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United States General Accounting Office: 
GAO: 

March 2002: 

Executive Guide: 

Best Practices in Achieving Consistent, Accurate Physical Counts of 
Inventory and Related Property: 

GAO-02-447G: 

Preface: 

Creating an effective and cost-efficient government has long been a 
public expectation. Achieving this goal will require federal agencies 
to produce useful, reliable, and timely information that can be used 
daily by the Congress, federal managers, and other decisionmakers. 
Inventory is one of the major areas in the federal government where 
useful, reliable, and prompt data are still generally not available. 

To provide a framework and guide that federal managers can use to 
improve the accuracy and reliability of the government‘s inventory and 
related property data, we studied the inventory count processes and 
procedures of seven leading-edge private sector companies to identify 
the key factors and practices they use to achieve accurate and 
reliable physical counts. Physical counts of inventory are only one 
aspect of inventory control that contribute to accurate and reliable 
inventory records. This Executive Guide, while intended to assist 
federal agencies in achieving the objectives of the Chief Financial 
Officers (CFO) Act of 1990 and subsequent related legislation, is also 
applicable to any governmental and nongovernmental entity holding 
inventory or property and equipment. This Executive Guide describes 
the fundamental practices and procedures used in the private sector to 
achieve consistent and accurate physical counts. It summarizes the 
fundamental principles that have been successfully implemented by 
companies recognized for their outstanding record of inventory 
management.[Footnote 1] Also, it explains and describes leading 
practices from which the federal government may be able to draw 
lessons and ideas. This guide applies to most forms of federal 
inventory, but certain of the discussed practices may not be 
applicable to various types of bulk, natural resource, and nonturning 
inventories, such as the Department of Energy‘s strategic petroleum 
reserve. Many of the concepts and controls for conducting physical 
counts discussed in this guide could also be applied to property, 
plant, and equipment, an area in which many federal agencies also face 
data reliability challenges. 

This guide was prepared under the direction of Gregory D. Kutz, 
Director, Financial Management and Assurance. Other GAO contacts and 
key contributors are listed in appendix VI. Please address any 
questions or comments to me at (202) 512-2600, steinhoffj@gao.gov, or 
Paul D. Kinney, Assistant Director, by phone, e-mail, or regular mail 
at the following: 

Mail: 
Paul D. Kinney, Assistant Director: 
U.S. General Accounting Office: 
1244 Speer Blvd., Suite 800: 
Denver, CO 80204 

Phone: (303) 572-7388. 

Email: kinneyp@gao.gov. 

Signed by: 

Jeffrey C. Steinhoff:
Managing Director, Financial Management and Assurance: 

[End of section] 

Contents: 

Background: 

Identification and Characteristics of Leading-edge Companies: 

Key Factors in Achieving Consistent and Accurate Counts of Physical 
Inventories: 

Key Factor 1: Establish Accountability: 
Performance Goals: 
Level of Accountability: 
Strategies to Consider: 

Key Factor 2: Establish Written Policies: 
Strategies to Consider: 

Key Factor 3: Select an Approach: 
Strategies to Consider: 

Key Factor 4: Determine Frequency of Counts: 
Frequency of Counts: 
Method of Selecting Items Strategies to Consider: 

Key Factor 5: Maintain Segregation of Duties: 
Physical Custody of Assets Transaction Processing and Recording: 
Approval of Transactions: 
Strategies to Consider: 

Key Factor 6: Enlist Knowledgeable Staff: 
Counters Are Knowledgeable about the Inventory Items: 
Counters Are Knowledgeable about the Count Process: 
Count Personnel Are Well-Trained: 
Strategies to Consider: 

Key Factor 7: Provide Adequate Supervision: 
Strategies to Consider: 

Key Factor 8: Perform Blind Counts: 
Strategies to Consider: 

Key Factor 9: Ensure Completeness of the Count: 
Cutoff Procedures:
Preinventory Activities:
Control Methods for Count Completion: 
Strategies to Consider: 

Key Factor 10: Execute Physical Count: 
Communicate Information to the Counter: 
Verify Item Data and Quantity: 
Capture and Compare the Count: 
Perform Requisite Number of Counts: 
Complete Counts in a Timely Manner: 
Strategies to Consider: 

Key Factor 11: Perform Research: 
Required Research: 
Timely Research: 
Approval and Referral of Adjustments: 
Strategies to Consider: 

Key Factor 12: Evaluate Count Results: 
Performance Measures: 
Communication of Results: 
Modification of Policies and Procedures: 
Strategies to Consider: 

Appendixes: 

Appendix I: Implementation Checklist: 

Appendix II: Objectives, Scope, and Methodology: 

Appendix III: Bibliography: 

Appendix IV: Other Related Publications: 

Appendix V: Acknowledgment of Best Practice Participants: 

Appendix VI: GAO Contacts and Staff Acknowledgments: 

[End of section] 

Background: 

Accurate and reliable data are essential to an efficient and effective 
operating environment in the private sector as well as in the federal 
government. Inventory represents a significant portion of assets in 
the federal government and private sector. Therefore, managers and 
other decisionmakers need to know how much inventory there is and 
where it is located in order to make effective budgeting, operating, 
and financial decisions and to create a government that works better 
and costs less. 

In the 1990s, the Congress passed the Chief Financial Officers Act of 
1990 and subsequent related legislation, the Government Management 
Reform Act of 1994, the Government Performance and Results Act of 
1993, and the Federal Financial Management Improvement Act of 1996. 
The intent of these acts is to (1) improve financial management, (2) 
promote accountability and reduce costs, and (3) emphasize results-
oriented management. For the government‘s major departments and 
agencies, these laws (1) established chief financial officer 
positions, (2) required annual audited financial statements, and (3) 
set expectations for agencies to develop and deploy modern financial 
management systems, produce sound cost and operating performance 
information, and design results-oriented reports on the government‘s 
financial position by integrating budget, accounting, and program 
information. Federal departments and agencies work hard to address the 
requirements of these laws but are challenged to provide useful, 
reliable, and timely inventory data, which is still not available for 
daily management needs. 

Managing the acquisition, production, storage, and distribution of 
inventory is critical to controlling cost, operational efficiency, and 
mission readiness. Proper inventory accountability requires that 
detailed records of produced or acquired inventory be maintained, and 
that this inventory be properly reported in the entity‘s financial 
management records and reports. For example, detailed asset records 
are necessary to help provide for the physical accountability of 
inventory and the efficiency and effectiveness of operations. 
Additionally, the cost of inventory items should be charged to 
operations during the period in which they are used. Physical controls 
and accountability reduce the risk of (1) undetected theft and loss, 
(2) unexpected shortages of critical items, and (3) unnecessary 
purchases of items already on hand. These controls improve visibility 
and accountability over the inventory, which help ensure continuation 
of operations, increased productivity, and improved storage and 
control of excess or obsolete stock. 

Producing and maintaining accurate inventory data is a multifaceted 
issue. The ability to accurately count physical inventories is only 
one factor that must be considered in improving the reliability of 
inventory records. The ability to accurately count physical 
inventories is critical in verifying that inventory actually exists 
and that on-hand balances agree with financial and logistical records. 
This Executive Guide is intended to assist federal agencies and other 
governmental and nongovernmental entities in establishing and 
implementing inventory counting procedures that will contribute to the 
accuracy and reliability of inventory data. 

In the private sector, the term inventory generally refers to items of 
property that are (1) held for sale as finished goods, (2) in the 
process of being produced or assembled for sale (i.e., work in 
process), or (3) raw materials and supplies used in producing goods, 
offering services, and accomplishing operational missions. The 
practices discussed in this guide are based on private sector 
inventories that are comparable in type, activity, and volume to 
inventories in the federal government, as listed in the following 
table. 

Examples of Inventory Types Common to the Private Sector and the 
Federal Government: 

* Aircraft engines and turbines; 
* Aircraft repair parts; 
* Nuts and bolts; 
* Electronics; 
* Industrial tapes, adhesives, textiles, and fabrics; 
* Medical supplies, equipment, and cosmetics; 
* Office products; 
* Packaging; 
* Refrigerators, dishwashers, ovens; 
* Sparkplugs, oil filters, fuels, and oils; 
* Hydrofluoric acid, dyes, and gases; 
* Insecticides and chemicals; 
* Vehicle assembly parts; 
* Aviation and vehicle electronic components and infrared devices. 

At the beginning of fiscal year 2001 the federal government reported 
$185 billion in inventory and related property consisting of a variety 
of finished goods, work in process, stockpile materials, commodities, 
seized and forfeited property, and other operating materials and 
supplies. 

GAO and other auditors have repeatedly found that the federal 
government lacks complete and reliable information for reported 
inventory and other property and equipment, and can not determine that 
all assets are reported, verify the existence of inventory, or 
substantiate the amount of reported inventory and property. These 
longstanding problems with visibility and accountability are a major 
impediment to the federal government achieving the goals of 
legislation for financial reporting and accountability. Further, the 
lack of reliable information impairs the government‘s ability to (1) 
know the quantity, location, condition, and value of assets it owns, 
(2) safeguard its assets from physical deterioration, theft, loss, or 
mismanagement, (3) prevent unnecessary storage and maintenance costs 
or purchase of assets already on hand, and (4) determine the full 
costs of government programs that use these assets. Consequently, the 
risk is high that the Congress, managers of federal agencies, and 
other decisionmakers are not receiving accurate information for making 
informed decisions about future funding, oversight of federal programs 
involving inventory, and operational readiness. 

An improved physical count process is only one of many corrective 
actions that will be required to resolve all of these deficiencies. 
Although conducting a physical inventory, comparing the count results 
to recorded quantities, researching differences, and determining and 
posting an accurate adjustment to the on-hand balance seems like a 
fairly simple, straight forward exercise, in reality it is not. There 
are many factors that can cause the record of on-hand inventory to 
differ from the physical quantity counted, including omission of items 
from the count, incorrect counts, errors in cutoff, and improper 
recording or reconciliation of count results. 

This Executive Guide presents processes and controls used by private 
sector companies recognized as excelling in their ability to manage 
inventory and achieve consistent and accurate counts of physical 
inventories. Federal agencies effectively implementing these practices 
can resolve significant weaknesses in the federal government‘s 
property and inventory accountability and financial reporting by 
improving the accuracy of data being used for budgeting, financial, 
and logistical and operational management decision-making purposes. 
The practices presented are widely adaptable to a variety of inventory 
types, volumes, and dollar values. Management should determine the 
extent to which the practices are applied based on their assessment of 
the objectives of the count, characteristics of the inventory, 
capabilities of the inventory system, effectiveness of the system of 
internal controls, and availability of the organization‘s resources. 
The conceptual issues discussed in this guide are focused on inventory 
and related property, and under certain circumstances may be applied 
to property, plant, and equipment. Appendix IV lists other related 
publications that provide further guidance and information on related 
topics of financial management, human capital management, and system 
controls and requirements. 

Identification and Characteristics of Leading-edge Companies: 

To help improve the accuracy and reliability of the federal government‘
s inventory and related property data, we studied seven companies 
having leading-edge inventory count process and procedures to identify 
the key factors and practices in achieving consistent and accurate 
physical counts. The seven companies we studied were recognized by 
leading professional service experts, consultants, and academic and 
business/trade publications as having best practices in inventory 
management. For more information on the criteria we used to select 
these companies, see appendix II. 

Leading-edge Companies: 
* Boeing; 
* Daimler Chrysler; 
* DuPont; 
* FedEx; 
* General Electric; 
* Honeywell; 
* 3M. 

Some of the seven leading-edge companies used more than one counting 
approach and allowed us to review their practices and processes at 
more than one operating location. A total of 12 separate locations 
(from the seven companies) were reviewed. 

All 12 locations used one or both of the two primary approaches to 
counting inventory–cycle counting, in which a portion of the inventory 
is counted either daily, weekly, or monthly until the entire inventory 
has been counted over a period of time, and wall to wall counting, in 
which the entire inventory is counted at a point in time. Further 
discussion of these approaches may be found on page 20, key factor 3. 
In just one location, and for only a very small portion of its 
inventory, was sampling (in which merely a portion rather than the 
whole of the inventory was subject to count) used as a counting 
approach. At this location, a progressive approach was used where the 
location started with wall to wall and then moved to cycle counting 
once there was a proven track record of high accuracy and then moved 
to sampling. A location was only allowed to implement sampling after 
management had proven a strong control environment evidenced by 
multiple years of highly accurate cycle counts in which management 
could be assured of an accurate system. Once the location had moved to 
cycle counts or sampling, the high accuracy rates had to be maintained 
or the location was required to return to a wall to wall approach. 
However, because sampling was not predominately used by this or the 
other leading-edge companies, the key factors contained in this report 
are discussed as they relate to cycle and wall to wall methodologies. 

This Executive Guide discusses common characteristics and practices 
used by leading-edge companies to ensure that the development, 
execution, completion, and evaluation of a physical count of their 
inventories provides management with useful, reliable, and timely 
information for decision making and financial reporting. Specifically, 
we have identified 12 key factors common to these leading-edge 
companies–regardless of the inventory count methodology or combination 
of practices they used–which collectively ensure consistent and 
accurate count results. In addition, this guide presents comparative 
summaries of the goals, practices, and results of certain key factors, 
and provides case studies of leading-edge companies. 

Key Factors in Achieving Consistent and. Accurate Counts of Physical 
Inventories. 

The 12 key factors, presented in the following table are essential to 
leading-edge companies achieving consistent and accurate counts of 
physical inventories. Overarching all of these factors is top 
management‘s commitment to an environment that promotes sound 
inventory control. 

Key factors in achieving consistent and accurate counts of physical 
inventories: 

Management Commitment: 
1. Establish Accountability. 
2. Establish Written Policies. 
3. Select an Approach. 
4. Determine Frequency of Counts. 
5. Maintain Segregation of Duties. 
6. Enlist Knowledgeable Staff. 
7. Provide Adequate Supervision. 
8. Perform Blind Counts.
9. Ensure Completeness of Count. 
10. Execute Physical Count. 
11. Perform Research. 
12. Evaluate Count Results. 

The inventory count process is an integral component of an 
organization‘s internal control environment and management‘s 
commitment is critical to establishing effective and reliable internal 
controls. We observed management‘s commitment at every leading-edge 
company where attitude and leadership had created unique corporate 
cultures. A disciplined and structured culture, which fosters 
integrity, corporate values, and commitment to competence, begins with 
top management and is seeded throughout the organization at all levels 
of staff and supervisory personnel. Characteristics of strong 
management commitment include: 

* Top management advocates change and empowers employees to make 
changes. 
* Performance measures are aligned with corporate goals. 
* Technology and systems are invested in and realize a return. 
* Human capital is developed and retained. 
* Goals and results are communicated. 

These characteristics were not just words in the mission statements of 
the leading-edge companies, but were in fact tools and practices 
employed by each of the companies to strategically manage change to 
enhance quality and profitability. In fact, few, if any, business 
practices remain static, including inventory count procedures. Senior 
representatives of each of the leading-edge companies discussed the 
need for and drive to improve cycle times, reduce costs, and reduce 
capital requirements by systematically reviewing their operations and 
processes. All seven leading-edge companies used fundamental 
methodologies to review their practices: three were active 
participants in Six Sigma[Footnote 2] and five developed other 
internal initiatives, including participative management improvement 
groups, benchmarking of practices to industry standards, and —
accelerated work groups“ to develop, test, and implement process 
improvements. As a result, the 12 key factors are an accumulation of 
continuously improved practices and controls for counting inventory 
and related property. 

Key Factor 1: Establish Accountability: 

Characteristics: 
* Set inventory record accuracy goals at 95 percent or better; 
* Set other performance expectations; 
* Establish accountability and responsibility for the overall physical 
count. 

One of the key factors in developing and implementing an accurate 
physical count process is to establish accountability. Establishing 
accountability for the inventory physical count process requires 
setting performance goals and holding the appropriate level of 
personnel responsible for the overall physical inventory process. 

Performance Goals: 

Performance goals establish targets for achieving management‘s 
objectives and contribute to the overall mission of the organization. 
Leading-edge companies set performance goals for the physical count 
process either through the establishment of inventory record accuracy 
goals (i.e., to measure the degree to which the physical on-hand 
balance agrees with inventory records), or other measurable, results-
oriented performance expectations. 

Setting high goals for inventory record accuracy rates is one way of 
establishing accountability for the physical inventory count. High 
goals "stretch" the organization and personnel to perform inventory 
counts with increasingly superior precision. Experts agree that 
inventory record accuracy goals should be set at 95 percent or 
higher.[Footnote 3] Six of the eight leading-edge locations performing 
cycle counts set performance goals by establishing inventory record 
accuracy goals that ranged from 95 percent to 98 percent. 

The other two locations performing cycle counts and all four locations 
performing wall to wall counts did not establish inventory record 
accuracy goals, but instead established other measurable performance 
expectations. Other performance expectations, as set forth by 
management, can also be used to establish high levels of 
accountability and measure the results of the physical count without 
explicitly setting inventory record accuracy goals. These other 
performance expectations measure aspects of the count, such as 
adjustments and the number of accurate counts. Targets for these other 
performance expectations are established by management and are 
typically based on impact to operations, including financial 
significance, effect on production or services, and compliance with 
policies and procedures. The four leading-edge locations performing 
wall to wall physical counts and the two cycle count locations that 
were not setting goals for inventory record accuracy established 
accountability through other performance expectations, such as dollar 
value and quantity of adjustments and number of accurate counts. For 
example, one leading-edge location set an expectation that net 
adjustments resulting from the count would not exceed 2 percent of the 
dollar value of the items counted. 

Additionally, many of these expectations were also used by the 
locations that set goals for inventory record accuracy. Table 1 
illustrates the range of performance goals and expectations used by 
the 12 leading-edge locations in establishing accountability. 

Table 1: Performance Goals Used: 

Performance goal: Inventory record accuracy goals; 
Cycle count locations: 
1: 98%; 
2: 95%; 
3: 98%; 
4: 98%; 
5: 95%; 
6: 98%; 
7: [A]; 
8: [A]; 
Wall to wall count locations: 
9: [A]; 
10: [A]; 
11: [A]; 
12: [A]; 

Other goal: Dollar value of adjustments; 
Cycle count locations: 
1: [Check]; 
2: [Check]; 
3: [Check]; 
4: [Check]; 
5: [Empty]; 
6: [Check]; 
7: [Check]; 
8: [Check]; 
Wall to wall count locations: 
9: [Check]; 
10: [Check]; 
11: [Check]; 
12: [Check]. 

Other goal: Quantity of adjustments; 
Cycle count locations: 
1: [Check]; 
2: [Empty]; 
3: [Check]; 
4: [Check]; 
5: [Check]; 
6: [Empty]; 
7: [Check]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Other goal: Number of accurate counts; 
Cycle count locations: 
1: [Check]; 
2: [Empty]; 
3: [Check]; 
4: [Check]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty] 

Note: 

[Check]: Indicates applicability to the 12 locations studied from the 
7 companies selected. 

[Empty]: These locations did not establish inventory record accuracy 
goals. 

[End of table] 

Level of Accountability: 

Holding the appropriate level of management responsible and answerable 
for the overall inventory process establishes accountability for the 
physical inventory and is essential to achieving consistently accurate 
counts. Accountability within an organization should exist from the 
top of the organization to the lowest level. However, primary 
responsibility for the overall physical inventory counts should be 
specifically designated and assigned. Accountability for achieving 
performance goals should be established in job descriptions and 
expectations and enforced through periodic performance evaluations and 
a reward system that measures the achievement of performance goals. 

Direct accountability for the overall physical inventory count process 
was established by the leading-edge companies at the level responsible 
for managing the physical count process. The person or persons at this 
level were typically supervisors or managers of an inventory group 
that performed all counts and research, or a materials area 
supervisor/manager responsible for the inventory within his/her area. 
These individuals had specific responsibility for (1) planning the 
count, (2) organizing the count teams, (3) reviewing counts, (4) 
reviewing research, and (5) approving adjustments within established 
tolerances. The accountable person(s) were held responsible for 
achieving the company‘s performance goals, including inventory record 
accuracy, through personnel performance expectations and evaluations, 
which affected bonus and pay decisions. 

Case Study: 

One of the leading-edge locations, a 700,000 square foot distribution 
facility, used a separate inventory group that performed all physical 
counts and researched all variances. The group consisted of a 
supervisor, inventory group leads, and counters/researchers. The 
supervisor of the inventory group was responsible for the overall 
physical count process, including organizing and supervising the 
count, performing research, reviewing and approving adjustments, and 
evaluating the results of the counts. The company had established 
accountability and responsibility for the overall physical count with 
the inventory group supervisor and the inventory shipping and 
receiving supervisor was responsible and accountable for receiving, 
storing, and shipping the inventory. These two supervisors were 
collectively held accountable for achieving the company‘s established 
inventory record accuracy goal of 98 percent based on an accurate 
physical count and the accuracy of the inventory records. This goal 
was included as part of the supervisors‘ expectations and evaluations 
and was used as a tool in determining merit raises and bonuses. 
[End of Case Study] 

In addition to holding appropriate management levels responsible and 
answerable for the quality of the inventory count process, leading-
edge companies often push accountability to the floor-level personnel 
performing the count. Personnel performing the count were held 
accountable for performing an accurate physical count of the inventory 
items, but not the accuracy of the count agreeing to the inventory 
records. For example, when a subsequent recount (discussed in key 
factor 10) revealed an error in the first count results, one leading-
edge location used this information as an indicator that the first 
count team may have performed an inaccurate physical count, indicating 
the need for additional training. 

Strategies to Consider: 
To establish accountability for the physical count process, senior 
executives could consider the following: 

* Establish performance goals for the physical count that are aligned 
with the organization‘s mission, strategic goals, and objectives. 

* Establish high measurement goals and continuously assess the 
organization‘s progress in achieving and maintaining those goals. 

* Identify the line of authority and responsibility from top 
management to the level of the organization responsible for 
accomplishing a consistent, accurate physical count of inventory and 
related property. 

* Develop employee/supervisor performance measurement systems to hold 
appropriate personnel accountable for achieving the organization‘s 
performance goals. 

[End of Key Factor 1] 

Key Factor 2: Establish Written Policies 

Characteristics: 
* Document policies and procedures for entire physical count process; 
* Regularly review and update established policies and procedures. 

Establishing and documenting policies and procedures are essential to 
an effective and reliable physical count. Policies and procedures 
demonstrate management‘s commitment to the inventory physical count 
process and provide to all personnel clear communication and 
comprehensive instructions and guidelines for the count. Establishing 
written policies and procedures helps ensure consistent and accurate 
compliance and application needed to achieve high levels of integrity 
and accuracy in the physical count process. Policies and procedures 
also become the basis for training and informing employees. 

Well-documented physical count policies and procedures typically 
pertain to all aspects of the physical count process, including the 
activities or tasks that take place before, during, and after the 
physical count. Documented policies and procedures generally include 
everything an employee needs to know to complete the requirements of a 
specific task for the physical count. 

Leading-edge locations established written policies and procedures 
addressing their physical inventory process. These policies and 
procedures include all aspects of the physical count including 
objectives of the count, types and timing of counts, instructions for 
counting and recording, and researching and adjusting variances. The 
policies and procedures at the leading-edge locations were written in 
sufficient yet succinct detail to explain the specific procedures and 
tasks to be performed. A table of contents from one leading-edge 
location‘s written policies and procedures manual, presented in figure 
1, demonstrates the breadth of the location‘s policies and procedures. 
Detailed written, specific instructions on all the tasks involved in 
the physical count process were included within each of its sections. 

Figure 1: Excerpt from A Leading-Edge Company’s Policies and 
Procedures Manual: 

[Refer to PDF for image: list] 

I. Why: 
A. Objective of the Physical Inventory Process. 

II. Planning: 
A. Inventory Methods; 
B. Record Definitions; 
C. Timing of Inventory; 
D. Review of Inventory Procedures; 
E. Physical Location Preparation; 
F. Cutoff Data Arrangements; 
G. Use of Specialists; 
H. Planning Meetings. 

III. Observing/Taking: 
A. Segregation of Duties; 
B. Forms; 
C. Recording Information; 
D. Inventory Movement During Taking; 
E. Obsolete, Damaged, and Slow-Moving Items; 
F. Inventories in Off-Site Locations; 
G. Preliminary Inventories; 
H. Review and Accountability; 
I. Bar Coding System. 

IV. Reconciliation: 
A. Summarization; 
B. Reconciliation; 
C. Timing and Approval of Adjustments; 
D. Recording of Inventory Adjustments. 

V. Computer Access and Security: 
A. System Security; 
B. Segregation of Duties; 
C. Processing Controls; 
D. Disaster Recovery; 
E. Documentation; 
F. Master File Changes. 

VI. Special Situations: 
A. Consigned Stock, Company Owned; 
B. Consigned Stock, Vendor Owned; 
C. Theft Sensitivity; 
D. Returnable Items; 
E. Special Materials. 

VII. Frequency: 
A. Inventory Type; 
B. Period. 

Appendix A Cycle Counts: 
A. Inventory Classification; 
B. Inventory Count Process; 
C. Inventory Accuracy; 
D. Inventory Tolerance; 
E. Cycle Count Inventory Adjustments; 
F. Management Reporting; 
G. Certification; 
H. Definitions; 
I. Checklist. 

[End of figure] 

Once policies and procedures have been established and documented, 
they must be regularly reviewed and updated. Policies and procedures 
that are regularly reviewed and revised to reflect changes in the 
process and tasks of the physical count reinforce management‘s 
commitment. Up-to-date policies and procedures provide a reliable and 
credible resource to employees, encourage compliance with management‘s 
directions, and form the basis for a reliable physical count process. 

All the leading-edge locations regularly reviewed and updated their 
policies and procedures. The majority of the locations reviewed and 
revised their policies every 1 to 2 years, while others revised their 
policies any time there was a change in the process or specific tasks 
of the physical count. 

Strategies to Consider: 

To establish effective written policies and procedures for the 
physical count process, senior executives should consider the 
following: 

* Develop broad policies affecting inventories that are designed to 
attain management‘s goals. 

* Develop written procedures for all aspects of the physical count 
processes, including: 
- defining the current process and the individual tasks associated 
with the process and; 
- procedures for and examples of filing and completing required paper 
work. 

* Regularly review and revise policies and procedures for changes in 
the process and individual tasks. 

[End of Key Factor 2] 

Key Factor 3: Select an Approach: 

Characteristics: 

* Cycle counting supports operational and financial needs of the 
organization. 

* A wall to wall physical count supports financial reporting at a 
point in time. 

* In selecting the best physical count approach management should 
consider: 
1) the objective or purpose of the count and the timing issues 
involved, 
2) the capabilities of the inventory system, 
3) the existing control environment over the inventory system and 
processes, and, 
4) the characteristics of the inventory. 

The process of counting physical inventory is an essential control for 
operational efficiency and financial reporting. A physical count, when 
properly executed, verifies the existence of physical assets and the 
completeness and accuracy of records. Accurate inventory records are 
key to management‘s confidence in financial and other information used 
in decisionmaking. 

The two predominant approaches used by the leading-edge companies to 
physically count inventory are cycle counting and wall to wall. Each 
approach offers distinct advantages and serves some purposes better 
than others. As a result, organizations may choose to use only one 
approach or a combination of approaches. 

Cycle counting is a method by which a portion of the inventory is 
counted either daily, weekly, or monthly until the entire inventory 
has been counted over a period of time. Cycle counting serves two 
purposes: (1) it supports the reliability of the on-hand inventory 
quantities used in management decisions and financial reporting and 
(2) it normally results in increased operational efficiency. Cycle 
counts are used as a control mechanism to reduce the risk that the 
inventory process and systems are functioning incorrectly. 

In the wall to wall approach the entire inventory is counted at a 
point in time, usually as of the end of an annual or interim period. 
This method is primarily used for financial reporting purposes in 
order to validate the amount of reported inventory. 

Determining which approach or combination of approaches is the most 
appropriate for an organization is a key management decision. When 
selecting an approach, management should consider the objective and 
timing of the count, capabilities of the inventory system, the 
existing control environment, and the characteristics of the inventory. 

The type of count performed is determined by management based on the 
reason for the count. Physical counts can be used to establish a 
balance on or as of a certain date for financial reporting, to monitor 
the accuracy of records in an inventory system, and to ensure that the 
proper inventory is available for operational needs. In determining 
the objective of the count, management should consider the time and 
resources available or needed to conduct and complete the count. We 
found that cycle counts were used to ensure that the balances in the 
inventory system were continuously correct for management decisions 
and financial reporting and to determine that recorded items were 
present to meet operational needs for production or distribution. We 
found that wall to wall counts were primarily used to establish a 
balance on or as of a certain date for financial reporting. In one 
instance, the wall to wall approach was used monthly to monitor the 
inventory system and meet operational needs. 

Another primary consideration is the capability of the inventory 
system. There are two general types of inventory systems-perpetual and 
periodic. A perpetual inventory system maintains current item balances 
by recording receipts and shipments. In contrast, a periodic inventory 
system tracks receipts and shipments in a purchases account, and 
infrequently updates item balances. For cycle counting, a perpetual 
system is needed to provide current balances for reconciliation of the 
system and physical count quantities. We found that all of the leading-
edge companies had perpetual inventory systems. Additionally, we found 
that five of the seven leading-edge companies used a perpetual 
inventory system with locator capability, commonly referred to as a 
locator system, which identifies the specific physical location of 
each individual item in inventory. 

The existing control environment over the inventory system and related 
processes is also a consideration in selecting the type of count to 
conduct. Internal controls over the inventory system and processes 
should be effective in providing reliable information for conducting 
the physical count. Controls must exist to provide reasonable 
assurance that all transactions affecting the inventory balances are 
properly executed and recorded in the inventory system. Unless this is 
the case, balances in the inventory system do not provide a reasonable 
basis to compare to the physical count quantities. Inventory record 
accuracy rates, based on results of prior counts, may be an indicator 
of the strength of the control environment. A pattern of low accuracy 
rates or known control weaknesses may suggest that (1) the recorded 
balances in the inventory system are not reliable for conducting cycle 
counts and (2) a wall to wall count may be more appropriate to 
reestablish accurate inventory balances. 

Characteristics of the inventory should be considered in selecting an 
approach. Management should consider if there are identifiable and 
distinct segments of the inventory that may lend themselves better to 
cycle counting, wall to wall counting, or a combination of both. 
Identification of distinct segments should include considerations of 
the size, dollar value, turnover, criticality to operations, and 
susceptibility to misappropriation, including theft, of the inventory. 

All of the leading-edge companies use cycle counting or wall to wall 
or both to count inventory. A majority of these companies used the 
cycle count approach. However, some companies used a combination of 
wall to wall and cycle for separate identifiable segments of their 
inventory. Three companies varied their approach for separate segments 
of their inventory based on either the type of material (raw material, 
work in process, or finished goods), or by a division‘s or location‘s 
operations (distribution, warehousing, and manufacturing). For 
example, one company conducted wall to wall counts until such time as 
the accuracy of the balances was sufficient to support cycle counting. 
Another leading-edge company conducted cycle counts on work in process 
materials that were critical to operations and conducted monthly wall 
to wall counts on finished products that were a material portion of 
the plant‘s inventory and were subject to strong logistical and 
process controls. 

Case Study: 

One leading-edge company had approximately 80 different facilities 
within the United States and manufactured and distributed a wide range 
of products from small units to large reels and bundles. This company 
used a combination of cycle counting and wall to wall counts based on 
the existing control environment and historical accuracy rates at its 
facilities. Facilities were allowed to move to cycle counting once the 
location had completed a wall to wall annual physical count and had 
demonstrated the ability to perform cycle counts by maintaining record 
accuracy rates above 95 percent and good inventory process controls 
for receiving, manufacturing, moving, and shipping of items. The 
facility also had to demonstrate adequate training procedures, 
processes, and a good system that would support cycle counts before a 
cycle count program would be approved. The facility would begin by 
cycling through its entire inventory four times per year. As the 
facility demonstrated its ability to maintain accurate inventory 
records by achieving high record accuracy rates and reliable systems 
and processes, it could reduce the number of cycles down to one per 
year. However, the reduction from four cycles to one cycle per year 
took approximately 6 years. Additionally, if the facility‘s inventory 
record accuracy fell below 95 percent it was required to submit a 
corrective action plan to address the causes of the low accuracy and 
conduct an annual wall to wall physical count, in addition to the 
regular cycle counts, until a 95 percent accuracy rate was once again 
achieved and maintained. [End of Case Study] 

Strategies to Consider 

To select a physical inventory counting approach, senior executives 
should consider the following: 

* Determine the objectives of performing the physical count: 
- to establish a balance as of a specific date for financial reporting, 
- to monitor the accuracy of the inventory records for financial 
reporting and management decisions, 
- to ensure the availability of inventory to meet operational needs 
including mission readiness, 
- to identify excess or obsolete inventory. 

* Assess the resources and timing needed to conduct the count. 

* Evaluate the capability of the inventory system to: 
- maintain item balances on a current or periodic basis, and, 
- maintain balances by item location. 

* Evaluate the existing control environment over the inventory system 
and processes: 
- to ensure transactions are properly executed and recorded in the 
inventory system, 
- to determine that the inventory system provides a reasonable basis 
for comparison to the physical count, and, 
- by considering existing or historical accuracy rates to support the 
assessment. 

[End of Key Factor 3] 

Key Factor 4: Determine Frequency of Counts: 

Characteristics: 

* Determine which items to count and how frequently. 

* Choose a method of selecting individual items or locations for count. 

Counting an appropriate amount of the total inventory at a point in 
time or over a period of time with regular frequency helps to provide 
accurate inventory records for operational decisions and financial 
reporting. Management should count an appropriate amount of the total 
inventory by determining the desired frequency of counts and selecting 
a method of choosing individual items or locations to count. 

Frequency of Counts: 

In order to count an appropriate amount of the total inventory, 
management must decide which inventory items to count and how 
frequently those items should be counted. The most desirable goal 
would be to count all of the inventory items at least once a year. 
However, maintaining accurate inventory records by counting items 
takes time and costs money. Since there are typically limits on these 
resources, the best way to balance control of the inventory and cost 
of the count is to focus on the items determined to be more important 
or of higher risk to the organization. Accordingly, it is not always 
practical to give the same treatment to each item; it may be desirable 
to segment the inventory into identifiable classes and assess the risk 
for each segment or class to determine the frequency of counts. For 
instance, management may determine that items critical to the 
production process, resulting in a high risk to the organization, 
should be counted every day, week, or month. In other instances, a 
segment of inventory that has little or no movement and does not 
represent a significant portion of the inventory, and thus has low 
risk, may be counted less frequently. The purpose of classifying items 
into groups or segments is to establish an appropriate degree of 
control over each item. Management should exert the highest degree of 
control (frequent counts) on the most important items, and the least 
control on less important items. Management may determine that there 
are many degrees of control and importance depending upon the 
organization‘s needs and inventory characteristics. Management should 
consider the dollar amount, criticality to operations, and 
susceptibility to theft or fraud when segmenting the inventory and 
determining the frequency of counts for each segment. 

Leading-edge locations used a variety of frequencies for various 
segments of their inventory. Locations performing cycle counts 
segmented their inventory by dollar value, activity or turnover, 
sensitivity or criticality, historical accuracy rates, or a 
combination of these elements in determining how often they would 
count. The frequency ranged from segments that were not counted at 
all, or less than once a year, to segments that were counted daily, 
monthly, quarterly, semi-annually, or annually, as shown in table 2. 
Locations that segmented their inventory by dollar value counted 
higher dollar value items more frequently than lower value items. In 
other instances, locations used a combination of dollar value and 
activity or turnover of items to segment their inventory, in which the 
higher dollar items by activity were counted more frequently, usually 
four times per year, than those that had low dollar value by activity, 
which were counted once a year. On the other hand, we found that 
locations performing wall to wall physical counts typically counted 
their entire inventory at least once a year at a point in time. 
However, we did note that one location performed a wall to wall 
physical inventory on one segment of its inventory every month, due to 
the dollar value significance of these items to the company‘s total 
inventory. Table 2 illustrates the frequency of counts for separate 
inventory segments at the 12 leading-edge locations. 

Table 2: Frequency of Counts by Inventory Segments: 

Frequencies: More than 4 times per year; 
Cycle count locations: 
1: [Empty]; 
2: [Empty]; 
3: [Empty]; 
4: [Check]; 
5: [Check]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Check]. 

Frequencies: 3-4 times per year; 
Cycle count locations: 
1: [Empty]; 
2: [Check]; 
3: [Check]; 
4: [Check]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Check]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Frequencies: 2-3 times per year; 
Cycle count locations: 
1: [Empty]; 
2: [Check]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Check]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Frequencies: 1-2 times per year; 
Cycle count locations: 
1: [Check]; 
2: [Check]; 
3: [Check]; 
4: [Empty]; 
5: [Empty]; 
6: [Check]; 
7: [Empty]; 
8: [Check]; 
Wall to wall count locations: 
9: [Check]; 
10: [Check]; 
11: [Check]; 
12: [Empty]. 

Frequencies: Less than once a year; 
Cycle count locations: 
1: [Check]; 
2: [Empty]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Check]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Note: [Check]: Indicates applicability to the 12 locations studied 
from the 7 companies selected. For example location 1 segments its 
inventory by dollar value and counts one segment with items over $250 
once per year and another segment with items less than $250 less than 
once a year. 

[End of table] 

Case Study: 

One leading-edge location (location 8 in table 2), manufacturing over 
11 million electronic components each year, segmented its work in 
process inventory and varied the frequency of counts for each segment 
in order to achieve greater coverage of the material segments of the 
inventory. The work in process inventory was segmented based on the 
dollar value multiplied by activity or turnover, and placed in one of 
four separate segments. Segment A represented those items that were in 
the top 10 percent, segment B were items in the next 20 percent, 
segment C were items in the next 30 percent, and segment D was the 
remaining 40 percent. Each segment was counted with either greater or 
lesser frequency to achieve more coverage of the higher dollar 
activity items and less coverage of the lower dollar activity items 
each year. Segment A was counted four times, segment B was counted 
three times, segment C was counted two times, and segment D was 
counted once per year. [End of Case Study] 

Method of Selecting Items: 

Once management has determined which items to count and how 
frequently, a method of choosing individual items or locations must be 
determined. The method should ensure that all items within the 
identified segments are chosen to achieve the desired frequency and an 
accurate count. Leading-edge locations used various methods to select 
items for count within an identified inventory segment. The most 
common method among leading-edge locations performing cycle counts was 
to select items sequentially by rows or geographic area within the 
warehouse or plant and work their way through the facility over a 
period of time. For example, one of the leading-edge locations divided 
its warehouse into geographic areas (shipping, receiving, and 
warehouse rows) and then selected an area to count each day. 

Other methods used by the leading-edge locations to select individual 
items or locations for count included a random selection, weighted 
selection toward higher dollar volume or value items, and selection 
based on management‘s discretion. One of the leading-edge locations 
used a random method by which the inventory system tracked which items 
had been counted and which items still needed to be counted in order 
to ensure that all items were counted each year. The inventory 
supervisor manually entered how many items to select for count each 
month, and the inventory system randomly selected the desired number 
of items from those not counted. In another instance, one of the 
leading-edge locations selected the top 25 items by dollar value each 
day from a list of items that had not been counted. Locations 
performing wall to wall physical counts counted all inventory at a 
point in time by splitting the warehouse or facility into geographic 
areas and assigning count teams to each area to ensure that all 
inventory was counted. 

Strategies to Consider: 

To determine the frequency of the physical counts, senior executives 
should consider the following: 

* Assess the resources and timing needed to conduct the count. 

* Identify segments or classes of the inventory and assess each 
segments risk to determine the degree of control needed based on: 
- activity or turnover, 
- dollar value, 
- sensitive or classified items, 
- items critical to production or mission readiness, and, 
- items susceptible to misappropriation, including theft. 

* Select a frequency to count each segment based on the assessed risk 
and degree of control needed such as: 
- daily, 
- weekly, 
- monthly, 
- semi-annually, or, 
- annually. 

* Determine a method of selecting individual items for count such as: 
- sequentially by row or area within the warehouse or facility, 
- random selection, or, 
- weighted selection towards higher dollar, higher activity items. 

[End of Key Factor 4] 

Key Factor 5: Maintain Segregation of Duties: 

Characteristics: 

Segregation of duties: 
* Physical custody of assets; 
* Processing and recording of assets; 
* Approval of transactions. 

Mitigating controls: 
* Blind counts (see key factor 8); 
* Increased supervision (see key factor 7); 
* Two-member count teams. 

Segregation of duties, a commonly used and widely accepted internal 
control and business practice, entails dividing or segregating key 
duties and responsibilities among different people. Implemented 
effectively, this type of control reduces risk of error and fraud so 
that no single individual can adversely affect the accuracy and 
integrity of the count. 

The key areas of segregation are (1) physical custody of assets, (2) 
processing and recording of transactions, and (3) approval of 
transactions. Ideally personnel performing any one of the above 
functions would not also have responsibilities in either of the other 
two functions. Thus, where practical, adequate segregation of duties 
for the physical count process includes using personnel who do not 
have overlapping responsibilities in (1) custody or access to the 
inventory items for count, (2) recording transactions resulting from 
the count, and (3) authority for approving adjustments resulting from 
the count. In situations where segregation of duties is not practical 
or cost-effective, other controls should be employed to mitigate the 
recognized risk. Such mitigating control procedures include blind 
counts (meaning that the counter does not know how many items are 
supposed to be there before or during the count process), increased 
supervision, and applying dual control by having activities performed 
by two or more people. 

Physical Custody of Assets: 

To best accomplish segregation of duties, the normal job activities of 
the person performing the physical count should not include custodial 
activities such as receiving, shipping, and storing physical assets. 
We found that the strongest control employed by leading-edge locations 
was to exclude those with asset custody from the counting activity. 
Five out of the eight leading-edge locations performing cycle counts 
accomplished segregation of duties by using a separate inventory group 
of dedicated counters with no other warehouse responsibilities to 
perform the physical count. The other three locations use warehouse 
personnel with normal warehouse responsibilities, such as shipping, 
receiving, and storing, to perform the count. These three locations 
implemented mitigating controls to reduce the risk of using warehouse 
personnel by performing counts in which the counters did not have 
knowledge of or access to the on-hand quantity. This is referred to as 
a blind count. 

The leading-edge locations performing wall to wall physical counts 
used warehouse personnel or a combination of warehouse and 
nonwarehouse personnel to perform the physical count. This is normal 
procedure for companies performing wall to wall inventories, since it 
is usually an enormous task to count the entire inventory in a short 
time, such as a weekend. All four of these locations had implemented 
mitigating or dual controls to ensure proper counts and to reduce the 
risk caused by the lack of segregation of duties. These mitigating and 
dual controls included (1) performing blind counts, (2) increasing 
supervision, and (3) using two-member count teams. 

Table 3: Segregation of Duties: 

Personnel performing counts: Inventory group of dedicated counters not 
having custodial duties; 
Cycle count locations: 
1: [Check]; 
2: [Check]; 
3: [Empty]; 
4: [Check]; 
5: [Empty]; 
6: [Empty]; 
7: [Check]; 
8: [Check]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Personnel performing counts: Warehouse personnel having custodial 
duties; 
Cycle count locations: 
1: [Empty]; 
2: [Empty]; 
3: [Check][A]; 
4: [Empty]; 
5: [Check]; 
6: [Check]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Check]; 
10: [Check]; 
11: [Check]; 
12: [Check]. 

Mitigating controls: Blind counts; 
Cycle count locations: 
1: [Empty]; 
2: [Empty]; 
3: [Check]; 
4: [Check]; 
5: [Check]; 
6: [Check]; 
7: [Check]; 
8: [Check]; 
Wall to wall count locations: 
9: [Check]; 
10: [Check]; 
11: [Check]; 
12: [Check]. 

Mitigating controls: Increased supervision; 
Cycle count locations: 
1: [Empty]; 
2: [Empty]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Check]; 
10: [Check]; 
11: [Check]; 
12: [Check]. 

Mitigating controls: Two member count teams; 
Cycle count locations: 
1: [Empty]; 
2: [Empty]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Check]; 
10: [Check]; 
11: [Check]; 
12: [Check]. 

Note: [Check]: Indicates applicability to the 12 locations studied 
from the 7 companies selected. 

[A] This location used warehouse personnel to perform 1st and 2nd 
counts and utilized a separate inventory group to perform any 
necessary 3rd counts and research variances. 

[End of table] 

Transaction Processing and Recording: 

Personnel recording transactions that affect the on-hand quantities 
should not be responsible for the physical custody of the inventory or 
approval of adjustments. Segregation between the duties of recording 
transactions that result from the physical count and duties of custody 
or approval is essential to provide for the integrity of the physical 
count process. Personnel recording inventory adjustments to the on-
hand balances at leading-edge locations did not have custodial 
responsibilities, such as shipping, receiving, and storing, and did 
not have to approve significant adjustments to the records. 

Approval of Transactions: 

Personnel approving transactions that affect on-hand inventory 
balances should not be responsible for the physical custody of the 
inventory or recording transactions. Leading-edge locations have 
controls in place to manage and limit who has the authority to approve 
adjustments resulting from the count. Most locations assigned approval 
limits to different levels of management. As the dollar-value of the 
adjustment increased, the approval level moved up the management chain 
to a higher level of management. 

Case Study: 

One leading-edge location, a distributor of prepackaged parts, 
accomplished segregation of duties by using a separate inventory group 
to conduct physical counts of inventory. In assembling this group and 
assigning responsibilities, management implemented the key areas of 
segregation, separating the duties of personnel responsible for the 
custody of the inventory (warehouse personnel), counting the inventory 
(cycle counters), and posting adjustments to the records (cycle count 
leads). The inventory group consisted of an inventory control 
supervisor, six cycle counters and one cycle count lead for the first 
shift, four cycle counters and one cycle count lead on the second 
shift, and three cycle counters and one cycle count lead on the third 
shift. Each counter was responsible for performing approximately 200 
inventory item location counts per day and any necessary recounts. 
Responsibilities of the cycle count leads included preparing daily 
workload assignments for the counters, posting and monitoring 
adjustments to the record on-hand balances, and researching variances. 
The inventory control supervisor along with the leads determined the 
cause of variances between counted quantities and record on-hand 
quantities and implemented solutions to rectify underlying problems 
causing the variances. [End of Case Study] 

Strategies to Consider: 

To implement and maintain effective segregation of duties in the 
physical count process, senior executives should consider: 

* Determine there are available resources to conduct the count and 
whether they have the appropriate knowledge and experience of the 
inventory and counting. 

* Analyze the normal job duties of personnel performing the physical 
count, considering who has responsibility for: 
- custody or physical control of the inventory, 
- processing and recording of inventory transactions, and, 
- approval of transactions and adjustments. 

* Determine whether controls may be impaired if any one person has 
been given responsibility for more than one activity noted in the 
previous strategy. 

* Perform a risk versus cost analysis of any apparent control risks, 
and determine whether: 
- duties may be reassigned, or, 
- mitigating controls can be implemented, or, 
- risk is at an acceptable level. 

[End of Key Factor 5] 

Key Factor 6: Enlist Knowledgeable Staff: 

Characteristics: 

* Counters are knowledgeable about the inventory items. 
* Counters are knowledgeable about the count process. 
* Counters are well-trained. 

Inventory counters who are knowledgeable about the inventory items 
being counted and the inventory counting procedures are critical to 
performing effective and accurate physical counts. It is important for 
inventory counters to be adequately trained; experienced, 
knowledgeable inventory counters increase the accuracy and efficiency 
of the physical count. In addition, counters most familiar with the 
plant layout and daily operations are more likely to conduct the 
counts quickly and resolve count discrepancies without having to 
conduct excessive research. 

Counters Are Knowledgeable about the Inventory Items: 

Leading-edge companies normally use in-house personnel–whether a 
dedicated group or warehouse personnel–who have been chosen expressly 
because of their prior experience with and knowledge of inventory 
items. One major advantage of this approach is that experienced 
warehouse personnel are better able to distinguish between items that 
look similar but have different technical specifications. They are 
also more likely to correctly identify the items they are counting and 
provide accurate item descriptions and count quantities, decreasing 
the likelihood of needing second or third counts. 

Additionally, experienced personnel are more familiar with the layout 
of plant and warehouse facilities and the movement of items within and 
between these facilities. They are aware of areas where items may be 
placed, either intentionally or unintentionally, and thus can more 
easily locate all the items that should be counted and potentially 
reduce misstatements in the quantities counted. They are knowledgeable 
about how items are packaged and stored as well as how items are used 
in a production line, so they can quickly and accurately count 
assigned items. 

Eleven of the twelve leading-edge locations use personnel who have 
prior work experience and knowledge about the inventory items being 
counted. A promotion from the warehouse to the position of cycle 
counter within a dedicated count team of one organization was one way 
in which a leading-edge location trained, developed, and retained high-
performing counters. Another location, which experienced high turnover 
and used personnel with varying degrees of experience, enhanced the 
knowledge of counters by providing on-the-job training and teaming new 
counters with experienced counters. 

Counters Are Knowledgeable about the Count Process: 

Inventory counters should be knowledgeable about the count process to 
perform efficient and accurate physical counts. Leading-edge locations 
performing cycle counts typically use individuals whose sole function 
is conducting physical inventories. These dedicated counters, often 
designated as the inventory audit group, usually have considerable 
experience working in the warehouse before being promoted to an 
inventory counter position. Cycle counters normally have significant 
prior inventory experience, are well trained, are dedicated to only 
counting inventory, and perform counts routinely. Leading-edge 
locations performing wall to wall counts typically use warehouse 
personnel to perform the counts using effective mitigating procedures 
to compensate for the lack of segregation of duties, such as blind 
counts and two member count teams. Warehouse personnel may be less 
experienced in the count process because wall to wall counts are often 
performed only once a year. If personnel with lesser knowledge of the 
inventory perform the count, then increased supervision, training, and 
instructions are commonly required. One leading-edge location used 
administrative or other staff to supplement its count teams, teaming 
these employees with experienced warehouse inventory personnel. 

Count Personnel Are Well-Trained: 

Training all counters and supervisors involved in the physical count 
reduces the risk of error in performing the count and communicates a 
consistent way to perform counts. Counters, supervisors, and 
individuals involved in research and adjustment of variances in the 
leading-edge locations all received appropriate training. At leading-
edge locations this was typically accomplished through formal 
classroom training, on-the-job training, or a mix of the two. 

The scope of training is generally dependent on the type of counts 
conducted, wall to wall and/or cycle counts. Leading-edge locations 
typically train counters on types of inventory, warehouse layout, unit 
of measure, recording of counts, computer systems, and use of radio 
frequency devices, if applicable. Leading-edge locations that use a 
separate inventory group to perform research and/or record adjustments 
typically provide training on researching variances, posting 
adjustments, and operating computerized inventory systems. 

Case Study: 

The dedicated inventory counter occupation in the inventory audit 
group of one leading-edge location is a well-paid, prestigious 
position. Candidates for this position are selected primarily from 
warehouse personnel with years of experience and an in-depth knowledge 
of the inventory items. The inventory audit group‘s commitment to 
excellence is such that newly recruited counters receive several weeks 
of formalized on-the-job training. New counters shadow experienced 
counters, who supervise hands-on training in specific areas, in 
accordance with a formal list of tasks and functions. The progress of 
each new counter is monitored by the group‘s supervisor and, before 
being allowed to conduct counts on their own, they must demonstrate 
mastery of the required tasks and functions. Once the new counter is 
on his/her own, their work is subject to increased supervisory review, 
including follow-up test counts by more experienced counters, until 
the employee meets required performance standards. [End of Case Study] 

Strategies to Consider: 

To enlist knowledgeable staff in the physical count process, senior 
executives should consider: 

* The amount of resources available to conduct the count. 

* Experience and knowledge of the inventory and count process of the 
count team. 

* Frequency of counts or time necessary to complete the count. 

* Establishing a separate inventory group of dedicated counters. 

* Assigning or promote personnel with prior experience in the 
warehouse and knowledge of the inventory a counting position. 

* Providing on-the-job and classroom training of the count process to 
counters, supervisors, and personnel researching variances on aspects 
such as: 
- types of inventory, 
- warehouse layout, 
- unit of measure, 
- RF devices, 
- computer system, 
- research (if applicable), and, 
- supervision (if applicable). 

[End of Key Factor 6] 

Key Factor 7: Provide Adequate Supervision: 

Characteristics: 
* Provide instructions and training; 
* Assign count team and responsibilities; 
* Review count sheets; 
* Ensure that all items are counted. 

Supervision, a key factor of the count process, includes directing the 
efforts of personnel and determining that the objectives of the 
inventory count have been accomplished. Elements of supervision 
include providing instructions and training, solving problems, and 
reviewing the work performed. Adequate supervision increases the 
likelihood of accurate and consistent counts and reduces the overall 
risk of incorrect or unreliable counts. Supervisor responsibilities 
include: (1) ensuring that counters are available to count, (2) 
selecting count team members, (3) assigning count team 
responsibilities, and (4) ensuring that the count is completed on 
time. Counters also make sure that needed supplies and equipment, such 
as count sheets, calculators, tape measures, scales for weighing, and 
forklifts are available. Supervision includes providing instructions 
and guidance to counters prior to and during the count and making sure 
that counters are following instructions. Supervisors also ensure that 
all inventory items are counted and that counters record counts on 
count sheets or other control devices. 

Supervision can be applied at different levels and degrees depending 
upon the experience of the inventory counters and other controls that 
are in place. The level of supervision is typically either direct, on-
the-floor supervision during the count, or indirect supervision in 
which the supervisor is not on the floor during the count, but instead 
uses controls that are in place to monitor count performance. 
Increased supervision in the form of direct supervision may be used as 
a mitigating control in instances where (1) the counts are infrequent, 
(2) there is a lack of segregation of duties, and/or (3) the counters 
are less experienced and knowledgeable about the inventory or count 
process. 

The use of direct or indirect supervision at the leading-edge 
locations was generally dependent upon management‘s determination of 
the adequacy of segregation of duties. (See key factor 5.) 

All leading-edge locations performing wall to wall physical counts 
used direct, on-the-floor supervision as one of their controls to 
reduce the risks discussed above. On the other hand, all leading-edge 
locations performing cycle counts used indirect supervision, some also 
using additional control mechanisms to monitor performance. 

For example, as discussed in key factor 5, the strongest of controls 
for segregation of duties, found at five locations, was accomplished 
by using a separate inventory group of dedicated counters. These 
separate, dedicated counters were highly specialized and independent 
of routine inventory responsibilities. Because of their years of 
experience and knowledge of counting, their performance was not 
directly monitored by the supervisors. Supervisors monitored the 
number of counts being performed and the number of variances. They 
also concentrated on identifying the causes of variances between the 
counts and recorded on-hand quantities in order to identify solutions 
to correct the causes of the errors. The remaining three locations 
performing cycle counts used warehouse personnel to perform cycle 
counts without direct supervision. These locations reduced their risk 
of impaired segregation of duties by using personnel who were 
experienced and knowledgeable about the inventory and count process 
and by performing blind counts. 

Case Study: 

One leading-edge location, an electronic component manufacturer 
producing 49,000 units per day with two warehouses totaling over 1 
million square feet, performed daily cycle counts on the raw materials 
used on the production line and performed monthly wall to wall counts 
on the finished goods. The location used a dedicated inventory group 
to conduct its daily cycle counts, which included an inventory group 
supervisor and 14 dedicated counters. These dedicated counters 
attained their position through prior warehouse experience and as a 
result, were highly knowledgeable about the inventory and count 
process. Because of the experience and knowledge of these counters, 
the inventory group supervisor did not directly supervise the 
performance of the counts, but instead monitored the cycle counts by 
reviewing count cards for accuracy and completeness, to ensure that 
all items were counted. 

Once a month, the location performed a wall to wall count on its 
entire inventory of finished goods. The location used the dedicated 
inventory group that performs cycle counts as well as warehouse 
employees to conduct the wall to wall count. There were a total of 24 
counters and each warehouse person was teamed with one of the 
dedicated cycle counters. There were three supervisors on the floor 
during the wall to wall physical count to directly monitor the count 
to ensure that the count teams were following instructions and that 
all items were properly and promptly counted. The degree of 
supervision was significantly increased for the monthly wall to wall 
counts because of the increase in the number of counters and to 
mitigate segregation of duties problems due to the use of warehouse 
personnel as members of the count team. [End of Case Study] 

Strategies to Consider: 

To provide adequate supervision over the physical count process, 
senior executives should consider the following: 

* The number of resources or teams performing the physical count. 

* Frequency of the counts or the time necessary to complete the count. 

* Knowledge and experience of the personnel performing the count. 

* Whether there is adequate segregation of duties from 
responsibilities of asset custody. 

* The assigned responsibilities of the supervisor such as: 
- the availability of count personnel, 
- selection of count team members, 
- assignment of count responsibilities, 
- monitoring of performance, and, 
- ensuring counters are following procedure and complete counts in a 
timely manner. 

* Size of the warehouse or area subject to count. 

* The number and complexity of items to be counted. 

* Other controls that may be in place during the count, such as the 
performance of blind counts. 

[End of Key Factor 7] 

Key Factor 8: Perform Blind Counts: 

Characteristics: 
* No prior knowledge of on-hand balances; 
* Limited or no access to inventory system. 

A blind count refers to the performance of a physical inventory count 
without the knowledge of, or access to, the on-hand quantity balance 
in the inventory records. Counters are provided the part number, 
description, location, and other information necessary to perform the 
count but not the item quantity information. Inventory items are 
counted and compared to the on-hand balance in the inventory records. 
If the blind count agrees with the record on-hand balance, there is a 
high level of confidence that both the count and the record on-hand 
balance are accurate. 

Blind counts offer the greatest degree of assurance of accurate and 
reliable counts. If the record on-hand quantity is provided to the 
counters, there is a risk that the counters will not actually perform 
the count. They may visually look at the inventory, conclude that it 
agrees with the record on-hand quantity, and record the on-hand 
balance amount as the physical count. The counters may be influenced 
by the record on-hand quantity provided to them and make assumptions 
that are incorrect. For example, if there is a box of 20 items and the 
record on-hand shows the quantity as 1, the counters may be influenced 
to record the count as 1 instead of recording the correct unit measure 
count as 20. 

We found that blind counts were one of the strongest control measures 
used at leading-edge locations. Counters did not have access to record 
quantity during the count at 10 of the 12 leading-edge locations. 
Specifically, six of the eight locations performing cycle counts and 
all four of the locations performing wall to wall counts performed 
blind counts. 

An important consideration in deciding whether or not to perform blind 
counts is the strength of control provided by segregation of duties, 
as discussed in key factor 5. Counts at all locations performing wall 
to wall inventory were completed by warehouse personnel having 
potentially conflicting custodial duties. However, management at these 
locations mitigated that increased risk by using blind counts and 
other controls. Conversely, the two locations performing cycle counts, 
in which the quantity was provided to the counters before or during 
the count, used a dedicated count team whose members had no other 
conflicting custodial duties. Management at these two locations 
asserted that this approach added to their efficiency by allowing 
counters the opportunity to solve variances often while they were at 
the inventory item location. They stressed, however, that the 
combination of segregated duties along with other control measures, 
such as maintaining a history of who performed counts by item and 
location and supervisory review, balanced the increased risk of 
providing the counters with quantity information. 

Table 4: Blind Counts: 

Blind counts: Record quantity not accessed during the count; 
Cycle count locations: 
1: [Empty]; 
2: [Empty]; 
3: [Check]; 
4: [Check]; 
5: [Check]; 
6: [Check]; 
7: [Check]; 
8: [Check]; 
Wall to wall count locations: 
9: [Check]; 
10: [Check]; 
11: [Check]; 
12: [Check]. 

Personnel performing counts: Inventory group of dedicated counters not 
having custodial duties; 
Cycle count locations: 
1: [Check]; 
2: [Check]; 
3: [Empty]; 
4: [Check]; 
5: [Empty]; 
6: [Empty]; 
7: [Check]; 
8: [Check]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Personnel performing counts: Warehouse personnel having custodial 
duties count; 
Cycle count locations: 
1: [Empty]; 
2: [Empty]; 
3: [Check]; 
4: [Empty]; 
5: [Check]; 
6: [Check]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Check]; 
10: [Check]; 
11: [Check]; 
12: [Check]. 

Note: [Check]: Indicates applicability to the 12 locations studied 
from the 7 companies selected. 

[End of table] 

Case Study: 

One leading-edge company with over 700 warehouse and distribution 
centers performed daily cycle counts. The company used warehouse 
personnel with normal warehouse responsibilities, including asset 
custody, to perform all first and second counts. A separate inventory 
control group was responsible for coordinating and overseeing their 
physical count(s), performing any third counts, and researching and 
reconciling variances. To reduce the risk of error or fraud increased 
by the counters having asset custody responsibilities, the company 
strengthened controls by using blind counts, and by restricting access 
to on-hand balances prior to and during the count. [End of Case Study] 

Strategies to Consider 

To effectively use blind counts during the physical count, senior 
executives should consider the following: 

* Tools used to perform the count (count cards, count sheets, or RF 
Guns). 

* Capability of the inventory system to not provide quantities on 
count cards or sheets, and restrict access to on-hand balances prior 
to and during the performance of the count, except for authorized 
personnel. 

* Personnel performing the physical count and whether there is 
segregation of duties between the responsibilities of asset custody 
and physical counts. 

* Personnel‘s experience and knowledge of the inventory items and the 
count process. 

[End of Key Factor 8] 

Key Factor 9: Ensure Completeness of the Count: 

Characteristics: 
* Cutoff procedures; 
* Preinventory count activities; 
* Control methods for count completion. 

A complete count requires that (1) the inventory being counted include 
all the items that should be present and not include items that are 
not part of the inventory and (2) control of the count process is 
maintained so that all inventory items that should get counted do in 
fact get counted. To facilitate the inventory being completely 
accounted for and accurately counted, there are a number of 
considerations that need to be made before the actual count begins. 
These considerations fall into three major categories: 

* Cutoff procedures, 
* Preinventory count activities, and, 
* Control methods for count completion. 

Cutoff Procedures: 

Cutoff is the process of (1) controlling the movement of items between 
locations, such as in shipping, receiving, production, and 
rewarehousing and (2) coordinating the timing and verifying the 
movement of items with the related quantity changes in the inventory 
system. Cutoff is an essential procedure to ensure the existence and 
ownership of inventory. Cutoff can be achieved in a variety of ways, 
but the easiest way, in addition to verifying and coordinating the 
movement of items and the inventory records, is to conduct the count 
when operations are shut down or during a period when there is limited 
movement of inventory, such as the graveyard shift or weekends. All 
leading-edge locations performing wall to wall counts shut down their 
warehouse operations during the physical count. 

One of the advantages of performing cycle counts is that companies do 
not have to shut down their entire operation, as is normally the case 
for wall to wall physical counts. The leading-edge locations 
performing cycle counts typically do not stop the movement of 
inventory but instead use other controls to ensure that items are not 
erroneously omitted, included, or counted twice. These controls 
include (1) counting during a slow period of operations when there is 
little movement, (2) preventing any movement of the inventory items to 
be counted on the day the items are selected for counting, and (3) 
using system-generated transaction histories to trace the movement of 
items and reconcile the count. 

Case Study: 

One leading-edge location addressed cutoff issues in its distribution 
center inventory by using a perpetual inventory system with locator 
capability. The difficulties of getting an accurate location count 
without shutting down operations were significantly reduced by 
stopping movement into and out of locations for the specific items 
selected for count that day. When the inventory system selected the 
items for that day‘s count, a "HOLD" indicator was placed by the 
system in the record for those items. Warehouse personnel were thus 
notified that, with certain exceptions, they were not to pick items 
from or store items in those locations until the "HOLD" is released. 
Inventory counters are required to complete all counts on the day 
scheduled and release "HOLDs" as the counts are completed, including 
any necessary recounts and research for variances between the quantity 
counted and record on-hand balances. [End of Case Study] 

Preinventory Activities: 

Preinventory activities, primarily physical location preparation, are 
accomplished prior to the physical count in order to increase the 
efficiency and effectiveness of the count. Physical location 
preparation typically includes (1) organizing work areas and storage 
locations, (2) identifying and segregating items, (3) ensuring that 
all inventory items have labels or identification, (4) verifying that 
items are in the correct location, (5) precounting slow moving items, 
and (6) identifying excess/obsolete inventories. In the well run 
warehouses of the leading-edge locations we visited, most of these 
activities were part of their daily routine. Other preinventory 
activities needing consideration include the timing of the inventory, 
staffing and equipment requirements, review of inventory procedures, 
and instructions to and training of counters. 

Control Methods for Count Completion: 

There should be a system to ensure that all inventory items are 
considered for count, including items on the receiving dock, in the 
warehouse, in the shipping area, in tractor-trailers, and at outside 
locations, such as owned or leased warehouses, public storage, or any 
other locations having inventory owned by the organization. For 
inventory outside the direct control of the organization, management 
may consider making arrangements to have the inventory counted by its 
own employees or by the people responsible for safeguarding the 
inventory. If its own employees are not used to count the inventory, 
management should consider making arrangements to have its personnel 
at the site to observe and verify that the count is preformed 
accurately and completely. Leading-edge locations used three primary 
methods for determining the quantities of inventory items stored at 
outside locations: (1) they count the inventory as part of their 
physical count program, (2) they obtain written confirmation and/or 
monthly statements from the parties responsible for storing the 
inventory, or (3) they send representatives to observe the physical 
counting of the inventory. 

Case Study: 

One leading-edge location with 20 distribution centers and 80 
manufacturing facilities maintained inventory items in several 
different locations. Raw materials, work in process, and finished 
goods were stored in tank cars, trucks, pipelines, drums, bins, and 
racks. Additionally, inventory was stored at off-site locations 
controlled by the company and public warehouses outside the control of 
the company. To maintain the integrity of the inventory records, this 
location counted all inventory items within the company‘s control at 
least twice a year, and all inventory outside of its control was 
physically verified once a year. To verify completeness, inventory 
items within the company‘s manufacturing, distribution, and off-site 
locations were physically counted through regular cycle counts using 
prenumbered count sheets that were reviewed by supervisors. In 
addition, a company representative was sent to observe and verify the 
annual physical count of inventory items held at a public warehouse, 
and thus outside the control of the company. [End of Case Study] 

As shown in table 5, control tools are used to determine that every 
inventory item gets counted. A manual system, such as count tags or 
count sheets, or a computerized inventory locator system that tracks 
an item‘s location, may be used to verify that every inventory item 
gets counted once and only once. Operations without inventory locator 
systems commonly use prenumbered count tags, sheets, or cards to 
ensure that all items are counted. For example, during a typical wall 
to wall physical inventory, personnel count the inventory item, record 
the count on the upper and lower part of the tag, and attach one part 
of the tag to the inventory item and give the other part to the 
control desk. The control desk accounts for all the prenumbered tags 
and compares the count to the record on-hand quantities. At the end of 
and during the inventory count process, the supervisor walks through 
the warehouse and visually inspects that a count tag is attached to 
every inventory item, which offers some assurance that all inventory 
items have been counted. The count tags attached to the inventory 
items also ensure that the inventory is not counted twice. A second 
check is done by the control desk crosschecking that all the inventory 
items recorded on the books have a physical inventory count recorded. 
Operations with inventory locator systems rely heavily on their 
systems to report any inventory items not counted and where the items 
are located. 

Leading-edge locations rely on their computerized inventory systems to 
ensure that all recorded inventory items are counted. Those performing 
cycle counts generally have their computer systems generate a list of 
items (count sheets) to be counted each day. The system keeps track of 
all items counted and entered into the system. If an item is not 
counted, the system carries the item forward and repeatedly lists the 
item until it is counted. Supervisors can generate a report (aging 
list) to list all items scheduled for a count but not counted. Some 
companies have their systems generate locations to be counted, and 
again the system tracks all locations that have not been counted. Nine 
of the twelve leading-edge locations also test the completeness of 
their systems by performing location counts[Footnote 4] in addition to 
their regular cycle and wall to wall counts. In other words, they test 
for the possibility of inventory items existing on the floor that are 
not reflected in the records. They perform these procedures by 
selecting inventory items in the warehouse and tracing those items 
back to the record on-hand balances in the system. 

Table 5: Control Methods to Ensure Completeness of Count: 

Controls to monitor count completeness: 

System tracks inventory items and/or locations counted; 
Cycle count locations: 
1: [Check]; 
2: [Check]; 
3: [Check]; 
4: [Check]; 
5: [Check]; 
6: [Check]; 
7: [Check]; 
8: [Check]; 
Wall to wall count locations: 
9: [Check]; 
10: [Check]; 
11: [Check]; 
12: [Check]. 

Location counts from floor to record; 
Cycle count locations: 
1: [Check]; 
2: [Check]; 
3: [Check]; 
4: [Check]; 
5: [Empty]; 
6: [Empty]; 
7: [Check]; 
8: [Check]; 
Wall to wall count locations: 
9: [Check]; 
10: [Check]; 
11: [Check]; 
12: [Check]. 

Counted areas are physically marked and walk-throughs are performed; 
Cycle count locations: 
1: [Empty]; 
2: [Empty]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Check]; 
11: [Empty]; 
12: [Check]. 

Supervisors account for all count sheets and/or count tags; 
Cycle count locations: 
1: [Check]; 
2: [Empty]; 
3: [Check]; 
4: [Check]; 
5: [Check]; 
6: [Check]; 
7: [Empty]; 
8: [Check]; 
Wall to wall count locations: 
9: [Check]; 
10: [Check]; 
11: [Check]; 
12: [Check]. 

Note: [Check]: Indicates applicability to the 12 locations studied 
from the 7 companies selected. 

[End of table] 

Strategies to Consider: 

To ensure completeness of the physical count, senior executives should 
consider: 

* The organization‘s operating environment, time of operations, and 
it‘s ability to: 
- suspend operations during the physical count, 
- perform counts when there is limited movement of the inventory, such 
as nights or weekends, and, 
- prevent movement of items subject to count on the day of count only. 

* Reliability of the inventory system to accurately capture and track 
transactions affecting the on-hand balances. 

* Existence of slow moving or excess obsolete inventory items that 
could be segregated and precounted. 

* Existence of inventory stored at outside locations and the personnel 
or organization responsible for verifying its physical existence. 

* Use of prenumbered count sheets or tags and reconciliation of the 
numbers issued to the numbers returned. 

* Reconciliation of items selected for count to actual items counted. 

* Performance of additional counts where items are selected from the 
floor and compared to the inventory system. 

[End of Key Factor 9] 

Key Factor 10: Execute Physical Count: 

Characteristics: 
* Communicate information to the counter; 
* Verify item data and quantity; 
* Capture and compare the physical count; 
* Perform requisite number of counts; 
* Complete counts in timely manner. 

Practices discussed in earlier key factors lay the foundation for 
completion of physical count procedures. Properly executing the count 
provides accurate results for (1) comparison of the count to the 
recorded balances and (2) the posting of adjustments to the inventory 
records for financial and operational decision making. There are five 
key areas of consideration when executing the physical count including 
(1) communication of proper information to the counters, (2) 
verification of correct item information, (3) appropriate method to 
capture and compare the physical count to the inventory records, (4) 
determination of the number of requisite counts to perform before a 
count is accepted as final, and (5) timely completion of the count. 

Communicate Information to the Counter: 

Communication of appropriate information ensures that counters have 
the necessary information to perform the count (i.e., items to be 
counted). Leading-edge location‘s communication to counters is usually 
in the form of a list of items to count, such as count sheets, or 
assigned zones to count, usually including stock location, stock 
number, description, and unit of measure. In instances where blind 
counts are not being performed, the quantity to be counted would also 
be included. This information is normally provided to the counters on 
count lists, sheets, cards, or on RF Guns (radio frequency devices).
[Footnote 5] 

Verify Item Data and Quantity: 

Verification of data supplied to the counter ensures that the 
significant information in the inventory record is consistent with the 
physical information about the item. The data verified by counters at 
leading-edge locations typically included stock location, stock 
number, description, and quantity in instances where nonblind counts 
are being performed. 

Capture and Compare the Count: 

The physical count includes the instrument or method used by the 
counter to record the results of the physical count for comparison to 
the on-hand balance in the inventory system. The leading-edge 
locations used a number of techniques to record the results of the 
physical count–some used traditional methods, such as manual count 
sheets or cards, while others used technical tools, such as RF Guns. 
When count sheets or cards are used, the actual physical count is 
recorded on the sheet or card and is then manually input into the 
computer system for comparison to the inventory record. When RF Guns 
are used, information is automatically uploaded into the computer 
system to capture the count for comparison to the inventory record on-
hand quantities. The comparison of the actual count to the record on-
hand balance determines the variance between the two and the need for 
recounts or research. The inventory record on-hand balances are 
typically not adjusted until recounts and research are complete. See 
key factor 11 for a discussion of adjustments to the record on-hand 
balance. The majority of the locations (cycle and wall to wall) used 
count sheets to record the physical count. 

Perform Requisite Number of Counts: 

Number of counts refers to the number of times an item will be counted 
before a final count is accepted. The number of counts by leading-edge 
locations ranged from as few as one to any number determined by 
management to be appropriate. Counts performed past the first count 
can be based on any of the following: a difference between the count 
and record on-hand balance (variance), judgment of supervisors or 
management, variances exceeding established tolerances, and until two 
counts agree. There was no minimum number of counts required past the 
first count by the leading-edge locations. The maximum number of 
required counts varied from two counts up to the necessary number of 
counts until two counts agreed. Typically, two or three counts were 
performed. 

If there is a variance between the count and the record on-hand 
balance, a second count is required. Segregation of duties should be 
reconsidered in assigning the personnel performing any additional 
counts. One of the leading-edge locations used a different count team 
to perform the second count. In this leading-edge location, the second 
count was accepted as the final, accurate count, after which personnel 
responsible for recording transactions, research variances and adjust 
the record on-hand quantity with the appropriate approval. Some 
leading-edge locations perform multiple, subsequent counts until such 
time as two counts conclude with the same quantities. 

Complete Counts in a Timely Manner: 

Timely counts are important due to management‘s reliance on the 
information in the inventory system for making operational decisions. 
Whether completing a single count or multiple counts, the leading-edge 
locations expected their count teams to complete their assignments as 
quickly as possible. The majority of the leading-edge locations 
expected the initial count and any necessary recounts to be completed 
within 24 hours. 

Case Study: 

One leading-edge location, a 710,000 square foot distribution facility 
maintaining over 20 million finished products, performed its counting 
procedures with the precision of a well-trained military exercise. Its 
"army" of over a dozen dedicated counters cycled through the warehouse 
performing counts daily. Warehouse locations were mapped on an Excel 
spreadsheet, and the inventory group supervisor assigned zones 
(warehouse aisles) to each counter. Counters were provided via RF Gun 
(radio frequency device) data on individual items in his/her zone 
including stock location, part number, and unit of measure and 
description. An item‘s quantity was not obtainable by the counter. By 
scanning the bar-coded location number contained on a preprinted 
location marker and entering the item number from the container, the 
counter verifies the accuracy of item data contained in the perpetual 
record. Once the counter verified that the description was correct, 
he/she performed the count and enters the quantity into the RF Gun. 
These data are automatically uploaded into the inventory system to 
capture the count, at which time a real-time comparison of the counted 
quantity and the system balance was made. Any variance is reported to 
the supervisor via an on-screen or printed variance report. For 
inventory items having variances, second counts are required to be 
performed within 8 hours by a different counter. If after the second 
count, the variance remains greater than $400, then all locations in 
the warehouse containing that inventory item are counted on the next 
shift to ensure location and total item quantity accuracy. [End of 
Case Study] 

Strategies to Consider: 

To effectively execute the physical count, senior executives should: 

* Determine the data to be verified by the count by considering: 
- knowledge and experience of the personnel performing the count, 
- the item data maintained in the inventory system or on location 
labels, and, 
- whether blind counts are to be performed, requiring the restriction 
of access to on-hand balances. 

* Determine the method to be used to capture and compare the count, 
such as count cards, sheets, or RF Guns, by considering: 
- the capability of the inventory system, and, 
- ability to use RF devices. 

* Determine number of counts to perform by considering: 
- resources necessary to perform additional counts, 
- personnel performing additional counts and their segregation of 
duties from asset custody and their knowledge and experience of the 
inventory and count process, 
- time necessary to complete additional counts promptly, and, 
- characteristics of the inventory (unit of measure, size, dollar 
value, classification, and size of variance in quantity and dollar 
value) to establish tolerances for additional counts. 

[End of Key Factor 10] 

Key Factor 11: Perform Research: 

Characteristics: 
* Perform required research; 
* Complete research in a timely manner; 
* Refer variances to management and security for approval and 
investigation. 

Even with a strong control environment and sound physical count 
procedures, it is not unusual for there to be differences in 
quantities between the physical count and the record. Research of the 
cause, sometimes referred to as —root cause analysis,“ and 
reconciliation of the difference is an essential element of an 
effective physical count process. Research, when properly conducted, 
provides support for adjustment to the inventory records, identifies 
the causes of variances between the physical count and the inventory 
records, and provides management with information with which to 
implement corrective actions. The process of research includes 
performing the required analysis, promptly completing research, and 
referring variances to management for approval and/or security for 
investigation. 

Required Research: 

Research is the process of investigating a discrepancy, often referred 
to as a variance, between the physical count and the on-hand balance. 
Variances may indicate that something is wrong with the inventory 
system or the warehouse operations that affect inventory balances. In 
order to reduce the potential for future errors in the inventory 
records, it is important to identify and correct the causes of 
variances. Management determines which variances to research and the 
extent of research necessary to identify the causes of the variances. 

Management‘s determination of which variances to research includes 
consideration of dollar value, type of item, and the effect of the 
variance on the operations of the organization. As the impact of 
variances on the financial records or on the operation of the 
organization increases, it becomes more important to conduct extensive 
research. Management may also determine that the impact of certain 
variances is insignificant by establishing a low dollar or quantity 
tolerance and allowing adjustment to the on-hand balance in the 
inventory system without requiring research. Leading-edge locations 
researched variances based on criteria established by management. The 
criteria established by management usually included setting quantity 
or dollar value tolerances. Tolerances ranged from zero, in which all 
variances were researched, to 5 percent, in which only those variances 
exceeding the established dollar value or quantity tolerance were 
researched. Others relied on the judgment of the researcher. Some 
locations used a combination of tolerances and researcher judgment 
depending upon the type of inventory or its impact to operations. 
Three of the eight leading-edge locations performing cycle counts had 
a zero tolerance for error for all inventory items and researched all 
variances. The remaining five locations researched variances that 
exceeded established dollar value or quantity variances by type of 
item, and/or on the basis of the researcher‘s assessment of the impact 
to operations. Two of these five locations had established tolerances 
ranging from zero to five percent based on product type. Locations 
performing wall to wall physical counts researched variances based on 
established dollar and quantity tolerances, as well as the judgment of 
the researcher. If a variance did not meet management‘s criteria for 
research, the on-hand balance in the inventory system was usually 
adjusted to reflect the actual physical count. Table 6 shows the 
established criteria for researching variances at leading-edge 
locations. 

Table 6: Criteria For Variances Researched: 

Established criteria: 

Zero tolerance (all variances researched); 
Cycle count locations: 
1: [Check]; 
2: [Empty]; 
3: [Check]; 
4: [Check]; 
5: [Check]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Variances more than $100; 
Cycle count locations: 
1: [Empty]; 
2: [Check]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Check]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Variances more than $1000; 
Cycle count locations: 
1: [Empty]; 
2: [Empty]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Check]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Variances more than 3-5 percent quantity variance; 
Cycle count locations: 
1: [Empty]; 
2: [Empty]; 
3: [Check]; 
4: [Empty]; 
5: [Check]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Check]; 
12: [Empty]. 

Judgment of researcher (based on impact on operations); 
Cycle count locations: 
1: [Empty]; 
2: [Empty]; 
3: [Empty]; 
4: [Empty]; 
5: [Check]; 
6: [Empty]; 
7: [Check]; 
8: [Check]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Check]; 
11: [Empty]; 
12: [Check]. 

Note: [Check]: Indicates applicability to the 12 locations studied 
from the 7 companies selected. 

[End of table] 

Once management determines which variances to research, it is 
essential to (1) correctly adjust the change in inventory balances to 
accurately reflect the physical on-hand quantity and (2) identify the 
cause of the variance. The extent of research may include reviewing 
(1) transaction histories, (2) shipping and receiving records, and (3) 
production usage records. We found that all of the leading-edge 
locations researched transaction histories, movement of items during 
the count, and shipping and receiving documents to ensure proper 
adjustment of the inventory records and identify causes of variances. 
After research was completed on the selected variances, an adjustment 
was posted to the on-hand balance in the inventory system to reflect 
the actual physical count. 

Identifying the causes of variances is useful in detecting weaknesses 
in the underlying controls and individual processes that affect the 
inventory system record. Grouping and tracking the nature or type of 
errors into assigned codes is an effective tool for analyzing causes 
of variances and implementing corrective actions to reduce future 
errors. For example, a leading-edge location‘s assignment of error 
codes enabled the company to implement corrective actions and process 
improvements, which increased the location‘s inventory record accuracy 
and decreased operating costs. We found that four of the locations 
performing cycle counts assigned and tracked error codes. The number 
of error codes used by the leading-edge locations to identify causes 
of variances averaged 22 and included codes for incorrect entries, 
leaks or spills, wrong location, receipt error, stock picking error, 
and shipping error. 

Case Study: 

One leading-edge location with over 113,000 stock numbers and 
approximately $222 million in inventory used a separate inventory 
group to research variances. Its research included reviewing 
transaction histories, shipping and receiving records, and documenting 
in-transit items to identify causes of variances. Also, management at 
the location had established criteria to determine what level of 
research was required for each type of item. The inventory was 
segmented into two primary types of items–-type "A" and "B." A zero 
tolerance was established for type "A" items, for which all variances 
were researched. A 3 percent quantity tolerance for type "B" items was 
established for which only quantity variances in excess of 3 percent 
of the record on-hand balance were researched. [End of Case Study] 

Timely Research: 

Prompt completion of required research is key to identifying and 
correcting the causes of variances. As the amount of time between the 
discovery of an error in the inventory records and research increases, 
the more difficult it is to identify the cause of the error. 
Adjustments posted promptly to the inventory and financial records 
provide reliable information for use by management. We found that the 
majority of the leading-edge locations performed and completed 
research either the same day as the original count or by the end of 
the following day. This allowed for timely adjustments to the 
inventory records and immediate corrective action to prevent future 
errors. 

Approval and Referral of Adjustments: 

Approval of adjustments by management and referral of potential fraud 
or theft to investigators helps ensure reliable counts and research. 
We found that all of the leading-edge locations routinely referred 
adjustments to management for approval. As the dollar amount of the 
adjustment increased, the approval level within the company increased. 
The approval levels progressed from the lead or supervisor of the 
researcher up to the location or plant manager. Although the leading-
edge locations indicated that they did not have significant problems 
with fraud or theft, some locations regularly reviewed adjustments and 
trends on items susceptible to fraud or theft in case referral to 
security or law enforcement was necessary. 

Strategies to Consider: 

To effectively research variances arising from the physical count, 
senior executives could: 

* Establish tolerances or criteria for selection of variances to 
research such as: 
- effect on operations or mission readiness, 
- quantity and dollar value, and, 
- characteristics of the items with the variance, such as sensitive, 
classified, or items susceptible to fraud or theft. 

* Develop processes for how to perform research, such as procedures 
for reviewing movement of items during the count, transaction 
histories, and shipping and receiving documents, by considering: 
- reliability of the inventory system to accurately capture 
transactions affecting the on-hand balance, 
- time necessary to complete the research promptly, and, 
- knowledge of the personnel performing the research. 

* Establish error codes that would identify the cause of variances. 

* Set approval levels for adjustments that move up the chain of 
management as the dollar value increases or the nature of the item 
requires a higher level of approval. 

* Define responsibility for reviewing adjustments and trends on 
sensitive and classified items and items susceptible to fraud or 
theft, and notify security or law enforcement. 

[End of Key Factor 11] 

Key Factor 12: Evaluate Count Results: 

Characteristics 
* Measure the results of the physical count using performance measures; 
* Communicate the results of the physical count to counters, 
management, and warehouse personnel; 
* Modify policies and procedures to address necessary changes in the 
physical count process. 

Evaluating the results of the physical count is essential to an 
accurate and effective physical count process. The evaluation of the 
results gives management the necessary information for measuring the 
effectiveness of (1) the physical count and (2) corrective actions or 
improvements to the inventory process and system. Evaluation includes 
measuring the results of the count, communicating the results, and 
modifying existing policies and procedures. 

Performance Measures: 

The results of the physical count can be measured several ways. 
Calculating an inventory record accuracy rate, summarizing the number 
and dollar value of adjustments, errors, or items counted, and 
tracking and analyzing error code frequencies are three ways to 
measure results. 

A common method of measuring the results of the physical count is the 
calculation of an inventory record accuracy rate. Inventory record 
accuracy rates measure the degree of agreement between the balance in 
the inventory records and the physical count. When calculating 
inventory record accuracy, it is necessary to define what will be 
considered an error. An error can be defined in various ways, 
including (1) any error in the item record, such as location, 
description, and quantity or (2) quantity errors exceeding established 
tolerances. Tolerance is a range within which an actual value or 
quantity can disagree with the inventory record and still be 
considered accurate for the purposes of calculating inventory record 
accuracy. Tolerances are typically based on an item‘s or a segment of 
item‘s usage or volume, dollar value, lead-time, and criticality to 
production or operations. The range of tolerance may be as low as 
zero, in which all quantity differences are considered errors, upward 
to "X" percent, in which quantity differences only in excess of that 
amount are considered errors. Once the definition of what constitutes 
an error has been established, the inventory record accuracy rate can 
be calculated. There are multiple ways of calculating inventory record 
accuracy; however, the common method is: 

Number of accurate items or records; 
divided by: 
Number of items or records counted; 
times 100%; 
equals: 
record accuracy rate. 

Leading-edge locations evaluated the results of physical counts using 
various performance measures, including inventory record accuracy 
calculations. Six of the eight leading-edge locations performing cycle 
counts measured inventory record accuracy. Locations measuring 
inventory record accuracy defined an error as either (1) any error in 
the inventory record (quantity and location) or (2) any quantity error 
exceeding established tolerances. Established tolerances ranged from 0 
to 5 percent; however, four of the six locations had a zero quantity 
tolerance for all items or segments of items. Three locations 
performing cycle counts had established separate tolerances for 
identifiable segments of their inventory based on type of item, dollar 
value, activity, or criticality of an item to operations. For example, 
one location (shown as location 3 in table 7) segmented its inventory 
by type of items (type "A" and "B"). It established a zero tolerance 
for the "A" segment, in which any difference in the inventory record 
counted as an error. It established a 3 percent tolerance for any 
quantity differences exceeding 3 percent of the on-hand balance for 
the "B" segment of inventory. Table 7 illustrates leading-edge 
locations' measurement of inventory record accuracy, definition of 
errors, and tolerances established by management for use in 
calculating inventory record accuracy. 

Table 7: Performance Measures: 

Performance measures: Inventory record accuracy; 
1: [Check]; 
2: [Check]; 
3: [Check]; 
4: [Check]; 
5: [Check]; 
6: [Check]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Performance measures: Other performance measures; 
1: [Check]; 
2: [Check]; 
3: [Check]; 
4: [Check]; 
5: [Check]; 
6: [Check]; 
7: [Check]; 
8: [Check]; 
Wall to wall count locations: 
9: [Check]; 
10: [Check]; 
11: [Check]; 
12: [Check]. 

Error definition: 

Any error in the inventory record (location, quantity, stock number); 
1: [Check]; 
2: [Check]; 
3: [Empty]; 
4: [Empty]; 
5: [Empty]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Quantity errors: Zero tolerance (all quantity differences are errors); 
1: [Empty]; 
2: [Empty]; 
3: [Check]; 
4: [Check]; 
5: [Check]; 
6: [Check]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Quantity errors: Greater than 0 but less than 5-percent tolerance 
(quantity differences exceeding the tolerance are errors); 
1: [Empty]; 
2: [Empty]; 
3: [Check]; 
4: [Check]; 
5: [Check]; 
6: [Empty]; 
7: [Empty]; 
8: [Empty]; 
Wall to wall count locations: 
9: [Empty]; 
10: [Empty]; 
11: [Empty]; 
12: [Empty]. 

Note: [Check]: Indicates applicability to the 12 locations studied 
from the 7 companies selected. 

[End of table] 

The leading-edge locations performing wall to wall counts and two of 
the companies performing cycle counts did not calculate inventory 
record accuracy rates but instead measured the results of the physical 
count using other methods. These other methods included (1) total 
quantity adjustments, (2) total dollar value of adjustments, and (3) 
number of errors by error code. Quantity and dollar values of 
adjustments were measured in both gross (sum of the absolute value of 
adjustments) and net (mathematical sum of the adjustments). These 
other performance measures were also used by locations calculating 
inventory record accuracy rates in evaluating their physical count, as 
shown in table 7. 

Communication of Results: 

Communicating the results of each physical count is essential to 
achieving and maintaining accurate, reliable counts and records and 
improving the results of future physical counts. The results of a 
count should be communicated to the people doing the work, including 
counters and warehouse employees, and to management. Communication of 
results to the counters reinforces the results of their work and the 
importance of reliable counts. Likewise, communication to warehouse 
employees makes them aware of the effect they have on the results of 
the count as they perform their daily activities and the importance of 
doing their jobs correctly. Communicating the results of the count 
conveys the importance of accurate records to all personnel and 
enforces management‘s dependence on personnel to achieve accurate 
records. Communicating the results to management ensures that 
management is informed and can then assess the impact on operations 
and implement corrective action. 

All of the leading-edge locations communicated the results of the 
physical counts to management, counters, and/or warehouse personnel. 
Management was forwarded the results of the physical count in the form 
of reports containing inventory record accuracy, amount of 
adjustments, and trend analysis of error codes. Weekly and monthly 
meetings were held with the managers responsible for the physical 
count, warehouse operations, and other areas affecting the inventory. 
The meetings were used to discuss the results of the count, including 
inventory record accuracy, amount of adjustments, and trends or error 
codes in order to identify the impact to the company‘s operations and 
address problems. The results of the physical counts were communicated 
to counters and warehouse employees in the form of display boards or 
scorecards published for areas of the warehouse, which were displayed 
around the warehouse in highly visible locations. At one of the 
leading-edge locations, the results of the physical count and the 
impact each employee had on the accuracy of inventory records was 
discussed during a quarterly meeting with all employees. 

Modification of Policies and Procedures: 

Once the results of the physical count have been evaluated and 
communicated, it is useful to —close the loop“ of the physical count 
by considering indicated changes to the inventory count and management 
process and making appropriate modifications to policies and 
procedures. Management‘s assessment of the results of the physical 
count and employee feedback is useful in determining the effectiveness 
of the physical count. The results may indicate the need to count a 
particular item more frequently due to high errors. Conversely, an 
item that has not had any errors and little activity may be counted 
less frequently. In other instances, the makeup of the inventory or 
the operations of the organization may have changed, in which case 
management may need to reconsider the significance of items and the 
frequency with which they should be counted. It is important that 
lessons learned from each physical count result in changes that 
improve the physical count process and inventory management process. 
We found that the leading-edge locations routinely updated policies 
and procedures for the physical count process as a result of changes 
to processes or systems, and at a minimum reviewed the adequacy of 
documented and performed procedures every 1 to 2 years. 

Case Study: 

One leading-edge location, a 710,000-square foot distribution center 
with over 380 employees, used a variety of methods to evaluate and 
communicate the results of its physical count. Results were measured 
with a combination of an inventory record accuracy rate, dollar value 
and quantity of adjustments, number of accurate counts, and analysis 
of error codes assigned to variances. A daily report was sent to the 
inventory managers and supervisors summarizing the number of items 
counted, accuracy rate, and dollar value of adjustments. Once a week 
the results of the count were published and posted in the warehouse 
summarizing the current accuracy rate and trends, as well as successes 
and problem areas. The location also held weekly and biweekly meetings 
with operation managers, the inventory group supervisor, inventory 
managers for material returns and receiving, quality control, 
engineering, and the director of operations to discuss the results of 
the count and causes of the variances–the purpose of which was to 
correct problems and improve operations on a —real-time“ basis. [End 
of Case Study] 

Strategies to Consider: 

To evaluate the results of the physical count process, senior 
executives should consider the following: 

* Establish performance measures that are aligned with organizational 
objectives and strategies and that are useful in evaluating the 
results of the physical count. 

* Determine the methods to be used to measure performance of the count 
by: 
- defining an error for purposes of measuring performance, and; 
- establishing tolerances based on characteristics of the inventory 
and the quantity or dollar value of the variances to be considered in 
error. 

* Establish mechanisms to communicate results and performance measures 
to counters, warehouse personnel, and managers. 

* Establish routine meetings with managers from all aspects of the 
inventory process including the physical count, receiving, shipping, 
ordering, stocking, and production, to discuss results and measures 
and evaluate the causes of the errors to identify corrective actions 
and assign responsibility for those actions. 

* Use results and performance measures as a basis to make changes to 
the process and modify existing policies and procedures to reflect 
changes in the processes. 

[End of Key Factor 12] 

[End of section] 

Appendix I: Implementation Checklist: 

Planning, Conducting, Researching, and Evaluating a Count of Physical 
Inventory (An Implementation Checklist): 

This checklist is provided as an aid to making and documenting 
decisions in the planning, conducting, and/or auditing of the 
inventory count process and researching and evaluating its results. It 
is presented in the chronological order of the major steps of the 
process. References are provided to the 12 key factors in the body of 
the report, which provide guidance in considering the issues and 
factors involved in the decision-making processes. 

The checklist is segregated into the following four major sections, 
with eleven steps to consider categorized in the numbered subtitles, 
as follows: 

Planning: 
1) Select an approach to the count; 
2) Determine count frequency; 
3) Organize the count team(s). 

Counting: 
1) Accomplish appropriate cutoff; 
2) Perform pre-inventory activities; 
3) Count the inventory. 

Research and Adjustments: 
1) Perform research; 
2) Adjust the record. 

Evaluation of Results: 
1) Determine the record accuracy rate; 
2) Consider other performance measures; 
3) Communicate the results of the count. 

Table: 

Planning: 
1) Select an approach to the count; 
2) Determine count frequency; 
3) Organize the count team(s). 

1) Select an approach—-The two basic approaches most used by leading-
edge companies to count inventory are (a) cycle counting a portion of 
items over time or (b) a physical wall to wall count. The approach or 
combination of approaches that is best for your inventory will depend 
on specific circumstances. Management should consider the following 
major issues when making this decision. 

Have You Considered: a) the guidance provided in existing policies and 
procedures? 
Report Section Providing Guidance: Establish written policies; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: b) what approach(es) your inventory system will 
support? (See AIMD-98-21.2.4, Inventory Systems Checklist) 
Report Section Providing Guidance: Select an approach; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: c) the amount of time available and/or deadline 
issues involved? 
Report Section Providing Guidance: Select an approach; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: d) the primary objectives in conducting a 
physical count? 
Report Section Providing Guidance: Select an approach; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: e) whether existing system accuracy supports 
reliance on it? 
Report Section Providing Guidance: Select an approach; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: f) natural or logical segments of your inventory? 
Report Section Providing Guidance: Select an approach; 
Yes, No, N/A: 
Notes/Comments: 

Document your final conclusions for selecting an approach below. 
(e.g., The cycle counting approach is selected for the (ABC) 
segment(s) and/or the wall to wall counting approach is selected for 
(XYZ) segment(s).) 

2) Determine count frequency—-Selecting how many, how often, and which 
items to count may not be as straightforward as it seems. Risk factors 
of mission and operational criticality, dollar values, quantity 
significance, rate of turn-over and pilferability, along with the 
following, should play a part in management’s decisions. 

Have You Considered: a) the frequency with which all or certain items 
or segments should be counted? 
Report Section Providing Guidance: Determine frequency of counts; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: b) if the frequency of counts should be weighted 
to certain items or segments? 
Report Section Providing Guidance: Determine frequency of counts; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: c) if items to be counted should be selected 
randomly or otherwise? 
Report Section Providing Guidance: Determine frequency of counts; 
Yes, No, N/A: 
Notes/Comments: 

Document your conclusions for determining count frequency below. 
(e.g., items in inventory segment(s) (ABC) will be randomly selected 
from a diminishing pool and counted, or cycled through, 4 times a 
year; segment(s) (XYZ) will all be counted once a month during the 
midnight shift.) 

3) Organize the count team(s)-—The selection and organization of 
appropriate count team(s) is critical to controlling the count process 
and achieving accurate results. rations of who is going to perform, 
supervise, record, evaluate, and analyze the results of the count 
should be made by management after considering the following issues. 

Have You Considered: a) whether adequate segregation of duties can be 
accomplished? 
Report Section Providing Guidance: Maintain segregation of duties; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: b) whether the degree and level of supervision is 
appropriate? 
Report Section Providing Guidance: Provide adequate supervision; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: c) whether blind counts should be required? 
Report Section Providing Guidance: Maintain segregation of duties & 
perform blind counts; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: d) who should do counts subsequent to the first 
count? 
Report Section Providing Guidance: Execute physical count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: e) how many people should be on a count team? 
Report Section Providing Guidance: Maintain segregation of duties; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: f) how many count teams are needed? 
Report Section Providing Guidance: Execute physical count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: g) whether count team members are knowledgeable 
of the inventory and count process? 
Report Section Providing Guidance: Enlist knowledgeable staff; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: h) whether the necessary training has been 
provided to team members? 
Report Section Providing Guidance: Enlist knowledgeable staff; 
Yes, No, N/A: 
Notes/Comments: 

Document your conclusions for organizing the count teams below. (e.g., 
All cycle counting of the (ABC) and wall to wall counting of the (XYZ) 
segment(s) will be accomplished and/or supervised by individual 
members of the independent inventory audit group. Six two-person wall 
to wall count teams will be supplemented by shift warehousemen. All 
counts will be blind counts.) 

[End of table] 

Table: 

Counting: 
1) Accomplish appropriate cutoff; 
2) Perform preinventory activities; 
3) Count the inventory. 

1) Accomplish appropriate cutoff—-The difficulties in achieving an 
accurate physical count of quantities on hand increase when items are 
moving into and out of, as well as between warehouse locations during 
the count. he risks to be concerned about include (1) not counting 
items that are moving, (2) counting items more than once that have 
moved, (3) counting items not yet recorded in the inventory records, 
or (4) counting items that have been removed from the inventory 
records. These risks exist for inventory movement at primary inventory 
locations, off-site storage, contract warehouses, consignment, and 
other locations. Management should weigh these risks and consider the 
following issues when deciding how to control them. 

Have You Considered: a) suspending shipping, receiving, production, 
etc., during the count? 
Report Section Providing Guidance: Ensure completeness of the count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: b) the risk of relying on your system for control 
of cutoff issues? 
Report Section Providing Guidance: Ensure completeness of the count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: c) other methods of reducing the risk of improper 
cutoff? 
Report Section Providing Guidance: Ensure completeness of the count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: d) the risk of cutoff at the contractor warehouse 
and other inventory locations? 
Report Section Providing Guidance: Ensure completeness of the count; 
Yes, No, N/A: 
Notes/Comments: 

Document your conclusions for accomplishing cutoff below. (e.g., 
Temporary HOLDS, restricting movement into and out of item locations, 
will be placed on the daily cycle count items. Holds will be released 
as counts are completed, no later than the end of the day. All 
movement of all wall to wall count items will be suspended during the 
count.) 

2) Preinventory preparation—-Prior preparation of the inventory, and 
the warehouse area housing it, can greatly increase the efficiency and 
accuracy of accomplishing the physical count of inventory on hand. 
Management should include the following in its consideration of 
preinventory issues. 

Have You Considered: a) organizing the inventory and warehouse to 
facilitate the count process? 
Report Section Providing Guidance: Ensure completeness of the count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: b) identifying and segregating certain slow 
moving, excess, obsolete, and reserved items from other items? 
Report Section Providing Guidance: Ensure completeness of the count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: c) precounting and increasing control of 
segregated, slow moving, excess, obsolete, and reserved items? 
Report Section Providing Guidance: Ensure completeness of the count; 
Yes, No, N/A: 
Notes/Comments: 

Document your conclusion for preinventory preparation below (e.g., 
Warehouse routine is expected to maintain (ABC) inventory segments in 
a count-ready condition. day prior to wall to wall counts, warehouse 
personnel will be detailed, under the supervision of the inventory 
audit group, to label, straighten, and precount as necessary.) 

3) Count the inventory—-Actually counting the inventory is a critical 
step and deserves an appropriate level of attention and control. There 
are a number of options available in the process of the count and 
decisions in one area will affect decisions in another area. The 
following are issues that management should include in making those 
decisions. 

Have You Considered: a) how information about the item to be counted 
will be communicated to the counter? 
Report Section Providing Guidance: Execute physical count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: b) what record data elements (e.g., quantities, 
description, location) should be provided to the counter? 
Report Section Providing Guidance: Execute physical count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: c) the pros and cons of requiring blind counts? 
Report Section Providing Guidance: Perform blind counts 

Have You Considered: d) what record data elements the counter(s) are 
to verify? 
Report Section Providing Guidance: Execute physical count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: e) the total lapse of time allowable to complete 
counting (including appropriate research) before requiring an 
adjustment? 
Report Section Providing Guidance: Execute physical count & perform 
research; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: f) when to require recounts (e.g., if first count 
does not equal record amount)? 
Report Section Providing Guidance: Execute physical count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: g) how many recounts to require (e.g., until two 
counts equal)? 
Report Section Providing Guidance: Execute physical count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: h) how the count supervisor will verify that the 
count is complete? 
Report Section Providing Guidance: Provide adequate supervision & 
ensure completeness of the count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: i) how data elements verified for each item will 
be captured during the count (e.g., count sheets)? 
Report Section Providing Guidance: Execute physical count & perform 
research; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: j) how and by whom will the count’s actual 
results be posted to the inventory system? 
Report Section Providing Guidance: Execute physical count & maintain 
segregation of duties; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: k) who should conduct recounts or verification of 
completed counts (e.g., someone other than the first counter)? 
Report Section Providing Guidance: Execute physical count; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: l) how to verify that all items selected for 
counting have been counted? 
Report Section Providing Guidance: Ensure completeness of the count; 
Yes, No, N/A: 
Notes/Comments: 

Document your conclusions for counting the inventory below. (e.g., 
item description, number, and location only will be provided to and 
verified by cycle and wall to wall counters on sheets generated by the 
inventory locator system. Quantities counted will be recorded on the 
count sheet and compared to record on-hand balances maintained by the 
inventory audit group supervisor. Recounts, until two counts agree, 
will be conducted by an inventory audit group individual other than 
the original counter. The original counter will conduct and document 
research and propose needed adjustments to the group supervisor.) 

[End of table] 

Table: 

Research and Adjustments: 
1) Perform research; 
2) Adjust the record. 

1) Perform research—-In the event of a discrepancy between the actual 
physical count and the recorded data element, appropriate research 
designed to determine the reason for the difference should be 
performed. The following are issues management should include in its 
considerations when making decisions of when to and who should conduct 
such an investigation. 

Have You Considered: a) when and where it may be appropriate to 
establish acceptable variances not requiring research? 
Report Section Providing Guidance: Perform research; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: b) the extent to which research should be 
performed? 
Report Section Providing Guidance: Perform research; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: c) using error codes to track the trends and 
frequency of the causes of discrepancies? 
Report Section Providing Guidance: Perform research; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: d) the required documentation and retention 
period for the research and adjustment of the records? 
Report Section Providing Guidance: Perform research; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: e) when discrepancies should be referred to 
management and/or security for investigation? 
Report Section Providing Guidance: Perform research; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: f) whether there should be a limit on the amount 
of time allowed to research a discrepancy before requiring an 
adjustment? 
Report Section Providing Guidance: Perform research; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: g) whether persons performing root cause analysis 
have responsibilities in areas of conflicting interest? 
Report Section Providing Guidance: Perform research & segregation of 
duties; 
Yes, No, N/A: 
Notes/Comments: 

Document your final conclusions for research and adjustments below 
(e.g., All variances between physical count and record amounts are to 
be researched, or variances of less than X percent are to be adjusted 
without research, etc. ). 

2) Adjust the record—-Adjustments to the record are most critical when 
they affect on-hand quantities. Such adjustments will likely directly 
affect information used to make managerial decisions. They will also 
establish new quantity levels for effective internal controls designed 
to safeguard assets from unauthorized use or disposition. The 
following are issues management should include in its consideration 
when making decisions on who should make adjustments and how 
adjustments to on-hand quantities should be made. 

Have You Considered: a) what levels of authorization to require for 
adjustments to on-hand balances? 
Report Section Providing Guidance: Perform research; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: b) how to allow for and control exceptions to 
authorization requirements? 
Report Section Providing Guidance: Perform research; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: c) whether there should be a limit on the amount 
of time allowed to elapse before an adjustment is required? 
Report Section Providing Guidance: Perform research; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: d) whether persons making adjustments to on-hand 
balances have responsibilities in areas of conflicting 
interest? 
Report Section Providing Guidance: Maintain segregation of duties; 
Yes, No, N/A: 
Notes/Comments: 

Document your conclusions for adjusting the records below (e.g., 
Adjustments to on-hand balances exceeding $XXX required documented 
approval by (middle management position), those exceeding $XX,XXX 
require documented approval by (senior management position), etc.). 

[End of table] 

Table: 

Evaluation of Results: 
1) Determine the record accuracy rate; 
2) Consider other performance measures; 
3) Communicate the results of the count. 

1) Determine the record accuracy rate—-Inventory systems usually 
provide management information upon which potentially critical mission 
readiness and financial resource decisions are based. n appropriately 
calculated record accuracy rate is a telling measure of how dependable 
your inventory system is at maintaining accurate information. e issues 
management should include in its considerations when making decisions 
for calculating an inventory accuracy rate. 

Have You Considered: a) what discrepancies in the record will be 
considered errors in the accuracy rate calculation? 
Report Section Providing Guidance: Evaluate count results; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: b) the actual mathematical calculation to be used 
in determining the accuracy rate? 
Report Section Providing Guidance: Evaluate count results; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: c) how you will use the results of the accuracy 
rate 
calculation? 
Report Section Providing Guidance: Evaluate count results & establish 
accountability; 
Yes, No, N/A: 
Notes/Comments: 

Document your conclusions for evaluation of results below. (e.g., 
discrepancies between any elements (e.g., number, description, 
location, quantity) verified by counters are considered errors. Or, 
quantity differences exceeding established tolerances are considered 
errors, etc.) 

2) Consider other performance measures-—The results physical counts 
may be measured by methods other than record accuracy rates. The 
following are issues management should include in its considerations 
when making decisions for calculating an inventory accuracy rate. 

Have You Considered: a) what other results/measurements are 
appropriate to your needs? 
Report Section Providing Guidance: Evaluate count results; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: b) how other measures can be expressed in 
relevant terms? 
Report Section Providing Guidance: Evaluate count results; 
Yes, No, N/A: 
Notes/Comments: 

Document your conclusions for consideration of other performance 
measures below (e.g., Total net and total gross (quantity and/or 
value) adjustments to inventory over a period of time shall be 
considered to determine the effectiveness of the count and root cause 
analysis process, etc.). 

3) Communicate the results of the count-—To maximize the usefulness of 
the physical inventory count, the results should be communicated to 
management and lessons learned should be incorporated in planning for 
subsequent physical counts. The following are issues management should 
include in its considerations when making decisions in communicating 
the results of the physical count. 

Have You Considered: a) how and what results you will communicate to 
management? 
Report Section Providing Guidance: Evaluate results and perform 
research; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: b) how and what results you will communicate to 
counters? 
Report Section Providing Guidance: Evaluate count results; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: c) how and what results you will communicate to 
employees who are responsible in areas giving rise to record accuracy 
errors. 
Report Section Providing Guidance: Evaluate count results; 
Yes, No, N/A: 
Notes/Comments: 

Have You Considered: d) changes indicated to existing policies and 
procedures by the results and considerations made above? 
Report Section Providing Guidance: Evaluate count results & establish 
written policies; 
Yes, No, N/A: 
Notes/Comments: 

Document your conclusions for communicating the results of the count 
below (e.g., Monthly written reports summarizing quantity and dollar 
amounts counted, adjustments made, results of root cause analysis, and 
frequency and trends in error codes will be prepared for management 
review, etc.). 

[End of table] 

[End of section] 

Appendix II: Objectives, Scope, and Methodology: 

To determine the principles fundamental to achieving consistent, 
accurate counts of physical inventories, our objectives were to (1) 
identify inventory counting procedures that have been successfully 
implemented by private sector companies recognized as leaders in 
inventory accuracy and (2) provide examples (case studies) of counting 
procedures used by these companies that might help federal agencies 
improve the accuracy and reliability of their inventory and property 
records. 

To fulfill our objectives, we identified 80 companies, 77 of which 
were Fortune 500 companies, with large inventories that are considered 
to be leaders in inventory management. In order to identify these 
companies, we consulted with experts in the field of inventory 
management. Our contacts included professionals from the major 
accounting firms of KPMG Peat Marwick and Ernst and Young, LLP, and 
professors at the Massachusetts Institute of Technology and Ohio State 
University. We also researched publications issued by CIO 100, 
Industry Week, and the American Productivity and Quality Center 
(APQC), and we considered companies that were winners of the 
prestigious Malcolm Baldridge National Quality Award. 

From these 80 companies, we identified 22 companies having best 
practices in inventory management. Our selection was based on the 
company receiving recognition for outstanding inventory management 
practices by at least three of the above named sources. In order to 
confirm our selections as best practice companies, we sent a survey to 
each company to obtain information on inventory record accuracy rates, 
policies and procedures, physical count methods, research, training, 
and willingness to participate in our study. 

Eleven of the twenty-two companies returned the survey; from the pool 
of eleven we selected seven companies willing to participate in our 
study. Our selection was based on (1) reported accuracy rates, (2) 
size and types of inventory, and (3) existing count procedures and 
controls. Based on these criteria, we selected the following companies: 

Leading-edge Companies: 
* Boeing; 
* Daimler Chrysler; 
* DuPont; 
* FedEx; 
* General Electric; 
* Honeywell; 
* 3M. 

Some of the selected companies employed more than one counting 
methodology and allowed us to review their practices and processes at 
more than one operating location. A total of 12 separate locations 
from the seven companies were studied. 

To gather the data needed from each company, we developed a structured 
interview checklist to cover the following areas: planning, execution, 
research, evaluation, training, and policies and procedures for the 
physical inventory count process. We consulted professional guidance 
issued by the American Institute of Certified Public Accountants and 
an accounting firm in designing the structured interview. 

During each site visit, we completed our structured interview 
checklist through interviews with officials responsible for inventory 
management and record accuracy. We also toured the companies‘ 
warehouses, distribution centers, and production and assembly plants 
to obtain an understanding of how inventory counting procedures were 
implemented at these locations. We relied on company officials to 
describe their processes to us. We did not verify the accuracy of 
their statements or any information provided to us, but, wherever 
possible, we obtained and reviewed company documents describing the 
inventory counting and verification processes. The documentation we 
obtained was consistent with the information we reported. Based on the 
information we obtained from each of our site visits, we consolidated 
and refined the inventory counting principles and practices to those 
presented in this guide. We asked officials at each of the seven 
private sector companies we studied to confirm the accuracy and 
completeness of the information presented in the report and 
incorporated their comments as appropriate. However, we did not 
independently verify the accuracy of the information the officials 
provided. 

[End of section] 

Appendix III: Bibliography: 

Brooks, Roger B., and Wilson, Larry W. Inventory Record Accuracy: 
Unleashing the Power of Cycle Counting. Essex Junction: Oliver Wight 
Publications, Inc., 1993. 

Edwards, Douglas J. "The Best 100." Industry Week (August 16, 1999) 

Taninecz, George. "IW‘s Ninth-Annual Honor Roll." Industry Week 
(October 19, 1998) 

"Practicing Judgment." CIO Magazine, August 1, 1995. 

[End of section] 

Appendix IV: Other Related Publications: 

Financial Management: 

U.S. General Accounting Office. Executive Guide: Creating Value 
Through World-class Financial Management. [hyperlink, 
http://www.gao.gov/products/AIMD-00-134]. Washington, D.C.: April, 
2000. 

U.S. General Accounting Office. Standards for Internal Control in the 
Federal Government. [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. Washington, D.C.: 
November, 1999. 

U.S. General Accounting Office. Managing for Results: Strengthening 
Regulatory Agencies‘ Performance Management Practices. [hyperlink, 
http://www.gao.gov/products/GGD-00-10]. Washington, D.C.: October, 1999 

U.S. General Accounting Office. Program Measurement and Evaluation: 
Definitions and Relationships. [hyperlink, 
http://www.gao.gov/products/GAO/GGD-98-26]. Washington, D.C.: April, 
1998. 

U.S. General Accounting Office. Executive Guide: Effectively 
Implementing the Government Performance and Results Act. [hyperlink, 
http://www.gao.gov/products/GAO/GGD-96-118]. Washington, D.C.: June, 
1996 

Human Capital Management: 

U.S. General Accounting Office. Human Capital: Key Principles From 
Nine Private Sector Organizations. [hyperlink, 
http://www.gao.gov/products/GAO/GGD-00-28]. Washington, D.C.: May, 
1998. 

Systems Requirements and Checklists: 

U.S. General Accounting Office. Property Management Systems 
Requirements: Checklist for Reviewing Systems Under the Federal 
Financial Management Improvement Act. [hyperlink, 
http://www.gao.gov/products/GAO-02-171G]. Washington, D.C.: December, 
2001. 

U.S. General Accounting Office. Core Financial System Requirements: 
Checklist for Reviewing Systems Under the Federal Financial Management 
Improvement Act. [hyperlink, 
http://www.gao.gov/products/AIMD-00-21.2.2]. Washington, D.C.: 
February, 2000. 

U.S. General Accounting Office. System Requirements for Managerial 
Cost Accounting Checklist: Systems Reviewed Under the Federal 
Financial Management Improvement Act of 1996. [hyperlink, 
http://www.gao.gov/products/AIMD-99-21.2.9]. Washington, D.C.: 
January, 1999. 

U.S. General Accounting Office. Inventory System Checklist: Systems 
Reviewed Under the Federal Financial Management Improvement Act of 
1996. Exposure Draft, [hyperlink, 
http://www.gao.gov/products/AIMD-98-21.2.4]. Washington, D.C.: May, 
1998. 

U.S. General Accounting Office. Business Process Reengineering 
Assessment Guide. [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-10.1.15]. Washington, D.C.: 
April, 1997. 

U.S. General Accounting Office. Framework for Implementation: Job 
Process Reengineering. [hyperlink, 
http://www.gao.gov/products/GAO/OIMC-95-8]. Washington, D.C.: May, 
1995. 

[End of section] 

Appendix V: Acknowledgment of Best Practice Participants and Advisors: 

We would like to acknowledge and thank the following companies whose 
management and staff provided advice and assistance throughout this 
project. 

Leading-edge Companies: 

The Boeing Company; 
Seattle, Washington. 

DaimlerChrysler AG; 
Stuttgart, Germany. 

E. I. DuPont De Nemours and Company; 
Wilmington, Delaware. 

FedEx Corporation; 
Memphis, Tennessee. 

General Electric Company; 
Fairfield, Connecticut. 

Honeywell International Inc. 
Morristown, New Jersey. 

Minnesota Mining & Manufacturing Company; 
St. Paul, Minnesota. 

Project Advisors: 

The Gillette Company; 
Boston, Massachusetts. 

Private Sector Council; 
Washington, DC. 

Raytheon Company; 
Lexington, Massachusetts. 

Samsonite Corporation; 
Denver, Colorado. 

[End of section] 

Appendix VI: GAO Contacts and Staff Acknowledgments 

GAO Contacts: 

Paul D. Kinney (303) 572-7388: 
Stephen W. Lipscomb (303) 572-7328: 

Acknowledgments: 

In addition to those named above, Letha C. Angelo and Robert A. Sharpe 
made key contributions to this report. 

[End of section] 

Footnotes: 

1. See Appendix II, Objectives, Scope, and Methodology. 

2. Six Sigma and Breakthrough Strategy are copywritten methods of Six 
Sigma Academy to provide companies the tactics and tools for rapid, 
total business transformation. 

3. Brooks and Wilson, p. 22. 

4. Location counts are physical counts used by the leading edge 
locations to check the accuracy of their “floor to record” quantities, 
whereby all items in a location or area in the warehouse are counted 
and compared to the inventory records to ensure the proper recorded 
quantity and location of an item. 

5. RF Guns are handheld units that receive and transmit information to 
and from the inventory system. The counter usually scans a bar code 
for the item or location for count and the RF Gun displays the 
information for the item or location (i.e., unit of measure, stock 
number, location). The counter then enters the physical count quantity 
directly into the RF Gun and the count is automatically transmitted 
and captured in the inventory system for comparison to the on-hand 
balance. 

[End of section] 

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