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Nailing down hardware store security.

Underringing merchandise and pocketing the difference or cashing in on a phony refund are common employee theft schemes - especially in hardware and home center stores, which, according to a 1995 survey by the National Retail Hardware Association, had an average shrinkage rate of 2 percent - higher than the rate for other retail outlets.

The problem has been particularly acute at Ace Hardware Corporation (AHC), where shrinkage rates last year were significantly higher than the average for the industry. Unlike some of AHC's national chain competitors such as Lowes, Hechinger, and Home Depot, the 5,200 independently owned and operated Ace Hardware stores worldwide had at that time no official loss prevention program. To address the problem, AHC officials created a separate, wholly owned subsidiary company last year called Loss Prevention Services, Inc., (LPS).

The nine-person LPS staff offers Ace retailers a variety of security services on a voluntary fee-for-service basis. The program has succeeded not only in reducing shrinkage but also in generating revenues. Originally, the board of directors wanted to break even with the company, but the service has paid for itself over the past year and surpassed its financial expectations.

Among the services LPS offers are in-store security assessment surveys - the focus of this article - undercover and fraud investigations, integrity shops, hidden camera installations, preemployment screening, awareness training, regional loss prevention workshops, civil recovery services, robbery prevention kits, a loss prevention reward program, and crime vulnerability assessments.

If an Ace store has a problem, the manager can call LPS and either request a particular service, request a range of services, or elect to become a "team member," entitling the store to certain basic services and discounts on other options.

Typically, when a store manager discovers a problem - usually by accident - he or she will call LPS and request one or all of its services. For example, the manager may find that financial data on the store's performance is fluctuating or that there has been an upswing in shrinkage data for an unknown reason. If the store is not tracking its shrinkage, a manager may discover an unexplained reduction in gross profit margin. An even more common problem is the discovery that a trusted employee has scammed the store out of money or merchandise. At this point, the store owner realizes that internal controls and procedures are weak and need to be strengthened.

When a customer signs on as a full team member, LPS provides, among the services listed above, an on-site, one-day review of the store's controls and procedures, known as a security assessment survey (SAS). The survey provides the basis for all of LPS's services and supports the company's philosophy that loss prevention should be proactive, not reactive.

The SAS, conducted by loss prevention specialists using an extensive checklist, begins with site preparation. It is followed by an on-site analysis and ends with recommendations and, as an option, a follow-up action plan for implementing a loss prevention program.

CHECKLIST CREATION. Before marketing LPS's services to Ace stores, six LPS staff members spent about six weeks developing a security survey, keeping in mind that controls and procedures were different for each outlet.

The survey team began its work by identifying the job functions in a typical retail organization, such as accounts payable and receivable, sales audit, receiving, and vendor invoice processing, as well as inventory record keeping practices, buying practices, and physical inventory practices. The specialists then analyzed each function and its associated risks, after which functions were grouped into four main sections: accounting, store operations, loss prevention, and safety.

To understand how the team compiled the initial analysis of risk by function, consider the sales audit function. One risk is whether all "no sale" register receipts, called "chips," are turned in regularly and accounted for manually via the exception reporting process. One reason to ring a no sale is to take extra cash out of the drawer; another is to make change for a customer. However, a dishonest employee may use the no sale option after he or she has underrung a sale. For example, a cashier may ring up a sale of $4.40 for merchandise that costs $44.00. Later, when no one is looking, the cashier will open the register for the remaining money by ringing up a no sale. If a particular store allows its cashiers to ring no sales, one recommendation might be to keep track of the chips by requiring each cashier to write the reason for accessing the drawer on the back of the receipt.

If the store's current policy already requires chip accountability, another recommendation might be for the sales audit person to track the number of chips allowed per day for each employee. If a cashier has more than the maximum allowed, the matter should be investigated. Or, to further reduce the opportunity, a specialist might recommend that cashiers be required to call a manager for approval before ringing a no sale.

After all job functions were analyzed, the risks were translated into 500 survey questions. The team also developed a comprehensive list of generic recommendations to correspond to the questions. Each of these recommendations proposes a solution to the risk at hand, referred to as "the reverse," because it negates the existing risk exposure.

One survey question under the sales audit function, for instance, reads: "Does someone periodically take several months of checks, flip the checks over to the endorsement side and compare bank information, signatures, and other pertinent data, looking for any discrepancies?"

The reverse of this situation, according to the survey, is "as part of the store's auditing program, a management person (not associated with accounts receivable) should review all checks processed. As part of the review process, all checks should be separated by recipient name. Once separated, the checks should be turned over to the endorsement side of the check, layering the checks so that the endorsement side of the check can be observed. A comparison can then be made of the endorsement data among all checks, looking for any discrepancies in the way checks are endorsed. For example, the person carrying out this procedure should look for any changes in banking data, account numbers, or a company stamp which is suddenly replaced by a handwritten endorsement and signed by an illegible signature. If discrepancies are noted, further investigation should follow."

Initially the team had organized the questions by topic and not job function, but found this approach too haphazard. After one month, they changed the format so that all questions relating to a specific job function were grouped together. This approach made the in-store survey more manageable and efficient for the field specialist.

For example, when interviewing a cashier about how he or she performs certain functions such as refunds, the specialist can also inquire about the specific countermeasures taken to deal with bad checks, phony credit cards, and counterfeit money, instead of listing these topics under separate headings later in the survey.

SITE PREPARATION. Prior to conducting an SAS at the retail outlet, LPS explains to the store owner that LPS's main objective is to identify weak points in the store's loss prevention program - not to "catch the bad guys."

LPS tries to ensure that client expectations are realistic. For example, when asked what they expect the survey to do for the store, some customers say "shake up the place," while more often they respond "improve profitability."

While LPS can provide an internal investigation searching for clues of malfeasance, the company's main focus is prevention through risk analysis and program development and implementation. By focusing on weaknesses, not catching people, the survey becomes a blueprint for the retailer, who can use it to audit the store in the future. The customer must commit to written expectations before LPS will provide any services.

Once the store manager and the loss prevention specialist have agreed on a set of expectations and methods to achieve them, the manager physically prepares the store for the arrival of the field specialist.

First, the field specialist requests a key contact person at the targeted location. The field specialist then mails out a one-page informational sheet to the retailer called "What Will Happen During My Survey?" It outlines the day's activities and the specialist's duties. At this stage, LPS also informs the retailer that the field specialist requires an out-briefing session with the contact person in the late afternoon to discuss some of the findings.

In addition, LPS sends the store an announcement flyer that should be posted in the employee break room. The flyer alerts store associates to the upcoming visit and states that the purpose of the survey is to identify opportunities for improving security and safety. The announcement specifically indicates that the loss prevention consultant may ask employees questions about the way they perform their jobs. It also requests employee cooperation in gathering information. In addition, the announcement states that, if during an interview a customer needs assistance, the customer takes priority and should be served.

ON-SITE ANALYSIS. The day of the on-site evaluation, the field specialist arrives when the "key is turned" to observe opening procedures, rather than waiting for the official opening time of the store. During this twenty- to thirty-minute observation, the specialist uses the survey questionnaire to consider the number of people opening the store, whether the entrance door is relocked once personnel enter, whether the safe is on "day lock," and whether the tills stored in the registers overnight still have cash in the drawers.

The specialist will also shadow the opening person to ask him or her additional questions regarding the alarm system or other responsibilities the employee may have. The field specialist then acquires from the manager (who may also be the opening person) names of individuals who perform each function to be audited. These names and functions are then written into the survey report.

Throughout the day, the field specialist asks the key contact person (usually an owner or store manager) to introduce him or her to other employees. Once introduced, the field specialist tells each employee the subject of discussion and how much time it may take to cover the issues. Plans are made for the field specialist to come by the employee's department at a convenient time. The interview is conducted while the employee is on duty because the specialist needs to observe the person in the work environment. As the specialist goes over the survey checklist, employees are expected to provide supporting documentation regarding the line of questioning, if appropriate.

While auditing the accounts payable function, for example, the employee is asked what information he or she looks at before approving an invoice for payment. If the employee says he or she reviews a purchase order and a receiving document, the specialist asks where those papers are filed. The field specialist then arbitrarily pulls three invoices from three different vendors to ensure that the proper paper trail exists. The employee is then asked further questions such as how changes are made to a purchase order or how shortages are indicated on a receiving document, until the field specialist is comfortable that all parts of that job have been reviewed.

The process is repeated for every function within the organization. The entire survey for a typical 8,000-square-foot store takes about eight to ten hours.

Typically, the specialist will talk with virtually every employee in the store. For example, the loss prevention specialist may stop an employee in an aisle and pose a shoplifting scenario to determine whether employees are receiving proper training. Remarks and comments are also jotted down in spaces provided on the survey form.

Finally, the specialist analyzes the physical security of the target store. This part of the survey contains questions such as: "Is the alarm sufficient?" "Is the safe adequate?" "Should the lumberyard be fenced?" and "Should the store consider installing closed-circuit video?" If the specialist recommends any changes, he or she roughly sketches the modifications on a pre-drawn diagram of the store and notes the recommendations on the drawing. Field specialists are also equipped with 35 mm cameras to document where a physical security device may be needed or to note other physical risks.

EXPERT RECOMMENDATIONS. The last part of the day's events is an out-briefing session with the store's owner or manager to discuss the findings and make recommendations. This meeting lasts between one and two hours, depending on the retailer's level of interest and concern. The specialist later prepares a thorough written report that is mailed to the retailer.

During the outbriefing, the specialist points out major store weaknesses such as an alarm system that is not producing opening and closing reports (which indicate the times the alarm system was turned on and off and by whom) or lax key control. The specialist will then take the retailer through each part of the checklist and comment as appropriate.

The final part of the SAS is conducted off-site at LPS. The specialist compiles and analyzes all of his or her findings to produce an approximately forty-page written report that is sent to the store within three weeks of the on-site visit.

Included in the report are not only the reverse recommendations mentioned above for all risks indicated from the checklist, but also a list of the client's top ten priorities. According to his or her expertise, the field specialist determines what is most important for the store in developing a good loss prevention program. LPS suggests that the retailer initially concentrate on the top ten findings and later follow up on the more detailed findings.

The report instructs the retailer to assign a rating to each detailed finding: a one represents a high risk, calling for immediate action; a two is moderate risk and demands action within six months; and a three is low risk, which calls for action within a year. Although the retailer assigns these ratings independently, LPS staff are available for consultation.

LPS's obligation to the retailer may end at this point, or the survey may prompt the customer to seek further consultation or other services.

OPTIONAL FOLLOW-UP. If the retailer has signed on for full team membership, a loss prevention specialist calls the store ten days after the customer receives the report. The specialist will provide up to three "coaching" phone calls in preparation for a half-day follow-up visit within three months of the on-site survey. The purpose of the visit is to assist the retailer in developing an action plan to implement a loss prevention program, called a program implementation review (PIR).

A PIR may require the specialist to spend time training the sales audit person how to implement proper controls, procedures, and paperwork requirements when counting down the cashier drawers and preparing the day's deposit. It may require meeting with an alarm vendor to discuss alarm system installation, or it may involve conducting some awareness training for employees. The specialist may also meet with the store's owner to suggest a future redesign of the store to eliminate an unused back entrance, for example.

While the specialist helps the store owner take the first few steps in implementing a loss prevention program, store owners are urged to complete the process on their own using unlimited consultation from LPS if necessary. So far, participating stores have experienced a measurable difference in their shrinkage rates.

The key to LPS's success lies in its approach to the security survey. By first identifying a store's weaknesses, highlighting the related risk, and then offering clear preventive measures for each one, LPS staff give retailers both an understanding of their exposure and the means to reduce it.

James P. Falk, CPP, is national loss prevention manager for Ace Hardware Corporation in Oak Brook, Illinois. He is a member of ASIS.
COPYRIGHT 1996 American Society for Industrial Security
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:Retail Security; preventing employee theft
Author:Falk, James P.
Publication:Security Management
Date:Dec 1, 1996
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