Inside Out

      While the existance of external inventory servcies goes back primarily to the 1950's, the concept of inventory counting is much older. In the early days of inventory counting, all counting was done internally by store employees and then by internal audit crews. Internal counters were employees dedicated to the task of performing inventory counts at the company’s stores. This was a thankless task that was cumbersome, difficult, and time-consuming for the employees who were assigned to this work. Because of these reasons, the quality of the work produced suffered. Internal counters had to in many cases take financial counts at cost, and in an era before barcodes, or standard inventory counting machines this was not an easy task. Eventually the notion of external inventory counting developed. The idea was to have dedicated, professional counters not associated with the store or the company itself come in and do the work of counting. Having people who have willingly chosen to become inventory counters perform a count, had to be greatly preferred over store employees who may have been begrudgingly selected for this duty. Also the client would not have to spend money to have counters on the payroll, nor spend money to train people to do the work of counting. Instead of paying money to have a counter on the payroll, you could merely pay for the ‘service’ of inventory counting whenever you needed an audit done. As a result of these factors, external inventories took off and have grown a great deal in the last 50 years. Early on external services where for the most part a collection of inventory counters, organized so that they could be dispatched to meet the inventory needs of many diverse clients. But despite of the presence and growth of external inventory services over the last half-century, the notion of internal counting is not dead. There still exists counters who work solely on the behalf of clients, and not for any inventory service that exists. Based on my experience this world couldn’t be any more different from the world of external inventory counting.


      The dynamics of internal counting are somewhat different. For starters the concept of “I” is virtually done away with. A counter deals solely with the client, in fact the notion of client and company here are pretty much combined. You don’t deal with a store manager as a customer, but rather as a co-worker. You are far more cogniscent of things like loss prevention, and accounting, and of what they want and need out of an audit. As a result the focus of the work can be strikingly different. There's less demand on averages and productivity, and greater emphasis on concepts like accuracy and thoroughness. The overall needs and goals of a counter are for the most part the same, but the priorites are shuffled into a different order. This may require a different approach or mindset than one would take when working externally. But ultimately is one system of inventory counting better than the other. If we attempted to take an objective analysis of external counting versus internal counting, we would probably find some advantages, and disadvantages to both. Fortunetly we already have an inventory service who has weighed in on this matter.

   Quantum Services has on their website a link that takes you to a listing of the Top 12 Problems of Internal Audit Services. Without further ado they are:

1. Our internal audit function costs too much
2. Stale Ideas….Old ways of doing things
3. What will happen to my costs when we start scanned audits?
4. Lack of a career path for internal auditors means we’re mired in mediocrity
5. Overhead and fixed costs of our internal audit function make it hard to run a lean operation
6. Our internal auditors get too chummy with store managers
7. Investments in non-core areas drag down profits of the entire company
8. We are missing opportunities for growth
9. How can I get flexible capacity without fixed costs?
10. Our recruiting efforts aren’t focused
11. The blame game vs true accountability
12. How to increase shareholder value?

     I can’t help but notice the repetiveness of these problems. First isn’t problem #1 and #5 basically expressing the same general problem that internal counters can be costly for a company? Problem #7 takes the issue of costliness and expands on it slightly by saying companies shouldn’t focus on areas that don’t offer much return on their investments. Of course inventory counting wouldn't be alone in this category. I can't imagine a company making a huge return off of the loss-prevention or accounting departments. Don't companies have to investment something into non-core areas? Problem #3 once again brings up the issue of cost, this time in relation to developing technology in inventory counting. Of course couldn’t this problem also arise for external services that develop new technology as well? Then there’s problem #2, which pretty much gives the exact opposite situation as #3. If an internal counting program was stuck doing the same methods and procedures, how much of an issue will developing new technology be?

     Apart from the constant emphasis on the cost of internal counting, my main criticism is the notion that some of these problems are unique to internal counting. For instance for problem #4, where exactly is this great career path that exists at external services? For some companies, there are opportunities to advance to manager and supervisor position, which offer more pay, albeit with a lot more responsibility. Outside of this there isn't much, the career path that mainly exists is from a counter to a ‘supervisor for counters’. Also consider that for companies like RGIS, or Washington, the numbers of counters is far greater than the number of managers. Most counters in these companies aren’t on a career path that will take them anywhere. Granted internal counters don’t stand much of a chance of moving into a different position within the company they work for, but the options for external counters aren’t much better. Breaking out of the inventory counting game is not an easy thing to do; it’s probably one of the reasons why some people continue to do this job for years and years. The notion of chumminess with managers being solely an internal problem is even more laughable. There are going to be relationships that develop between counters and store employees. This is unavoidable especially given the cyclical nature of inventory audits. The fact that people are returning to the same store over and over again, it’s only natural to expect relationships to develop. Chumminess is not necessarily a sign of trouble, nor is it neccessarily wrong, ideally you want counters and managers to have a good professional relationship, you want them to get along. I mean how should counters behave when doing their job? Should they act like insolent, insufferable, douchebags? Can chumminess hint at some sort of collusion between the counter and manager? Maybe, but most of the time it signifies very little. Of course on the flip side of that there’s the notion that a cold chilly relationship between the counter and the manager could hint at the possibility that the counter will “count low” to make the manager look bad. This situation is certainly not better. But external services also work in a cyclical manner in regards to audits. Why is not possible for external services to become familiar with their clients and develop a relationship with them? Collision can still occur with external services as well. The external argument though would be that they have the option of sending different people in to count the store, making it harder for collusion to take place. This would be a strong advantage for external services. Still the notions that chumminess is one a serious problem and two that it's unique to internal counting are simply not true.

    Then there's problem #11; “The blame game vs true accountability”. This statement seems somewhat vague, but hints at the potential difficulties that arise when a counter’s work is called into question. If the results of a count turn up bad, I couldn't imagine any counter internal or external who wouldn’t argue to defend their work. Regardless of who they work for counters simply aren't going to come out and just freely suggest that their counts might be wrong. But for the issue of accountability, internal counters might be better. An external counter is more likely to be in a rush to wrap up an inventory, and maybe more likely to argue that a big variance is the result of theft or bad paperwork. They may even try to point out possible evidence of these things, or resort to typical explanations like departments flopping or audits bouncing back from previous audits to make their case. External counters too often get into the count and run mode, this makes it hard to make a case for them having greater accountability, it's even harder to suggest that accountability is only an issue with internal counters. Internal counters might have more time and freedom to check the accuracy of their work, and more importantly they will have more impetus to do so, since it’s far more likely for their superiors to demand and judge them on their accuracy. Internal counters may also be more inclined to try and figure out what has caused these variances to occur, instead of merely pointing out potential problems which might exist. As an employee, there'd be more interst to dig deeper into an audit variance. Some of these other problems listed are extremely vague (Shareholder value?) and could use some greater detail to flesh out the ideas being expressed. But in general it seems the main problems with internal counting are cost, and a slightly greater potential for collision, with some other problems that might also exist for external counters as well. This list does not address the notion that external counters are prone to some of these problems, or that they may have some unique problems of their own, or that there may be some advantages to internal counting. But then again this list was comprised by an external inventory service. It shouldn't come as a shock to see such a strong slant in favor of external inventory services. For further analysis of the internal vs external debate, we can turn to Jack Henry for insight. According to the information found at the NAAIS site, Jack Henry did spend some time working for an external service, before leaving to pursue a career in loss prevention. For the most part Henry strongly believes in using external services, and unlike Quantum he goes into greater detail on why.
     Henry talks about the internal/ external debate in relation to different store types, the small regional, large regional, and national chains. For the small regional chains, Henry points out some of the issues with external services, one that they have a need to keep their costs below the rate that they charge. Two, that their employees tend to be more counters than auditors, who develop the count and run mentality, which is probably tied to the cost issue. And third that the accuracy and quality of the service can be so poor that the store's become frustrated with external services to the point that they switch services often. Yet despite theses problems, not to mention the occurrence of audit results that bounce from one audit to the next, (Something that isn’t necessarily the counters’ fault), Henry ends by citing the cold economic truth “…the cost to hire the least expensive service is so much cheaper than the increased expense to develop an internal auditing crew.” Henry goes much deeper into the cost issue by listing the different cost expenditures for internal counters, there’s payroll, travel, lodging and meals, training, benefits, and the cost to fill out paperwork like payroll and other forms. Frankly there’s very little to argue with here, many of these costs like training, benefits, and payroll aren’t present with external services.

     Henry also talks about the idea of specialization. The notion here is that companies that specialize in certain types of stores are better than companies that offer their services to all types of stores. Companies like RGIS or Washington whose counters may wind up counting inventories for a wide range of businesses. I don’t necessarily think that this is a bad thing, there might be some value in having counters exposed to a diverse set of situations in inventory counting, it can be a good learning experience, and there’s probably some aspects of inventory counting that are common to all types of inventories. The idea that a well trained and experienced counter couldn't tell the difference between as department store and a grocery store doesn't make much sense. The argument that Henry makes for specialization is pretty weak, and then even if specialization is preferred, that would seem to favor internal counters. They don’t just specialize in one type of store, they specialize in one particular client. Internal counters are the ultimate specialists.

     Henry also spends time mentioning crew size, as a major factor in determining weather to use internal counters. Counting inventories for some stores will require a great deal of manpower and effort, not to mention equipment and supplies. If you consider how much money it costs in payroll and benefits, travel, training, and so forth for one internal counter, multiple that cost by the number of people needed to count a store accurately and efficiently. It’s pretty clear that bigger stores with massive levels of inventory have no choice to go external. The choice for big box retailers may essentially come down to RGIS or Washington. I’ve heard stories that some clients will intentionally switch from RGIS to Washington all the time to keep the cost of inventory audits low. However the smaller the store, the less manpower that is needed for an inventory count, and more importantly the lesser the cost to get the job done. For convenience stores that require financial counts done, the cost to count an inventory can be relatively small and far more manageable allowing internal counters to be a viable option.

     Henry goes on to compare internal and external services, on other aspects, mainly with the scheduling of audits. Henry argues that both sides will struggle with providing audits on desired inventory dates and with being able to schedule recounts. Granted scheduling inventories is a difficult task, and making everybody happy is near impossible, for either internal or external services. But of course each one experiences difficulty for different reasons. Obviously internal crews will be limited in their manpower, but manpower is relative to the volume of business that a service has. External services will always have other clients to service and for them they have to balance the needs of all their clients. Scheduling for external services gets complicated when they have to please multiple clients who probably don’t care about the other clients an inventory company might service. Scheduling issues with internal services at least stay within one company who at least can weigh in on which stores need an audit more. Henry also talks about crew stabilization, namely getting the same counters each time. He reasons that if an external service can’t send the same people to a store each time, neither can an internal service. Of course if the manpower of an internal service is small enough, it seems that crew stabilization might happen by default. The fact that internal counters are specialists would make crew stabilization easier for internal crews. Of course the notion that crew stabilization is difficult for external services can be challenged as well. RGIS has for years utilized dedicated crews for some of its clients. The issue here may not be crew stabilization, but rather crew control. And control is one of the main reasons people consider using internal services. With an internal service the client can have some input on who counts which stores on which days, whereas with an external services, they are at the mercy of whom the service dispatches to the job, and when the service can fit them in. But does having more control over the audit program, lead to better counting and more confidence in the counters who perform the inventory counts. Henry poses this very question and vehemently claims that the answer is no. In my all time favorite Henry quote he writes:

This has been my experience since 1965, when first entering the inventory service business. I have seen very few owners, supervisors, managers, and lowly employees collectively, and perpetually respect internal or external inventory auditors, much less have confidence in them.

Henry further adds that:

By the very nature of their job function, auditors as a whole, whether internal or external, will not now, nor will they ever win the confidence of the majority of managers.

I find it strange that Henry talks about external services being a must, but then here he seems to suggest that it doesn’t matter whether you go internal or external. I agree with Henry that to some extent an inventory counter is an inventory counter, and that there’s going to be some natural aversion to them regardless of whether they represent an inventory company or not. But is theis aversion the result of the fact that this job function has to be done, or is it because of the way this job function is performed. Perhaps Henry is right, who cares about weatehr to go internal or external, perhaps the real issue is the individual person doing the job and how they go about doing it. Ultimately a business wants someone or a group of people who can come in and perform a solid, accurate count. that’s the end game here, and how a client goes about obtaining this (whether through external or internal services) is probably far less important than wheather or not that they do. I'll give Henry credit for pointing out that there are difficulties prsent in both options. But there are still some sharp differences between external and internal counting. The ciurcumstances under which the counting gets done in these two options can be vary different indeed. In the client's quest for a high quality inventory count, some consideration should be given to these differences.


Internal vs. External Counting:
As I have experienced them


    Henry at the beginning of his internal and external analysis calls the notion of having store employees count the stock 'archaic'. Let me just make a clarification here. I would never suggest to have a random employee be tasked with counting the store's inventory. I want to make a distinction between this type of scenerio and one where a company has a trained inventory counter on staff. For me an internal inventory counter is one whose principal job is to count the inventory for a store, and who performs their job solely on behalf of the company they work for, and not for any inventory service. I have spent over a decade as an inventory counter, and I have had the opportunity to spend some time working internally in the latter scernerio described above.
     When I got hired as an internal inventory counter, I had already spent about 4 years working as an inventory counter. So I came aboard as someone who had a good deal of prior counting experience, albeit all of it at that time was with RGIS. Becoming internal meant getting used to a different culture, a different set of goals to achieve, and even different equipment to be used to perform the count. Nothing I had experienced before had really prepared me to succeed in this world, and unfortunately I would realize this almost immediately. The first internal inventory that I performed was a disaster, I had trouble getting used to the ICAL that I was using to count with and I just never felt comfortable. But not only that, I was still in the RGIS mode of counting, and that was not good. I screwed up the departments on a lot of items, I missed some merchandise that was hidden underneath the checkout counter, and made a good number of handkeying mistakes, evidence of such could easily be seen on some of my section totals. The results of the audit were bad and the accuracy of my numbers were questioned, and rightfully so. The loss prevention manager was there with me that day, and he actually considered not booking the audit because it was so bad. I suddenly saw how sloppy and inaccurate my work was and it bothered me a great deal. The LP manager decided to schedule a recount in 3 days later. The company I worked for tried to downplay this inventory in order to keep my spirits up, but I knew better. I wasn’t happy with the job I had done, and it didn’t matter what anybody else said. I knew I had to change the way I did things, or I wouldn’t last long with this job. When I did the recount, I approached the job far differently, I was more cautious, and far more meticulous in my counts. I also was far more comfortable with the ICAL, I did anything I could to make sure that my counts were right. I probably spent way too much time reviewing my past keystrokes on the machine, not to mention looking at it. I probably 'saw' more of my ICAL for this count then for any other count I ever did. The end result was that the audit was over roughly the same amount that it had been short 3 days earlier.

     I took with me a few things from this early experience, one that I could not continue to count inventories the way that I had for the better part of the last 4 years, and two if I was going to be successful here, I had to be accurate. I was starting to come into contact with the world of “C”, and I was about to see what they desired from me as an inventory auditor. Throughout the first few months on the job, I remember getting calls from LP asking me questions about my counts from the day before. I was aware that my work was under scrutiny, by managers, district managers, LP, and others, and more importantly that if I wasn’t accurate then my work would be challenged. The importance of accuracy was stressed from day one, and it would continue to be a constant theme. A lot of the feedback I got from my “co-workers” dealt with accuracy, even when my accuracy was great. But what was most interesting about this experience was what the company didn’t stress as important. Nobody whom I worked with, not my boss (who worked in the accounting department), not LP, not any manager ever talked about my average per hour. This statistic pretty much didn’t exist at this company. Granted people did talk about how long it would take for me to get these audits done, but nobody ever came out and said I counted $9000 per hour or $10,000 per hour, nor did they talk about what my APH should be, or what my goal was in regards to my APH. Nobody probably really knew how fast I counted any store, and most likely it wouldn’t have meant much had they did. Working in an environment where APHs were nonexistent was a little weird, yet at the same time somewhat liberating. I had never really got into all the APH talk when I worked for RGIS, so I felt comfortable working in this culture, and I flourished in it. As a result I worked hard on my accuracy, developing somewhat hardcore tactics for achieving it. I remember going to some small kiosk sized store and thinking, I can take the time to count every last item accurately in this store and still get the audit done in a decent amount of time. Why not? I began to take this why not attitude to bigger stores, and despite what Henry has said, I did earn the respect of a lot of people I worked with; managers, lowly employees, DM’s, LP, accounting, and more. I began to acquire a very good reputation for the high quality of my work. But of course no matter how much equatity one’s reputation could build, there is still potential for my work to be challenegd. There could be no greater challenege, then tabluating results that seem impossible to believe.

     When I first started working for this company they referred to this one store as one of the good ones, where shrink percentages are always low and inventories are sometimes skipped in favor of more pressing issues. However the results of the first two audits that I did at this store were unusually bad, which caused some concern from my boss and LP. The result of the third audit would cause a great deal of concern. My current counts were fairly consistent with the previous counts, and yet they resulted in huge variances. The manager of this store was someone whose respect I had earned very early on, he very much liked the way I did my job. Despite this, the results were still bad enough for me to worry about how he would react. Surprisingly he let me live, actually I would find out that the manager had looked at his inventory levels weeks before and he could see than that he was headed for trouble. He actually expected a bad audit, and the results of my work actually confirmed his suspicions. He never questioned the accuracy of my counts, in fact when he was on the phone with LP he uttered four words I’ll never forget “The kid can count”. I didn’t think much of it at the time, but this was probably the biggest complement anyone’s ever paid me, especially when you consider the circumstances under which it was said. After my work was done, LP proceeded to investigate what was taking place and what they found was somewhat stunning. Without getting into any specifics, (which I'm not really aware of) there turned out to be a great deal of internal theft taking place at this store, most of it occuring at night with one or two clerks as the main culprits, and this went on for awhile. The investigation by LP accomplished two things, it further confirmed the manager’s suspicions that something wasn’t right, and two it validated the work that I had done.

     Looking back on this audit years later, I had a strange thought, that this disastrous result was a good thing for the store and the greater company that I had worked for. This audit helped exposed a serious level of theft that was taking place allowing LP and the store management to implement actions that would resolve this issue. Isn’t this what inventory counting is all about? To determine if any issues are taking place at a store, to expose possible theft issues that may be occuring. As a result of my audit actions got taken against the employees who were responsible for this theft, and in the upcoming months the audit results returned to the levels that they had been prior to my arrival. By that point my work had already served its purpose, and the respect I had from this manager was fully earned. From this audit I had a chance to see how important my work was to the people I worked with especially LP. I become aware that decisions get made, and actions get implemented because of the work that I do. It made me take my job very seriously and caused me to continue to work hard to make sure that my counts were on the mark. Working internally allowed me to see the true purpose of inventory counting, of how important it is to “C” as it were, and how even a truly bad audit can be a positive thing for a company. The experience of working internally has had a profound effect on the way that I do things. It has changed the way I look at an inventory counting, and more importantly has made me a better counter.

     Despite this there are still some common arguments against internal counting. One is the idea of independence. External counters aren’t representatives of the company whose stores get audited, and thus are less likely to “fix an audit”, or collude with the manager. Granted external counters will have a drastically different relationship with the store manager and the overall “client” as it were, but then again are external counters really independent? They may have little need to do the store manager any favors, but they are beholden to do favors for the company that they work for, namely “I”. The biggest difference between external counters and internal counters is that external counters work under the shadow of “I” and their needs, whereas internal counters are more in tune with the needs of “C”. What effect does “I” have on external counters? “I” will promote the techniques of profitable counting; they will extol the importance of counting averages, and will occasionally mention accuracy. During one practice session while working for RGIS, I remember a manager suggesting to us to “look at things in a big picture”, a detailed-orientated approach predicated on precision counting will never be the preferred counting style for “I”. And as for the concept that a count is meant to investigate possible theft, for some external services this idea is rarely if ever mentioned to the people tasked with performing inventory counts. The nature of the business of inventory counting has in some respects helped to decrease the quality of inventory counting. Of the entire “History of Inventory Services” article I read on the NAAIS site, half of it is devoted to discussing audit fraud amongst external services, Henry and Jackson even list 7 reasons for why it exists. The truth is that no one is truly independent; everybody will eventually be forced to serve the company that they work for. External counters will count in order to best serve the company that they work for, which means producing high APHs and not getting bogged down in minor details. Internal counters will be more concerned about providing a service for the company that they work for, which meaning accurately measuring the level of shrink, and attempting to find explanations for the presence of audit variances. And the notion that internal auditors can’t be independent is not always true. When I worked internally I had no stake in the outcome of the audit, nor did the people I worked under either in the accounting department, or LP. I knew what they wanted and more importantly needed from me in regards to the audit and they really didn’t interfere with the process that I employed to get the job done. Granted if I did something that they didn’t like, they would let me know, but for the most part they let me figure things out on my own. Strangely I felt more independent working for them then I ever did working for an external service.

     The other big reason to support external services is the notion of professionalism among the audit crew. When external services first started up, probably one of their strongest appeal was the notion that they can bring a professional crew of well-trained counters to perform the inventory count. Despite the existence of external services for over half a century, the notion of a professional inventory counter has really failed to fully develop. For one thing the average “career” length of inventory counters is pretty low. Sure you’re find people who have been counting forever, but you’ll also run into people who are just starting out in the business, and who may not be around in a month or two. The turnover rate in some external services is pretty high, mainly caused by the difficulty of the job, combined with the low pay and the low prestige of the work, not to mention the increasing demand for productivity. But the demand for “bodies” to get the job done, will force many external services to hire “amateurs”, people with no counting experience at all. In fact in today’s times, most counters will first enter the inventory counting business though an external service, I fall into this category myself. Good inventory counting has to come from professionals who have a lot of experience and know how when it comes to counting. But there’s no reason why a highly experienced counting professional couldn’t work internally. To develop a good internal counting program you won’t necessarily need “I”, but the trick is you need “i”, someone who has the basic skill sets to get the job done.

      And as I hinted at before perhaps, it's less about the service and more about the people. A client, whether it’d be a manager or LP, or lowly employees, will not have confidence in a service or an audit program, so much as they will have confidence in people. A company that hires good, honest counters to work internally can have good results. Still the biggest problem for internal services is cost. For a internal service to even exist, and to work well, a lot of things have to be in place. One you have to have stores that can be counted using little manpower and equipment. Ideally you would want to pay a counter salary to one keep the costs fixed, and to allow a counter time to do the job right and to investigate variances, without worrying about the cost to the company. Paying a counter salary would mean you'd have to have enough stores to keep a counter or two busy, so that you can get plenty bang for your buck. You also might want to have stores that aren’t too scattered across a geographical region, so that transportation costs aren’t too high. Despite the success I had working internally I do have to admit that the situation I found myself in was well suited to make things work. A different company might not have things situated as well to facilitate a successful internal program, and on top of all this you have to find a good enough counter to get the job done. Pulling a good counter away from an external service is pretty easy to do, especially if you mention things like benefits, a company car, and a decent pay rate. The biggest trick is getting the counter to convert form an external mindset to an internal mindset to counting. A good counter will bring plenty of experience, but you have to work at promoting the things you want out of a counter, accuracy, precision, a detail-orientated approach, greater accountability. I succeeded internally because I was able and willing to make that adjustment. If anything I’ve had more difficulty adjusting from internal counting back to external counting. I’ve fallen too much in love with the counting style I developed internally. I still think about my first internal audit, that great cataclysmic failure and how it forced a huge shift in how I went about counting inventories, and honestly I’ve never truly recovered from it. After leaving my internal counting position I returned to the world of external counting and brought with me a far different perspective of the inventory counting process, and of the business itself. The results of this new perspective are what you are seeing when you read this blog.