inventory? Here are some of the more common areas that contribute to this cost.

Supplies
      Performing an inventory, can require paper, inventory tags, batteries for machines, (if printers are utilized) ink, among other things. Most of these items can be bought for in bulk (especially for things like paper) and their cost can be spread across a lot of inventories, so the cost per inventory for supplies usually is pretty low.

Equipment
     Includes hopefully counting machines, and depending on the company may also include laptop computers, printers, lasers, and other devices actually used in counting the merchandise. The cost of these items is going to be more significant then mere supplies. But most are still going to be one-time costs and not something that gets factored in every single inventory. If the equipment is durable enough to be used for a large number of inventories the cost per inventory for equipment can still be pretty managable, but still higher than it would be for supplies.

Travel/ Transportation
     A major part of inventory counting is still travelling to stores to count them. How costly this portion is can vary from company to company and depends on how much territory a service needs to cover. Transportation costs can include obvisously gas for vehicles, vehicle maintanence, hotels, and meals when out on the road. Some companies may even compensate their employees when such costs are incurred during the job.

Other Overhead Expenses
     I'll use this category to lump in other things that might not fit elsewhere. The most significant examples of overhead costs might be rent for office space or the use of company-owned vehicles. These can be spread over a lot of inventory counts, and like travel costs can vary widly from company to company.

Payroll
     Lastly and definitely not least is the money a company pays it employees to perform the work itself, and this can include not just coutners, but also all corporate and administrative positions as well. This could also include the cost of employees benefits should a company offer them, like health care, or bonuses.


      It's hard to say what category would contribute the most to a company's cost structure. Companies like RGIS or Washington could spend a lot on overhead costs, other companies will cover a large territory of space, incurring costs along the road. Then there's payroll which unlike some of the other categories shows up in every single inventory, nothing gets spread out in this category. To cut costs, a different approach may need to be used for each category. It'd be hard for an inventory service to skim on supplies or equipment, and even if they did the additional savings per inventory wouldn't seem worth it. To skim on travel costs, a service can schedule stores in runs, groups of 2 or 3 stores to be done consecutively to cut down the miles on the road, outside of this not much can be done with travel costs. Skimming on overhead costs may only mean not utilizing the assets like office space that would eat away at the company profits. Payroll is a different story, because it can't be eliminated or spread out over multiple inventories, controlling it is more of a challenge. Corporate and administrative positions usually are paid salary, so their pay is predetermined and fixed making it easy to control. That only leaves the task of controlling the payroll of inventory counters.

      To compensate employees for the work of counting a store's inventory, you could pay them a set salary as well, this would eliminate the length of an inventory as a factor relating to the cost of an inventory, and also eliminate overtime pay from the equation. In situations where the counter works a steady number of hours each week, this actually might make the most sense. The times in my career where I've focused solely on performing C-stores inventory counts I have worked very steadily week in and week out, and the companies that employeed me during those times did pay me salary. However outside of a C-store focus, most inventory counters aren't going to get steady work. Inventory services are for the most part at the mercy of clients when it comes to scheduling and that means some weeks (especially in January) counters will work non-stop and other weeks (like November) there'll hardly be any work at all. Most inventory services will choose to pay counters by the hour. Companies like RGIS or Washington with their large workforce would never even contemplate paying anybody salary unless it was an management position where they know that person is going to put in a lot of hours of work towards the job. Thus controlling the cost of the inventory comes down to one thing more than any other, the hours a counter puts in towards that inventory and ultimately the length of the inventory count.

      Thus the task of cutting costs on a inventory requires minimizing the man-hours needed to get a job done. There are different ways to approach this. One way is to minimize the number of counters assigned to a job, to do more with less. Fewer people counting at an inventory means fewer man-hours used during an inventory and less money for the service to dish out in employee pay. Granted sometimes fewer people may mean a count that takes longer to complete. A service may have to find the right balance between crew size and inventory length in order to minimize payroll for a count. This balance also has to consider other factors as well. Sending three people to do a grocery store will still take awhile to complete, and that may not be too pleasing to the client. One of the things a client wants out of a service is a crew that can get the job done in a timely fashion, so there has to be some balance between profitablilty and client satisfaction when choosing the crew size. In the inventory service's quest for the right formula to minimize payroll costs, not only can they consider 'how many' to send, but also 'who' to send. Not all counters are equal in terms of ability or talent or work ethic, some people are simply faster than others. Sending in faster counters will result in the inventory being done quicker and thus less man-hours used, and that leads to greater profitibilty for the service. For an inventory service it would be in their best interest to get their counters to count as fast as possible, but how do they do that? By pretty much creating a culture where such counting prowess is highly encouraged.

      Consider an example where an counter is sent to count a c-store by themselves. Let's say inventory counter A takes 6 hours to complete the store, and on the next count counter B takes 4.5 hours to get the job done. For a store that pays the same rate for each inventory count and for two counters paid the same, counter B is obvisously more profitable for the inventory service, and will get the most praise from the inventory service on his/her job. The inventory service will end up looking at counter B as more of the idealized concept of how people should count according to the inventory service. They may try to get others including counter A to be more like counter B. But more importantly if a job comes up that both counter A and counter B are available for, who do think gets employeed to do it? The inventory service is going to go with the counter that they will make the most profit from. Remember they're a business, they have a bottom line to look after. The inventory service will even keep a statistic on each counter to try to determine how profitable each one is, this statistic is their average counted per hour. In a financial inventory it's the dollars counted per hour, in other types of inventories it's the pieces counted per hour. For many inventory services the road to profitibilty starts with trying to get their counters to increase their average counted per hour (or APH for short). They do this by promoting the techniques of profitible counting, they'll instill in their counters things like the 1% rule, the concept of 'sight counting', and other shortcuts to counting like price estimating. There definitely will be talk from the inventory service about 'minimizing downtime' and having better 'audit flow', they'll talk about not wasting too much time in the set-up and in the wrap-up of the inventory. In the end what gets promoted is a get-in, get-it-done, and get-out type of mindset to inventory counting. Attention to detail? nah, that'll only slow you down. Accuracy? well as long as you have enough to keep the client happy, don't go crazy with it. The question is though is how far would a counter or an inventory service go in order to be more profitable? In many cases there's some tradeoff between the level of "service" and the demand for profitablity, but would a company tradeoff their own integrity in order to be profitable? If you think the answer to this is 'No', then let me suggest that you read more from the blog which I quoted from at the beginning. I don't think any RGIS counter would be shocked to read descriptions of how people actually count on this blog. The Misfit and his responders have helped expose some of the methodology and mindests that exists within the inner RGIS culture. Below are some more windows from which one can peek into this world:
"My district's inventory reports were never quite up to par, so there was ever increasing pressure on the managers to improve. Of course, that meant more pressure on us auditors to count fastert faster faster! Faster counts meant better-looking inventory reports. Better looking inventory reports meant bigger bonuses for the managers. But what did it mean for us lowly auditors? Not a whole lot. If we were fortunate we might get a laconic "Thanks" as we closed out our audit machines and headed out the door"


" You're[sic] ability to count fast is all that matters, and the means to the end is not considered."


" Another item that gets batched a lot is greeting cards. In some stores we would do financial counts on them rather than scan even if we were scanning everything else in the store. Those counts were usually way off. The way we were taught to batch cards were to take a card from the middle row and then keep keying the 6k key for the whole row going across. I remember recounts would never come close."

" For instance, if the magazine total for the first register came up to $609, then we would just look and see if the next register seemed to have more or less magazines and just key in a total on that department based on that. Of course we had to make it look like we were actually counting to the store personel[sic], so we would hit 2 or 3 numbers on our machines and then the clear button. We would keep doing this until we felt that we spent sufficient time at each register as to not get questioned how we could have counted so fast."


"Batching was sometimes overlooked by TL's and managers because it was understood by them that it was necessary to get out of the store on time. No manager ever came right out and said, "Yes, batch", but they knew about it all right and if they thought they could get away with it they would look the other way."



    All of these are from the "Batch? Natch" entry, you can read the whole thing at http://rgisauditor.blogspot.com/2006/05/batch-natch.html. And if you think this problem is limited to a few bad districts from within RGIS, there's more. During my early days with RGIS I got to work with a manager named Charlotte. She transferred into our district right after one of our own area managers got promoted. She had only been in our district 2 months when one day, she went off to attend a meeting with some corporate suits at our division office. The next thing I hear, a Team Leader had to drive her home, because she had gotten fired. At a division meeting the following week, our Operations Manager let us in on what had happened. Charlotte and Morris her DM were at a grocery store when they decided to plug some numbers in for a few sections that weren't counted. I don't know if they were missed by accident, or the two decided to just plug the numbers in. Morris actually asked to Charlotte to plug the numbers in, which she did, and they then finished up the inventory. Well long story short, they got caught. RGIS did an investigation into that inventory and it was pretty clear that they had plugged the numbers in. Charlotte tried to defend herself by saying she was simply doing what Morris had instructed her to do. This was for naught unfortunetly as both of them were fired. In an attempt to be productive and make the company money at one single inventory, these two went beyond what was acceptable and paid for it with their reputations and their careers. I don't know what the benefit either Morris, or Charlotte would have incurred had this deception gone undetected, but I'm thinking it probably pales in comparasion to the price they paid for getting caught. The another thing I learned from this episode is that the only real losers, here are Morris and Charlotte. Granted RGIS did probably lose some good standing with this particular client, but you know what RGIS is still in business today, they have survived and they're still making money, even without Morris and Charlotte. What's more RGIS corporate in situations like this get to take the high road and fire these cheaters as a gesture to their clients that they take these incidents seriously and that they will take swift action to prevent these events from happening again. When a counter cheats in order to be more productive, its only their reputations that get smeared, not the reputation of the company they work for. Although events like this can be a double-edged sword for RGIS, on one hand it's good that corporate can catch people exhibiting such low integrity behavior and act upon it, on the other hand it exposes the fact that there are problems that exist, and it might lead one to ponder about what percentage of cheaters at any inventory service actually get caught. The last "Batch? Natch" quote seems to suggest a 'look the other way' approach to such events, a mentality that exists for the purpose of maintaining profitably, and one that is only discarded when engaged by the client.

     But if you think that this is only a RGIS problem, there's more. At the History of Inventory link on the NAAIS website Jack Henry and Carl Jackson have also collected examples of inventory "counting" at its finest. My personal favorite was the company where 3 people counted a $300,000 inventory in 3 hours. After their work was compared to a more reputable inventory service, it was discovered that what the 3-man crew did was count the top shelf on each aisle, and then multiply that figure by the number of remaining shelves. I'm amazed that they even got away with something like that. But Henry/Jackson do spend time discussing one case of inventory fraud in particular, involving Accu-Rate. As the story goes Accu-Rate was found gulity of systematically padding inventories at a whole bunch of grocery stores on the East coast. How they went about it was by walking in with the previous inventory figures, and simply estimating large sections of the store based on the previous figures. In some cases reportedly the company president of Accu-Rate entered stores during their inventories and either "fixed" the inventories, or trained his staff to do so. But here's the kicker, the reason he did this was not to bilk the client out of excessive fees (even though that happened anyway), the reason was to increase profits by reducing man-hours spent in the store. So Accu-Rate didn't want to bilk the client, only their workstaff. This practice got so bad that at one particular inventory an 8-person crew counted a $500,000 store in 3 hours and 15 minutes. With what Henry calls 'mass estimation' taking place, the counters employed by Accu-Rate in many cases got cheated out of money because either they weren't needed to be employed or the ones present did not get to work the full complement of hours that a proper count would have taken. And if the counters were part of this scam, you have to ask yourself why? Why would a counter put his own reputation and essentially his own job on the line in order to get the job done faster, work less hours, and get paid less money? I honestly can not understand the rationale for any counter to estimate like this in any inventory, although some companies do attempt to come up with some. It's not hard though to understand the rationale of the Accu-Rate's president. According to this article Accu-Rate was able to land their clients by offering a lower rate then most competitors and thus it was the impetus of Accu-Rate to turn a profit on every inventory performed. When choosing an inventory service, you should probably never choose one solely based on price, but even further than that whatever price a service quotes, one should consider that their intention is to provide a service that costs less then their quote. Clients should consider how much a good, "proper" inventory would reasonably cost when choosing an inventory service. And clients should understand that properly counting an inventory is hard work, at times it's tedious, and time-consuming, and this means the service has to spend some money for payroll. If counting inventories was an easy job, odds are most companies wouldn't outsource the task to a third-party company to do it for them. Granted external services do provide some level of independence to the job, but the main reason external services exist is to accomplish things that the client couldn't possibly do on their own.

The Shrinking Phantom

     Of all the things that comprise a store's book inventory, one of the more interesting factors to consider is the previous inventory counts. The previous inventory counts can have a bearing on the audit-to-book variances for the current audit. An inventory count is not a seperate entinty all to itself, but rather part of a series of measurements to continually monitor conditions within a store. The first count you do for a client is always going to be the most difficult, not only are you unfamiliar with the store and with their unique merchandise, but also another counter's work will have an impact on that day's audit results, and you have no idea on how accurate that counter was. On an inventory audit the inventory counts will get booked into the store's inventory replacing what they had before. At this point the inventory is "zeroed out". If a count was not particularly accurate and those numbers get "booked", than a highly accurate count on the next audit would produce what's called a "bounce back". A bounce back is essentially the result when one audit comes out over or short, and the subsequent audit results in the exact opposite effect essentially cancelling the two results out. There are actually many things that can create a bounce back, like a badly timed booking of an invoice, but the main suspect is always the inventory counts. But what would happen if one inaccurate count was followed by another inaccurate count, would this produce a bounce back? That may depend on the magnitude and direction of the error.

     To answer this question I'm going to focus on financial inventory counts, primarily for c-stores, and I'll start by discussing the counting error that we already know will occur, error from sales adjustments. Obviously if we count a store while it's still open there will be some level of error in the adjustments made for sales during the count. The size of the error may be small enough to be of little consequence on the audit results, yet the erorr will still be there. It would still throw off the number that get booked, and it should still cause a slight bounce back for the next audit, or would it? If you think about it when won't you have sales adjustment error during a count? When the store gets sold or shut down and they decide to close the doors for a count I suppose, but outside of that probably never. What type of bounce back effects can we expect when we know that error will always be present in every single count?

     Let's say for instance that a sales adjustments inflates the inventory by $20. If the exact same error takes place on the next count, nothing would bounce back at all. The $20 boost on the second count would cancel out the bounce back effect from the first count. If the error on the second count shorted the count by $20, then it would bounce back too much, you would lose the $20 on the second count, and you would be hit with the bounce back from the first count creatign a total shortage of $40. With error taking place every single time lots of scenerios could unfold, you could see inventories padded on consecutive counts, you could see inventories shorted on consecutive counts, you could see inventories go from being over and then to being short and then back again swaying back and forth like a pendulum, only it never quite evens itself out. Unfortunetly when it comes to inventory counting errors there are more things to discuss then the "nickels and dimes" one loses or gains from the half-sales method.

     Inventory error can also appear in cases where there's poor estimating, honest counting mistakes that go undetected, or in cases of inventory fraud. Fraud is the most interesting to consider because it is far more intentional, and the most likely to be repeated on subsequent counts. Talent at estimating can rise and fall, making the exact some honest mistake two times in a row and not fixing it either time is unlikely, but purposely throwing off a count is not always a one-time occurance.

     In most cases of audit fraud an inventory is padded to prevent (or more accurately to conceal) large variances on the audit-to-book comparasions. There are several reasons why a counter would pad an inventory, part of it may be to prevent confrontation with the store managers by having an agreeable audit result, part of it could be to expediate the inventory wrap-up, part of it could be to improve on their level of production. An highly skilled counter I once worked with told me a story of a manager who came up to him one time during a count and told him "count it high or go home". This could easily be a mantra for a lot of inventory companies. Fraud is at its worst when it is the result of collusion between the counter and the store management.

    Let's say that a store manager somehow steals $500 from a store during an audit period, he could cover it up by having a counter pad the next count by $500, thus resulting in decent looking audit results that avoid the scruntiny of loss prevention or accounting. There's only one problem, eventually there's going to be another audit. The store manager has to address the issue that the book inventory still overstates the 'actual' inventory by $500. If a counter pads an inventory, he essentially adds money to the count for merchandise that isn't really in the store at all, something I'd like to refer to as "phantom inventory". How does the manager and maybe even the counter as well, deal with the eventual bounce back effect that this phantom inventory will cause? There are several ways to do this.

     The counter could on the next count pad the inventory again by the same amount. This would offset the bounce back that should occur and may even result in a decent audit result. The problem though is that by offsetting one bounce back effect, you'd be setting up another one to occur on the next count. A counter would then have to pad the count on the next count and the next count, and so on and so on. If the counter pads the inventory by the same amount each time, we could refer to this as the "constant phantom" method. This type of scheme would only delay the bounce back from occuring, it wouldn't eliminate it all together. At some point the padding will stop, and the evitable shortage will occur. If one can delay the bounce back effect long enough it may make it difficult to find the source of the shortage.

     Another approach would be to try to deal with the bounce back effect that gets created when an inventory is padded. In what I'll call the "shrinking phantom" method, consider a scenerio where a counter initially pads the inventory by $500 to conceal a theft. He could pad the inventory by $450 on the next count, then pad the inventory by $400 on the count after that, then $350 on the next count and so on until the counter no longer needs to pad the inventory at all. What's interesting about this method would be that each subsequent count gets more and more accurate to the point where a counter doesn't need to add any phantom inventory at all. What this method does in this case is take the initial loss of $500 that should occur in one audit and spreads it out over 10 audits, where each count has a smaller bounce back effect of $50. However the trick to the shrinking phantom method is in the spread. If you spread it too thick, the audit losses might be big enough to draw some scruntiny from loss prevention, if you spread to too thi, you'll end up employing a system that may take forever to complete. Depending on the aduit frequency 10 audits could take 1 to 2 years to complete, and ideally you'd want the same counter for all the counts. The amount of time that is required to use this method of systematic padding could be a deterant to it's use, another reason for this method not to be used might be greed.

     If the manager and counter successfully cover up the theft during one audit period, they may figure why not do it again. But here's where the bounce back effect works against them. If another theft of $500 takes place during the next audit period, then the counter has to count $1000 of phantom inventory in order to conceal the theft. $500 of it would be needed to counteract the bounce back effect from the last count, and another $500 to conceal the most recent theft. If this trend continues, the phantom inventory will continue to grow and may reach levels to a point where the total inventory counted seems infathomable. The thing about padding an inventory is that the extra money has to go somewhere on the inventory counts. A counter has to stick this phantom inventory somewhere in one or more sections of the store. If phantom inventory continues to increase the current to previous comparasions could start to signs of trouble. Not only that but the book numbers will also rise. In fact they'll show a secular upward trend over the course of several sudits, and this usually is a sign of trouble. Inventory levels don't just steadily and continually grow by natural means alone. From their essay "What Causes Inventory Fraud?", Henry/Jackson detail a story of a counter who used this "growing phantom" method. On the first audit the pad was $2,000, on the second audit it was $4,000, on the third $6,000 and so on, eventually a store that normally carries $30,00 was showing an inventory total of $52,000. Phantom inventory obvisouly was the cause for the sharp rise in inventory and if Jack Henry is writing about this counter then obvisouly he got caught. Constant theft in each audit will leave the counter with few options when it comes to concealing it. Eventually the numbers will get too big and will invite scrunity from Loss Prevention or Accounting. And if the counter decides to stop padding the inventory, then he'll wind up creating the audit results from hell, which is guaranteed to bring scruntiny.

     Then there are situations when a counter misses counting merchandise. This will cause the inventory to be booked short, and create what I call "bonus inventory", where a store actually has merchandise that isn't on book. This would create a bounce back effect on the next count provided that no theft takes place. If someone where to steal bonus inventory, it wouldn't cause a shortage, because they'd be stealing stuff that isn't on book, it'd be as if the merchandise was never theoritcally there to begin with. With bonus inventory you could create the audit shortage before the theft. A collusion scheme with bonus inventory could be interesting to implement. although it would still include purposing counting things short and creating audit shortages. Probably most collusionists would prefer a plan that keeps audit results fairly even not intentionally short.

     Of course trying to identify bonus inventory or phantom inventory is not easy, and just like with counter accuracy, the audit-to-book comparasions offer little insight. When you get right down to it there's very little connection (if any at all) between counter accuracy and the stores' audit results. It's possible for a count that produces a bounce back to be highly accurate, and for a count that doesn't to be somewhat inaccurate. It's also possible to have decent audit results right after a theft, and have a sizeable audit shrink after an audit period with no theft at all. When you think about it all one gets with an audit-to-book comparasion is a series of numbers. One has to dig deeper for the story behind these numbers. All by themselves numbers never speak.

How's My Accuracy?

When I worked for Quantum Services, every so often they would publish a newsletter internally for all of it's employees. One month they devoted a small section to the notion of accuracy. They wrote:

"Quantum Services is paid by our clients to account for all merchandise at the client locations. Quantum Services' employees must physically count all merchandise in the client locations. All employees are required to maintain an accuracy level of 99%."

Interesting how quickly they go from the hard absolute concept of 'all' to the notion of 99% and the wiggle room that comes with it. But if 99% accurate is Quantum's goal, the question is how would they go about measuring and monitoring one's accuracy to ensure that a counter is in compliance. At any one particular time is an inventory service able to say that a certain counter is accurate at a certain percentage. How does this statistic get captured?

In pretty much every scanning inventory I've done for RGIS, counters will record a piece count for each section they do. In some stores, store employees will verify behind the inventory count to ensure accuracy. In this type of scenerio one could keep track of all the discrepancies that take place, record how big it was and who the counter was, and as a result could possibly tally an accuracy percentage for that counter. Although, I've yet to work for an inventory service that ever did this. For financial inventories arriving at an accuracy percentage is a little tougher, and honestly I doubt that anybody really does anything to capture exactly how accurate any counter is. If you asked an employee of an inventory service how accurate someone was, they probably wouldn't answer you by citing an exact number. If they did they're probably making that number up. However even in financial inventories, there are some tools used in determining or in gauging how accurate somebody is. Below are some of the most common tools used.

Current-to-Previous Comparasions
In this method the inventory totals from the current count are simply compared to the totals from the previous count. This will provide a view of what sections in the store are "up" and "down" when compared to the last count that was done. Generally totals should be consistent from count to count, but the main problem here is that there is going to exist some variation from count to count. No one would expect the exact same totals each time a count is done, natural variation will occur, the question though is how much variation should we expect, and what factors would cause some variation. The day of the week a count is conducted on could create some variation into the count. Most vendors will deliver merchandise to c-stores on a weekly basis, so catching a store at a different time in the vender cycles will cause a good deal of variation. For instance if a store had their main grocery delivery on a Wednedsay, and a Tuesday count was being compared to a Thursday count. The Tuesday count totals should be lower, especially in the areas most affected by this vendor, like candy and tobacco. So if the one candy side is down $200 from last time, that might seem reasonable. But what if it was down $300, or $450, then you get into 'maybe' territory, and that's generally not a good place to be if where's trying to guage how accurate the count is. Store resets are another big problem that creates huge amounts of variations. After some resets, you end up comparing counts from 2 completely different store configurations, and these comparasions wind up being pretty worthless, especialy if you're trying to gauge accuracy. These Current-to-Previous comparasions can be useful in some cases however. Once during my days when I was working internally, I had counted $10,000 worth of candy on one of the gondolas in a c-store. The count last time was only about $5,000. I decided to recount that section and the recount came up with a number that was more in-line with the previous count. I used this recount and thankfully kept myself from inadvertently inflating the inventory by roughly $5,000. Current-to-Previous comparasions are great for judging the 'feasablilty' of a count, but as for the accuracy of it, there do exists some limitations and obstacles.

Audit-to-Book Comparasions
Perhaps the biggest misconception in inventory counting is the notion that if there's a large variance between the book figures and the count, then the count must be wrong. Granted an inaccurate count could create a large variance between the audit counts and the book values, but there's a lot of things that can create such a variance. The notion that a perfectly counted inventory will never result in a large variance is simply not true. Let's consider what all goes into the store's book inventory. To clarify a book inventory figure at any point in time is based on the past inventory counts, sales from the last inventory audit, deliveries from the last inventory audit, store transfers, store credits and write-offs, and retail inventory adjustments that are necessary for items sold at a markup or markdown price, or for price changes. If anyone of these are inaccurate or missing, then the book inventory is going to be off. Thankfully modern technology has enabled automation for some of these factors like sales, and adjustments for markups and markdowns, but other factors like entering in delivery invoices, doing write-offs, and price changes still require human effort, usually from a store manager or their underlings. In the end, both the inventory count and the book figures wind up being products of human effort, and both are prone to error. Thus when we compare the inventory counts to the book numbers, you have one set of numbers that's prone to error being compared to another set of numbers that's prone to error. Trying to determining which side of the equation is responsible for a variance is not going to be immediately transparent, which will require further investigation. One thought that comes to mind is that when one side of this deal is extremely accurate and bulletproof, it will probably expose the inadequancies of the other side. Managers who are always on top of their paperwork, and who keep their book inventories in good order will have better insight into the accuracy of a counter when the time comes for audit-to-book comparasions to be made. The problem though is that store managers exist at many different levels of experience and talent, and much like inventory counters it is a profession that has its share of turnover. Also my 'bulletproof' axiom can work in the opposite way as well. A highly accurate counter can expose an inexperienced manager. So when there is a sizable descrepancy between the book and the count, naturally it's human nature for one side to look to the other side for the explanation, as an inventory counter I've been both a victim and an offender to this mindset. And if this weren't enough we can complicate things even more by adding the notion that an actual theft could create a variance. In this case there may be nothing wrong with the inventory count nor with the manner in which store paperwork is processed. When you consider all the things that can affect the audit-to-book variances, this is probably going to be one of the worst ways to judge counter accuracy.

Recounts
If a particular number doesn't look good, one of the most popular methods of dealing with it is to have a counter recount that particular section. If the recount comes back with a similar total this will seem to confirm the accuracy of the count. But what if the second count is vastly different? That's the thing about a recount, you're essentially repeating the same process that might have failed initially. A recount is as much prone to error as the originial count was. Also if recounts are done some time after the initial count, and the store remains open during the inventory there may be some variance between counts. Although the variance here should be fairly small, much like count-to-previous comparasions there's going to be some 'maybe' territory when judging a recount against the orginial. A recount that comes out higher than the original though should raise an eyebrow or too, unless merchandise was stocked in-between counts. In some cases a recount is merely a 'second opinion', a chance to see if someone else would come up with something different? If 2 people count a section and come up with the same thing this would seem to validate the work of both counters. If a counter recounts a section that they counted originally, you have to wonder if you're getting a measure of their consistency or their accuracy. Ultimately what can we infer from 2 counts that are wildy different? You could argue that one count is right and one wrong, or to complicate matters that neither are correct. In this case you would need a third count to judge which one is right, whether it'd be from another recount or from a past count. From these scenerios what can we say about a counter's accuracy? If a recount is wrong, do we infer that the recounter is inaccurate, and what does this say about the original count? anything? And by how much do we say that they were inaccurate. If both counts are wrong how do we arrive at a measure of inaccuracy for either counter? With each count being prone to error, and with the presence of some 'maybe' territory, it's hard to arrive at an accuracy level from a recount. In general a recount seems better designed to confirm someone's count, rather then to offer proof against it. As for the magic measure, it's even more ill-designed to do that as well.

Keystroke Detail
This method involves examining the keystrokes that comprise the counts themselves and verifying them against the product on the shelf. Keystroke detail allows you to see how an inventory count for any section is constructed, and allows one to see whether or not it's right when held up to the items in the section itself. This method probably offers the best view of how accurate a counter is. What makes this method different from the rest is the fact that we're comparing the counts up against the actual merchandise itself. When we think about counter accuracy what should come to mind is how well a count reflects what is physically present in a store. It would make sense then that to measure accuracy that's what we would want to look at , what is actually there, not what someone else counted or what the book inventory says should be there. Keystroke detail also gives you far more certainy as to whether or not the physical count was correct. For instance say I accidently count a few boxes of candy at $8.99/piece instead of $.89 because of a keystroke error. Comparing my count to last time may reveal that candy is up, but it could be viewed as within normal levels of variance especially if I consider a factor like vendor cycles. A recount, done properly, would result in a smaller count but it could still fall in the land of 'maybe', and if it didn't it wouldn't necessarily give much insight as to whether my original count was incorrect. Looking at the keystroke detail, I'm going to know that $8.99 is not correct, and I'm going to know that the this count is not accurate, and even better, I'm going to know exactly what needs to be done to correct the mistake. The level of certainty you get from this method can result in greater accuracy in the end. Granted you probably wouldn't want to review every single keystroke in an entire inventory, but this is a great tool for zeroing in on a certain portion of the count. This can be used for the 'further investigation' I mentioned earlier. With keystroke detail you're sort of putting a slice of an inventory count under the microscope for a more intense review of one's accuracy.

But more importantly the certainty that this method brings can allow us an opportunity to measure a person's accuracy. When we find a mistake we'll know the value of the mistake and the value of the section when correct. We could use these two values to arrive at an accuracy percentage. The only problem here is going out and collecting the data. To obtain this measure someone has to review keystroke detail up against the physical merchandise itself, if not the counter themselves ( a scenerio that might present some issues) then who? Keystroke detail most of the time is used to 'obtain' accuracy not to measure it. I honestly can't think of anything that any inventory service does to literally measure and record a person's accuracy. It seems odd for an inventory service to uphold a standard of excellence in regards to accuracy when there seems to be no internal mechanism present to monitor and measure it. There probably isn't an answer to the question of how accurate a given counter is. Nor would there be an answer to the question of "exactly how much is very?"