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.