Taking stock of losses.
Reliable Stores, Inc. (RSI), based in Baltimore, Maryland, has operated since 1892 as the parent company of well-known franchise stores such as Hub Furniture, Kline's Furniture, La-Z-Boy, and a chain of forty-five jewelry stores that operate under six local trade names. In all, the company operates eighty retail establishments.For its first ninety-eight years in business, RSI prospered without a loss prevention staff. It wasn't until March 1990, after loss rates spiraled out of control and culminated in two consecutive years of escalated inventory shrinkage, that company executives realized something had to be done to address the problem.
A security consultant's analysis of four representative stores convinced management of the need for a full-time in-house security position. Over the next two years, the loss prevention department set about to significantly reduce shrinkage by implementing a loss prevention infrastructure from the ground up. Since first tackling the problem of shrinkage in 1991, RSI has realized its fifth consecutive year of shrinkage improvements from a loss of 1.81 percent of sales in fiscal year 1991 to .19 percent of sales in fiscal year 1996, well below the national average of 1.87 percent a year. By 1993, the program was so successful that it was spun off into a separate, revenue-generating subsidiary - Asset Protection Specialists, Inc. (APS).
APS began capitalizing on its success by expanding its shrinkage control program to outside clients. APS now has a staff of three investigators and one administrative assistant. The company provides twelve loss prevention services - such as investigations and training - to RSI. These services are also marketed to a growing number of other businesses interested in shrinkage control. In October 1995, APS incorporated and since then has increased its revenue dramatically - to $300,000 last year.
The key to APS's success is a multiphase shrinkage strategy that includes resolving all pending internal theft issues, developing and implementing a loss reporting policy, creating a realistic preemployment screening program, and upgrading physical security.
Internal theft. The first step of the three-part plan is to pursue, isolate, identify, and resolve all pending internal theft issues. As part of this phase, APS identifies all problem stores within a chain. Problem stores are defined as those with inventory losses that exceed the predetermined loss factor. Those stores are labeled High Inventory Theft, or H-I-T, stores.
Initially, investigators interview each employee and analyze store records to corroborate employee testimony. This phase generally produces documented cases of internal theft and general admissions of fraud and other types of wrongdoing. After problem employees are identified, they are asked to leave.
APS investigators then work to prevent recurring problems by creating new loss prevention policies at H-I-T stores. For example, employees may no longer be permitted to ring their own sales but instead must have a supervisor approve their purchases, or managers may be required to count inventory both in the morning and again at night and report any discrepancies between the two.
Throughout the next inventory year, all H-I-T stores receive special attention from APS and the internal audit departments. During each visit, APS employees perform compliance audits and hold loss prevention training sessions for managers and sales personnel using various tools such as interactive role playing and video presentations.
Training. In addition to the emphasis on H-I-T stores, APS requires on-site loss prevention training for every store no less than once each year. APS investigators travel to each location and present a three-hour program that includes role playing and training exercises. APS employees re-create actual events, such as armed robbery or shoplifting, with employees taking active roles in playing out the various scenarios. A discussion then follows on how events occur as well as how to resolve them appropriately. Store managers also travel to RSI headquarters two to three times a year for formal loss prevention training conducted by APS personnel.
Reporting policy. APS then develops and implements a loss reporting policy geared to create "early warning" systems. An effective loss reporting program enables the corporate loss prevention staff to react quickly to problems and to assess their root causes.
The loss reporting system provides specific data for every loss, such as the time it occurred, its monetary value, the employees and manager working at the time, and the location where the loss occurred whether a vault, a showcase, or a cash drawer.
Every loss is then placed into one of eight classifications of theft including armed robbery, burglary, grab and run theft, showcase theft, cash theft, mysterious theft, switched merchandise, and other, each of which is ultimately defined as being "preventable" or "nonpreventable." Preventable theft occurs under circumstances such as leaving showcases unlocked, displaying more than one jewelry item at a time, leaving keys exposed on the counter, leaving open doors unattended, or other circumstances indicating negligence.
Nonpreventable theft, on the other hand, typically includes armed robbery or burglary. APS then uses computer tracking and analysis of this information to determine the scope and magnitude of the problem company wide.
RSI implemented its loss reporting policy in April 1992. As part of this program, RSI accounts for and tracks shrinkage in two ways.
First, shrinkage is defined as either "reported" or "un-reported." The corporate accounting office removes all reported losses from the store's physical inventory as they occur, preventing them from becoming unreported shrinkage. Unreported loss is what the store claims at year-end when the physical count of all inventory is compared against the company records. RSI wants to avoid undocumented losses because they cannot be analyzed.
To encourage reporting, unreported loss is charged against the store at year-end and cuts into the store's profit. Losses that have been reported but classified by the loss prevention department as "preventable" are charged against the manager's annual bonus, at cost. Reported losses that are "nonpreventable," such as an armed robbery or burglary, are not charged against the store.
The APS team uses reported losses as a barometer for determining shrinkage trends. Each loss reported is evaluated individually, by store and by manager, to determine trends and causes. All losses reported are constantly compared to the previous year and immediate follow-up action is taken to prevent a recurrence.
The follow-up action varies depending on the type of theft, but it may include training and an internal and external investigation. In many cases, physical improvements are also made such as changes to showcase frames, doors, locks, or glass. Visibility within a store may be enhanced by relocating, removing, or reducing walls and doors.
Screening. The third prong of the APS strategy is a realistic preemployment screening program. In RSI's case, APS had to find a program that could be used across the board for applicants of the furniture and jewelry store divisions, the distribution and delivery operations, and corporate offices.
The team decided that in addition to the interview and reference-check process, all final applicants should be screened using psychological honesty testing, credit bureau inquiries, and inquiries to store mutual associations (any one of several nonprofit groups funded by retailers that compile databases of dishonest employees and those with convictions in the retail sector). The largest of RSI's furniture distribution facilities also conducts criminal record checks and drug testing.
Physical security. Every store receives a specialized loss prevention manual and undergoes an annual review of its security systems by APS investigators. The review determines whether new technology would be more cost-effective than the existing equipment. In several recent cases, APS has replaced ineffective and antiquated security systems with state-of-the-art systems at a fraction of the cost, as the following examples illustrate.
Alarm reorganization. In 1991, the responsibility for all contractual burglar and fire alarm protection was centralized under the loss prevention department. Previously, this responsibility rested with store managers and division heads.
To evaluate the alarm systems, APS conducted an initial survey and tested existing systems to compare the various technical specifications and performance of each store's equipment against annual vendor costs. This survey produced a list of twenty stores with inadequate and malfunctioning alarm equipment that had been in use for many years without being tested, replaced, or upgraded.
RSI was also paying exorbitant annual fees on leases that were automatically renewed with increases each year without formal evaluations or approval from an RSI employee. And because the equipment was aging, maintenance costs were high.
The loss prevention department then used the information gathered to renegotiate all existing and future vendor contracts. Because alarm operations were now consolidated under the loss prevention department, the vice president of loss prevention was able to negotiate better bulk deals with vendors who previously did not know that various stores operated under the same parent company. APS not only improved the overall physical protection of RSI assets but also reduced the company's expenditures by $45,000 over the new three-year lease term.
Since then, RSI has introduced a competitive bidding process for the installation of new systems that helps hold down costs and prevents the company from becoming dependent on any one vendor.
As part of its most recent annual system review process last year, APS discovered that aging burglar and fire alarm systems with expiring leases needed to be replaced in ten furniture stores. The subsequent negotiation process led to the installation of state-of-the-art systems with a two-year return on investment and an annual savings of $21,000 over the life of the agreement.
The company also arranged to receive its alarm activity information on-line through a departmental PC. This in-house capability permits RSI to monitor its chain stores to identify and resolve the causes of false alarms, to identify improper use of the system, and to help gather evidence for internal and external investigations.
Alarm activity is downloaded overnight onto a desktop PC at APS headquarters for review by investigators who may want to know when an alarm was activated and the persons from the store and police agency who responded to the alarm.
In January 1993, RSI made a number of other physical and procedural security improvements to enhance the protection of its facilities.
Furniture. At its largest furniture distribution facility, the company installed a secure perimeter consisting of steel fire doors to segregate the shipping dock, administrative and executive offices, and warehouse from the merchandise staging and storage areas. In addition, a master-key-controlled locking system was installed to secure and control all interior and exterior doors to the facility.
RSI then purchased an electronic access control system to control and monitor all of the internal ingress and egress to sensitive areas. The system prevents unauthorized entry by securing all protected openings with electromagnetic locks that are linked to authorization keypads. An employee wishing access must have a preassigned user code - and user activity is captured by location, time of entry, and employee access number. The system retains the information for periodic review, investigation, and time and attendance monitoring.
In 1996, the company refurbished and enlarged all delivery dock security cages, which were formerly too small to accommodate the merchandise scheduled for any one delivery. Before the upgrade, items had to be placed outside the cage, causing frequent mix-ups, mistakes, and shortages. Now, the steel-enclosed cages are large enough to house and secure furniture in the merchandise staging area until it is ready for delivery to the customer. The cages are preassigned to a specific truck and driver, who loads the furniture from the cage without ever gaining access to the inside of the warehouse.
Also last year, the company installed a closed circuit television system composed of fifteen internal color cameras, commercial time lapse VCR, and a 16-channel multiplexer to monitor and capture warehouse activity and merchandise movement. The company maintains a thirty-day film archive to follow up on investigations when necessary. An external rooftop camera with pan/tilt/zoom capability was installed to monitor and record vehicle traffic entering and exiting the facility.
Jewelry. The company installed master-key-controlled locking systems on all jewelry store perimeter openings and on jewelry showcases. In addition, motion sensors are placed inside each case to detect forced entry. Alarms also sound if showcase doors are left open or unlocked. Each authorized employee is given a week of training on how to use the system and the hand-held wireless remotes that allow them entry into the cases.
Depending on the seriousness of the alarm - whether, for example, a door has been left open for more than twenty seconds or glass has been smashed - a different tone will sound to alert store personnel who respond accordingly. In several stores, the alarms are also integrated with the CCTV system. When an alarm is activated, the camera pans and tilts to the case that has been disturbed and at the same time activates a VCR that records the event. Electronic access control systems - similar to those used at the furniture facility - were installed at the two jewelry distribution facilities to control perimeter egress and ingress. This keypad system captures the identity of the person entering the facility through personal passcodes as well as a stationary CCTV camera, and also records the time he or she enters and exits. Prior to this improvement, individual store managers established locking procedures and decided what equipment to use, making security in- consistent and difficult to assess objectively.
Although each system cost about $10,000, the company saw a return on its investment within the first few months. Stores using these systems have been able to entirely eliminate shrinkage and external theft.
Additional steps. Several other deterrents and programs that were added in both the furniture and jewelry divisions have contributed to the company's remarkable success in reducing loss levels. One effective program is the employee hot line.
Hot line. In 1992, the company began a third-party Employee Reporting Hot Line Program. This program encourages employees to report problems within the company before they escalate, without fear of retribution. The program also encourages employee involvement and makes a strong statement to employees that the company cares.
The hot line company hired by RSI provides pamphlets, brochures, and posters to help promote the program and educate the work force. The program not only addresses internal theft but also other problems that employees think they should report, such as sexual harassment, aggressive or illegal employee behavior, or anything perceived to be business abuse.
Any employee calling into the hot line is guaranteed anonymity, and each caller is assigned a code number that he or she may use for future inquiries to check the progress of an investigation or to provide additional details about a particular case.
Rewards. At RSI, an annual recognition and awards program was established for store managers who exceeded company shrinkage standards or improved shrinkage in five categories, including best loss-control history over the last two years, best loss-control history in the past year, best shrinkage improvement in the current year, best reported loss improvement over one year, and the top five best inventory results for the current year. To recognize the stores and managers with the best loss-control records, APS management hands out plaques during the company's loss prevention segment at its annual two-day managers meeting.
Results. Combining its three-step strategy with physical and procedural improvements has paid off for the company. In its first year (1992), RSI saw a reduction in dollar losses in the jewelry division to 1.98 percent of sales - a 52-percent reduction from the previous year, while shrinkage in the furniture division in 1992 declined 65 percent to .37 percent of sales.
In 1993, furniture shrinkage was again down by about 50 percent - to .14 percent of sales, and in 1994 shrinkage was reduced to .08.
Program results are similar for the jewelry division and the company overall. In 1993, jewelry shrinkage decreased to 1.19 percent of sales. The total shrinkage sustained that year by RSI was .49 percent of sales. In 1994, unreported shrinkage for the jewelry division came down again to .97 as a percent of sales, while company shrinkage was reduced to .35 percent of sales.
APS achieved two major milestones for RSI in the next two years: it reduced the shrinkage again in 1995, and held it there in 1996. Company shrinkage both of those years was .19 percent of sales.
Retail inventory loss prevention is not easy, but it can be accomplished with a comprehensive plan of action. The critical components of a successful program are preemployment screening, loss reporting and analysis, physical security, awareness training, and a reward system for those who excel at shrinkage reduction.
Paul G. Talbott, CPP, is an assistant vice president of loss prevention and asset protection for Reliable Stores, Inc. He is also president of Asset Protection Specialists, Inc., of Columbia, Maryland. He is a member of ASIS.
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| Author: | Talbott, Paul G. |
|---|---|
| Publication: | Security Management |
| Article Type: | Cover story |
| Date: | Jun 1, 1997 |
| Words: | 2872 |
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