Meet Gary, the Warehouse Manager Who Did It All
At “Precision Parts Inc.,” a supplier of specialized industrial components, Gary was the linchpin of the warehouse. He managed the physical receipt of goods, organized storage, picked and packed orders, and, crucially, was also responsible for updating the inventory management system. If a shipment came in, Gary logged it. If parts were used for an order, Gary deducted them from the system. For a rapidly growing company, this seemed efficient – one person with complete oversight of inventory.
The Unseen Risk: A Direct Path from Shelf to System (to Pocket)
The problem was that Gary had control over both the physical custody of the inventory and the record-keeping for that inventory. This is a classic SoD violation. It meant Gary could:
- Take physical items from the warehouse.
- Adjust the inventory records to hide the discrepancy (e.g., mark items as damaged, write them off, or simply adjust counts).
There was no independent check to verify that what the system said was on hand actually matched the physical stock, or vice-versa, without Gary himself being involved.
The Slow Leak: How Inventory Began to Disappear
It started innocuously. A few small, high-value components went “missing” – Gary would mark them as “damaged in transit” or “quality control reject” in the system. No one questioned it too much; these things happened. Emboldened, he began to take larger quantities of desirable parts, which he then sold privately online. Because he controlled the inventory system, he could make adjustments to stock levels, attributing the discrepancies to “cycle count errors” or “system glitches” that he would then “fix.” The discrepancies were always just small enough not to trigger major alarms individually, but they added up.
The Fallout: More Than Just Empty Shelves
The consequences of this SoD failure were significant for Precision Parts Inc.:
- Direct Financial Loss: The cost of the stolen inventory was substantial.
- Production Delays & Lost Sales: Customers faced delays or cancelled orders when parts they needed were shown as “in stock” in the system but were physically missing, leading to frustration and lost business.
- Inaccurate Financial Statements: The value of inventory on the balance sheet was overstated, leading to incorrect financial reporting and potentially flawed investment decisions.
- Wasted Resources: Time and money were spent investigating stock discrepancies, reordering missing items, and dealing with customer complaints.
- Erosion of Trust: Discovering theft by a long-term employee can damage morale and trust within the warehouse team and the wider company.
The Solution: Building Walls Between Stock and System
To prevent inventory fraud and ensure accuracy, Precision Parts Inc. needed to implement SoD:
- Separate Physical Custody from Record-Keeping: The individuals responsible for physically handling inventory (receiving, storing, picking) should be different from those who update the inventory management system.
- Independent Cycle Counts and Physical Verifications: Regular physical inventory counts (cycle counts for specific sections, full counts periodically) should be conducted by personnel independent of the day-to-day warehouse operations and record-keeping (e.g., finance team members or a dedicated inventory audit team).
- Controlled Access to Inventory System: Limit who can make adjustments to inventory records. All adjustments (write-offs, quantity changes) should require documented approval from a supervisor who is not directly involved in physical inventory handling.
- Reconciliation of Receiving Reports, Purchase Orders, and System Entries: Ensure that goods received match purchase orders and are accurately entered into the inventory system by someone other than the warehouse staff who physically received them.
- Surveillance and Physical Security: Implement measures like CCTV in storage areas and restricted access to high-value items.
- Compensating Controls:
- For smaller operations, ensure a manager or owner who is not involved in daily warehouse tasks performs surprise spot-checks of inventory and reviews system adjustment logs.
- Require dual signatures for any significant inventory write-offs.
By separating these duties, companies can create a system where the physical reality of their inventory is independently verified against the records, making theft and manipulation much harder to conceal.