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Keeping Tabs

Inattention to inventory control could have your bottom line walking right out he door.

Many owners of beer distributorships unfortunately are neither adequately informed or concerned with their inventory control systems. Owners are often sales-oriented and feel they have other "more important" things to oversee than inventory control. Because of this attitude, the ultimate responsibility for inventory control usually is passed down to a lower-level middle manager.

The attitude described above usually prevails until the wholesaler gets "burned." This often occurs when a problem employee or even a trusted employee will find a way to beat the system and steal from you. Just as often, a group of employees--not necessarily working in concert with one another--will take a few cases on a regular basis because it is an "okay" thing to do. Over time, these cases add up to a tremendous amount of money. If these conditions are allowed to prevail unchecked, they give an ambitious "small time thief" an opportunity to steal in even larger quantities.

When the wholesaler eventually does get "burned," it forces him to look into his inventory control procedures and determine where the system is breaking down. Frequently, the wholesaler finds that his original system is reasonably sound--but that it is not being followed.

Denver Management has found that employees often implement short cuts in the system to save time. By short cutting the system and doing what they think is needed to help the company, these employees have caused the entire control system to break down. Since stopping this "short cutting" is not usually a priority of management, wholesaler management often gives a "psychological endorsement" to employees. And, because upper-level management has not expressed an interest or a concern in controlling the inventory, middle-level managers who have front-line responsibility to control that inventory adopt the same position or attitude.

To solve this problem, most owners realize that their inventory control systems need modification. But, more importantly, the solution will require changing bad habits employees have developed over the years. At this point, the owners starts to wonder, "How much product and money have I lost in the past that I am not aware of?"

This article is designed to help prevent the wholesaler from getting "burned." The most common causes of inventory control problems--problems observed as a result of the analysis of over 100 beer and wine wholesalers' inventory control procedures--will be addressed.

War stories

Recently, some inventory theft situations have been very elaborate plots involving management, while others have involved simple pilferage by numerous employees.

A properly-designed and implemented inventory control system, however, should eliminate the majority of inventory theft opportunities.

Employees can be ingenious at subverting inventory control systems. In one such case a warehouse manager and sales manager, who were in cahoots with the company's largest off-premise account, both sent pallets of imported beer to the retailer at a reduced price while getting paid in cash. The retail account was getting ahead by paying less than the wholesale price and the warehouse and sales manager pocketed the cash the retailer paid for the product. This went on for six or eight months until the president finally hired a private investigator to determine where this product was going.

Another case was much simpler in scope but not as effective in terms of cases stolen. In this instance, the night crew lined the trucks up inside the warehouse and prepared them to be counted out in the morning by the drivers. The drivers came in the morning and, with the warehouse manager, counted their trucks before they were allowed to leave. The driver whose truck was at the front of the line would have to count his truck first and then the warehouse manager would move down the line assisting the drivers in checking out their trucks. By the time the manager moved down the line three or four trucks, the driver of the first truck would open up his doors and throw more product on his truck, close the doors and leave without anyone knowing it.

This does not seem like much of a problem until you consider 20 drivers doing this every morning. If these 20 drivers take an extra four or five cases daily, this amounts to 100 cases of product a day. At $8.00 a case this adds up to $150,000 to $200,000 per year in theft.

Customer refusal scheme

Yet another incident involved two drivers who consistently came in each day with customer refusals--unusual, as this was a pre-sell situation where the trucks should have come back empty. The drivers would pull in, open their doors, and tell the checker what was on the truck and the checker would sign off on the load sheet.

At first glance, this seemed harmless enough. But upon further investigation, the company discovered that these two top drivers who claimed refusals of 80 to 90 cases each were lying about the denials. The discrepancies were further compounded by the "lazy" checker who took the word of the drivers rather than counting each truck. At any rate, the drivers were selling beer to retailers who paid cash, and then pocketing the cash. While this may not have been an ingenious scheme, it does show what a motivated driver can do given the opportunity to make a few extra bucks.

Some of the most devastating theft problems encountered, however, have occurred in branch operations that were run independent of the parent company. Upper-level management spent little or no time at the branch and showed no concern about the inventory. In two of these instances, the company sold about 1.5 to two million cases of beer per year, per branch. Inventory losses averaged well over $15,000 per month. These incredible losses continued for 18 months, partially due to pilferage by drivers and salespeople, and partially due to middle-level managers who were pilfering much larger quantities, usually truckloads.

The wholesalers in these examples, interestingly, were average or even above-average performers. Their underlying problem, however, was that they failed to recognize that inventory was their most valuable asset. Because the operators themselves did not realize this, they failed to convey this attitude to the managers, setting up an environment prone to theft.

The 20 most common inventory problems are described below to better help wholesalers prevent inventory shrinkage losses. The challenge for the wholesalership owner is to find a way to determine whether or not these problems exist in the company. This will require time and close scrutiny of existing systems and procedures.

1. Apathy

Apathy toward inventory has to be the biggest cause of wholesalers' inventory-control problems. While all owners presumably care about their inventory, if they never ask about it, "assume" it is okay, and do not make it a priority with managers, they send a message of apathy to the entire company.

2. Access

In any book on inventory control, the first chapter points out that it is impossible to control inventory if you do not control access to the product. If a wholesaler allows his sales people or drivers to have access to the inventory and to walk freely in the warehouse, he is inviting an inventory-shrinkage problem. Additionally, if he allows non-warehouse employees to walk through the warehouse and have physical access to the product, it is almost impossible to hold the warehouse manager or inventory manager accountable for the shrinkage. Other than warehouse people, no one should have access to the inventory.

3. Cost of goods sold

Frequently, owners are not aware of the extent of their shrinkage problem because the identified shrinkage is usually expensed through the "cost of goods sold" portion of the profit and loss statement. Shrinkage should be expensed rather as a line item under the warehouse expenses and should not be included in the "cost of goods sold."

Also, the shrinkage should be broken down into two categories: breakage and unexplained losses. Once this has been accomplished, each month the president can look at his P&L and see how much product has been lost through damage and shrinkage. If the company does not break out those figures and continues to group them with the cost of goods sold, this cost will be hidden and the president's awareness not stimulated because he will never know how much shrinkage is really costing him.

4. No goal

Zero discrepancy must be the goal. This means that when the physical counts of the inventory are compared to the computer inventory, they should match. Oftentimes--because inventory is so out of control--the people involved with inventory control become "calloused" to the discrepancy problem and never try to reach a zero discrepancy level for individual packages and the inventory as a whole. While it is not reasonable to achieve a zero discrepancy level for the total inventory every single month, it is possible to achieve a zero discrepancy on the vast majority of individual line items.

5. Product removal

Whenever product is taken out of the warehouse--whether it is removed to be put on a truck, to run a hot-shot, or to give away free to a customer--this removal must be documented. Often, a wholesaler lacks a solid system to document and control the numerous product removals that occur during the course of the day. Worse yet, it is not uncommon to find fairly sound product removal procedures which are being circumvented or not used at all. The president then has a false sense of security until he finds out that inventory is even more out of control than he thought.

6. No dual counting

Two people must count the inventory each time the inventory is counted. They should not count the inventory together but should count it separately, thereby achieving two independent counts. This allows the counter to verify that the physical count is correct prior to comparing it to the computer count and initiation of the reconciliation procedure. The counters should not be permitted to walk together with one person counting and the other person writing. Instead, they should start at opposite ends of the warehouse and do a completely independent count of each package in the warehouse before comparing it to the other counter's results.

7. Access to book numbers

A very common problem in inventory control procedures is that the person or persons counting the inventory know what the count should be before he starts or when he is done. This seriously damages the credibility of the physical counts. This problem also manifests itself when the physical count is complete and does not match the computer count and a recount is needed.

If the person doing the counting knows what his recount should be, he is less likely to do a legitimate job of recounting the package that is out of balance.

8. Access to load sheets

Similar to an inventory counter having access to the computer numbers, a similar problem occurs when a driver has access to his or her load sheets. If the driver knows what is supposed to be on the truck prior to counting the truck, the credibility of the driver's count is seriously damaged. When the driver leaves the yard it is never clear what actually left on the truck.

9. Financial officer involvement

On a monthly basis, the financial officer of the company must check the month-end inventory counts. This is best done by having the controller count the inventory on a monthly basis, accomplishing two things. First, it sends a message to everyone involved in the inventory counting and reconciling process that upper-level management is involved and is aware of what is going on. Secondly, there is a possibility that a warehouse or inventory manager who is involved in counting could also be part of a theft problem.

The financial officer's check of the inventory ensures that the inventory manager is not inflating his physical counts in order to hide product shortages which he helped create.

10. Freeze the inventory

A fairly common problem in counting inventory is that it is almost impossible to freeze the inventory during the physical counting process. If the product in the warehouse is not frozen it is impossible to verify the counts or to ensure that any needed recounts are correct. Many wholesalers accomplish this freezing of the inventory by counting during non-peak times and simply putting their foot down and saying, "No product will come in or go out of the warehouse." Other wholesalers count once a week, for instance, on a Wednesday morning, and tell all their shipping companies that they will not receive product on Wednesday prior to noon. Thus, during these "frozen" periods, the wholesalers make sure that the counts are correct prior to allowing any product to be moved in and out of various locations within the warehouse.

11. Time lag

Typically, the warehouse inventory is counted and given to an office person. The office person enters the physical inventory into the computer, and a report is run that compares the physical count to the computer count. Once this comparison is made, a manager usually reviews the comparison and determines if certain products need to be recounted. If the inventory is counted early in the morning and the recounts are not assigned until early or late afternoon or, worse yet, the next day, it is almost impossible to verify the original accounts. Product has usually been moved in and out of the warehouse or has changed locations within the warehouse. The solution to this problem is to shorten the lag time between the original counts and requested recounts. This may require adjusting the workload and priorities of the person entering the original counts into the computer or the time of day when the counting is done.

12. Recount procedure

A common problem is when the computer and the physical count do not match and there is no set procedure or parameters defined by upper-level management to determine when a recount must be done. A recount of a package showing a discrepancy should occur when the size of the discrepancy exceeds the tolerance levels established by management. Without a recount policy, middle managers make an arbitrary decision based on a "gut feeling." Upper-level management must set parameters which identify when managers involved in the inventory-count procedure should recount product.

13. Inventory wash theory

The most serious manifestation of the bad inventory-control attitude occurs when inventory discrepancies are washed. For example, if a company is over 27 cases of Stroh's Light six-packs and under 30 cases of Stroh six-packs, the inventory control manager can often assume that these packages "wash" each other, that they are in balance. While this type of attitude is for the large part, endorsed by wholesalers, this should not be done.

The wholesaler must realize that just because two packages are off approximately the same amount, one being positive and one negative, it is not safe to assume that both those packages are "okay" and do not need to be researched. Sometimes, after researching these discrepancies, it is discovered that the packages were confused, thus explaining the variances. Other times however, the 30 missing cases of Stroh six-packs have been stolen.

Illustrations A and B show the comparisons of net difference and absolute value. In Illustration A, an inventory reconciliation of book inventory to physical showed a net difference of negative 13 cases. This number, taken by itself, is deceiving because it indicates inventory-control processes are effective. Further review of the data shows that of the 10-line items only two, or 20 percent, have a "0" variance. This is disturbing and demonstrates the lack of control over processes and paperwork which effect inventory balances.

The true indicator of the level of control is the absolute value figure. The absolute value is basically the sum of all the variances regardless of whether the variance is positive or negative. For example, a -4 and a +5 have an absolute value of 9 (4 + 5). This figure provides us with an overview of the level of control and is more realistic than the net difference. In Illustration "A", the absolute value of the differences is 89 cases, a far cry from -13.

Where illustration A compares net difference to absolute value in cases, illustration B compares the same information in dollars and annualizes the discrepancies. Annualizing discrepancies demonstrates the impact of poor daily inventory-control procedures on a yearly basis. An analysis of inventory discrepancies for a six-week period showed a net difference of $1,738, and an absolute value of $22,494. Annualized, the net difference was $15,062 and the absolute value was $194,948, also a big difference.

An owner needs to know what the absolute difference is, not the net difference. By now it is apparent the "inventory wash" theory should not be acceptable as an inventory-control concept. A positive variance is not better than a negative variance. Both imply something is wrong with the system.

14. Come back tomorrow theory

The "come back tomorrow theory" is very troublesome and comical. For example, when the physical count and the computer count do not match, the people responsible for inventory spend a "reasonable" amount of time looking in the most obvious places for the cause of the discrepancy. After spending this so called "reasonable" amount of time, they do not find the cause of the discrepancy or the missing product. So, they decide to "see if the missing product comes back tomorrow."

The problem here is that their idea of a reasonable amount of time usually is not anywhere near the amount of time that should be put into reconciling the difference between book and physical inventories. More importantly, the "let's see if it comes back tomorrow" attitude just allows the problem to be put off--and often forgotten.

15. No audit procedure

Each wholesaler must develop a strict procedure that details the steps inventory people go through in order to thoroughly research or audit an unresolved inventory discrepancy. This must include: 1. Procedure involved in looking for discrepancies. 2. Documentation of the procedure. 3. Management follow-up to ensure the audit steps were properly carried out.

This procedure is the most time-consuming, as well as the most important aspect of the inventory-reconciliation process. Without a defined procedure, management cannot be assured that the correct action is being taken to identify the cause of the reconciliation problem and, in turn, finding the missing product.

16. Write-off frequencies

Adjusting the book inventory on a daily basis to make the inventory zero is way too frequent. It is too easy to push a button in the computer and "force" the inventory to be correct. Thus, any possible chance of determining the size of the real discrepancy is lost. Inventory management will also find it easier to adjust or write-off the product than take the time to search for the answer to the discrepancy. On the other hand, if inventory is adjusted only on an annual basis, this is not often enough.

After the inventory is out of balance for three or four months, the tolerance level of inventory people regarding the discrepancy increases. Thus, they do not look for small errors that, over the course of the year, will add up to big write-offs. Inventory discrepancies should be adjusted to zero balances on a monthly basis. This allows 30 days before management gives up on finding the product while, at the same time, allows each month to start fresh with a zero discrepancy.

17. No executive sign-off

It is imperative that the president sign-off on all inventory adjustments. Middle-level managers should not be allowed to adjust book inventory to physical inventory without upper-level management's approval.

Before the executive signs off on these adjustments, however, he must make sure the inventory people have done everything possible to determine the cause of the discrepancy.

It is important for the president to stress that the adjustments are not made strictly as an accounting procedure with the biggest concern being the accuracy of financial statements. The executive in charge of signing off must understand that his biggest concern is to provide upper-level management control over the inventory and to increase awareness of an inventory problem. Adjustments or write-offs that are done strictly for the benefit of the accounting department--namely, to help them close out the month--are often unseen by upper-level management. Once again, this invites an apathetic attitude on the part of all the company's executives and management people.

18. Counting damaged inventory

Often beer wholesalers find that many individual packages are off by one or two cases. The inventory people will often assume that, "It is probably in the breakage area." However this excuse is used too frequently to justify small discrepancies. When a saleable product is damaged, it should be taken out of the saleable inventory in the computer and put into a separate "damaged goods" inventory. Therefore, all saleable inventory on the floor in the warehouse should balance with saleable inventory in the computer.

Damaged inventory should be counted separately and compared to an independent count which can be tracked by computer or manually. With damaged inventory, it is often not neccessary to keep track of individual packages but only total units of breakage inventory. When a damaged package is repaired, it is then put back into the saleable floor inventory and the saleable inventory in the computer is increased.

This helps eliminate what is often the single most common justification or rationalization for small inventory discrepancies, namely, that the missing product is in breakage. If damaged inventory is not separated from saleable inventory in the computer, workers will have the excuse that the few cases that are missing are "probably in breakage."

19. Receiving product

Incoming products must be staged and counted before being put up in the warehouse. If it is not staged and counted, the potential for inventory discrepancies occurs. Elimination of this problem can be resolved with sound product-receiving procedures.

20. Lax driver procedures

It is important that the wholesaler have very strict driver check-in and check-out procedures. Not only do check-in and check-out provide an excellent opportunity for a driver to steal from the wholesaler, but it is here where honest mistakes are made that cause innumerable book-and physical-inventory problems. Driver check-in and check-out should not be performed by the lowest-level warehouse people who are easily intimidated by the drivers. Driver check-in and check-out is one of those areas where the wholesaler sends a message to the driver. This message is usually based on how strict the check-in and check-out procedures are. Strict procedures that are well managed send a message that the owner takes inventory control seriously. Lax driver check-in and check-out procedures, on the other hand, send a message to the drivers and to the warehouse people that upper-level management "really does not care."


In reviewing these 20 common inventory problems, beer wholesalers should understand how easy it is for a good inventory system to break down. Many wholesalers, however, do not feel they are losing a tremendous amount of money in inventory shrinkage. Quite the contrary, more than half of the wholesalers in the country are losing two or three times as much money in shrinkage than they estimate. For a small wholesaler, a $50,000 or $70,000 inventory loss is substantial. For a large wholesaler, $200,000 inventory loss is substantial. If a company makes 25 cents per case profit, and loses $50,000 per year in inventory shrinkage, it needs to sell an additional 200,000 cases to make up for this loss.

For those wholesalers who are not experiencing excessive shrinkage, it is important to determine if the above-mentioned potential problem areas exist and if so to plug the holes before they cost money.

Joseph J. Verno is a founder and managing partner of the Denver Management Group, Inc. Headquartered in Denver, CO, the Denver Management Group is a nationally recognized management consulting firm to the beer wholesaling industry. Verno grew up in a family-owned beer distributorship and has served as a consultant to brewers and wholesalers. He has authored numerous articles and was regularly featured in Beer Marketing Management. Verno is also a noted speaker at seminars and workshops throughout the U.S.
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Title Annotation:inventory control, beer distributors
Author:Verno, Joseph J.
Publication:Modern Brewery Age
Article Type:column
Date:Nov 20, 1989
Previous Article:Master brewers convene in Philly.
Next Article:Tips you can bank on.

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