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Inventory Controls in the Public Warehouse

Matthew Jahrsdoerfer, CPA 05.17.2017 | Berdon Industry Insights

 

Private warehouses continue to represent approximately 77% of storage facilities within the United States. Yet, an increasing number of manufacturers/distributors are turning to public warehouse operators. The shift to public warehouses might represent the answer to a short-term solution — the private warehouse operator has simply run out of space — or to the recognition that an outsourced warehouse solution can bring increased security and efficiencies to operations.

Many companies are also increasing their level of inventory and often need outsourced space to hold "safety stock." Surplus stock is due to a variety of reasons including increased sales, recent acquisitions, product line expansions, logistics issues (concerns about supply chain disruptions) and/or customer demands.

Whatever the reason, outsourcing warehouse space may reduce an organization's daily concerns about inventory safety, but the practice of outsourcing certainly does not ensure that all concerns can be eliminated.

Ensure Proper Processes Are in Place

Once the decision has been made to use a third-party provider for warehouse services, companies need to ensure that the service provider maintains a sound control environment that protects products, data, and company information. Such information comes with a SOC-1 (Service Organization Controls) audit report, which offers assurance for the services provided, along with the supporting processes, policies, procedures, personnel, and operational activities that constitute the service organization's core activities that are relevant to user entities. As the customer - or user entities - companies should request that this type of audit of the warehouse be conducted, and that a copy be provided to them for review. 

While receipt of a SOC-1 audit report would provide a full accounting of the warehouse's core activities, such reports may not always be available. If a company is unable to obtain a SOC-1 audit, it should request that the warehouse's management provide a detailed report of its current processes and procedures for review. This report should include all systems that exercise controls over the inventory it holds.

Knowledge of existing systems is important, because the use of public warehouses brings its own list of issues, including a lack of control over a company's inventory, personnel, and security, as well as a co-mingling of inventory with other inventory that is not theirs. A clear understanding of the measures a warehouse takes in securing its environment will enable a company to take action to address any weak or lacking controls if the potential risk is significant.  

Take Measures to Prevent Theft and Fraud

Theft and fraud still occur in the public warehouse scenario. With that in mind, a number of steps can be taken to prevent such acts from within the warehouse.  Here are important points worth considering if outsourcing warehouse functions.

Physical Security

The foundation of physical security - Deter, Detect, Delay, and Deny (the four D's) - should be considered when developing any strategy and include, among other things:

  • Installation of high fencing at least 25 feet away from all structures
  • A gated fence to monitor inbound and outbound traffic
  • Controlled entry/exit points for visitors and employees
  • Use of security guards at entry/exit points
  • Use of good internal and external lighting, such as "glare lighting," that shines outward from the building making it difficult for intruders to see as they approach the warehouse
  • Video camera surveillance

Procedural Controls

To augment these physical security measures, a number of procedural controls are also recommended, such as:

  • Counter surveillance (i.e., keeping a watchful eye on those watching the warehouse)
  • Employee screening that includes criminal background checks and drug testing
  • Photo IDs for employees
  • No cell phone use; employees should not have their camera-enabled cell phones in the warehouse
  • Limited customer/content information on packaging and documents; this practice makes it more difficult for prying eyes to detect client information and products housed in the warehouse 
  • Secured dumpsters, so thieves cannot "dumpster dive" to determine the products or client base being served; dumpsters should be placed within a secured area of the warehouse facility

Other potential public warehouse procedural control considerations include:

  • Scrutiny of warehouse insurance to ensure adequate coverage
  • Controls over receipts/shipments into and out of the warehouse and timely communication about movement
  • Occasional inspections of the facility
  • Periodic counts - condition/age of the inventory (obsolete/expired/damaged)
  • Implementation of measures to safeguard electronic data of information the warehouse can access
  • Ability to integrate warehouse reporting with existing company systems

These are just some of the considerations to keep in mind when selecting a public warehouse or working to improve the security of an organization's private warehouse.

There are no techniques that will ensure that an organization's inventory is impenetrable to theft. However, the measures noted herein will go a long way to Deter, Detect, Delay and Deny, and bring greater peace of mind regarding the selection of a public warehouse.

Question? Contact your Berdon advisor or Matthew Jahrsdoerfer, CPA — Berdon LLP, New York Accountants

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