Preventing Operational Loss

By Erin Harris, Editor-In-Chief, Cell & Gene
Follow Me On Twitter @ErinHarris_1

March 2015 Integrated Solutions For Retailers

an interview by Erin Harris

Identifying the breakdowns that cause operational loss is challenging enough. What about prevention?

Alan Greggo, chairman of the Retail Loss Prevention Council of ASIS International, and Keith Aubele, president and CEO of the Retail Loss Prevention Group and Integrated Solutions For Retailers editorial board member, provide in-depth explanations on the preventative measures retailers can take to thwart operational loss.

Are the controls for operational loss different from those for external and internal loss?

Greggo: There are some operational controls that are more targeted at operational loss; however, general controls will also work to prevent external or internal losses. Think of it in terms of overall compliance with company policy; retail stores that are highly compliant usually are well-run, meet sales goals, and keep shrinkage low. That translates to higher profitability on the profit-and-loss statement.

Operational controls are very effective with auditing programs that check for compliance. For instance, some retailers complete pricechange audits. By verifying price, retailers can ensure they limit occasions where merchandise is incorrectly priced on the sales floor at a lower retail value than it will ring up to at the POS system. Most state laws and consumer protection laws agree that if the price marked on the item is lower than the POS retail price, the lower price must be honored. Price-change audits may also uncover that the retail price tags were switched by a thief, or that retail price tags were removed and placed on other items. This is an example of how an operational audit that is a also a control reveals an external or internal problem.

Retail stores that use RFID tags reap the benefit of operational control by using scanners to track merchandise throughout the store. They can also use the RFID labels as “smart tags” to tell when the shelf is being emptied or when the merchandise makes its way out the door without going through the register area. This is an example of the dual benefit of a control.

While cycle counts are a method of determining whether a store has operational loss, the process of cycle counting is also a control. When two or more sales associates conduct cycle counts, it alerts them that the store tracks its merchandise very closely. This is a deterrent to someone who intends to steal merchandise.

Aubele: Yes and no. Consider this example — an operational rule may be that in order for a customer to process a refund, the manager must approve the refund. In order for the refund to be approved, there must be:

1. an actual customer present;
2. store merchandise to be returned;
3. proof of purchase or legal identification of the person returning the merchandise.

"Improperly trained employees tend to be the cause of operational errors."

Alan Greggo, chairman, Retail Loss Prevention Council of ASIS International

 

Because the retail environment is a hectic one, the manager tells return associates to approve the refunds themselves, thus saving the time of having the manager respond to the customer return. This is fine, until it is discovered that the returns associate has been processing fraudulent refunds to the tune of tens of thousands of dollars. Or, it is discovered that customers have beeen defrauding the store with bogus returns by working in conjunction with the returns clerk. Both scenarios are avoidable if the proper operational controls were followed.

Consider an operational control such as markdowns. When an item is reduced in price from the original retail set point to the new lower price point, a markdown must be taken to adjust the inventory dollar value in the store. If for some reason the person executing the markdowns does a great job of reducing the price point on the sale tag, but fails to capture the numbers of items they marked down, that equates to instant operational shrink. Whether the item is sold or is inventoried at the lower retail price, the difference is shrink. If the proper counts were followed, shrink would have been avoided. This is an example of an operation shrink control not related to internal or external theft.

What preventative measures should retailers take to reduce operational loss?

Greggo: There are quite a few things; here’s the list.

• Return merchandise audit. Check the box before it ships to returns department to eliminate errors that would eventually be charged against the store’s inventory.
• Reconcile inventory locations to inventory control lists. This involves requiring merchandise out for demonstration use to be tracked in the book inventory so it is not mixed in with or sold as part of the salable inventory.
• Use basic auditing of received merchandise, ticketing accuracy, price changes, returns, and transferred merchandise. Compare the control paperwork to actual shipments and/or merchandise. This is where many errors are found and corrected.
• Arrange for high-quality employee training for those responsible for processing merchandise at the POS. Improperly trained employees tend to be the cause of operational errors. Operational errors are generally not caused by employees with dishonest intentions.
• Pay strict attention to open-door communications so that employees feel comfortable reporting operational errors. Store operations is not the place for retaliation. This applies not only to internal theft controls, but also to running a top-rate organization where information flows freely, in both directions, all the time.
• Pay employees well and treat employees well. This is often associated with the question of why employees steal from their employers. While it’s true that how employees are treated is a big driver of dishonesty, it more importantly affects the overall operational excellence of the retail store locations. So many retailers don’t understand that, and it shows when you visit their stores.
• Use cycle counts as a preventative measure.
• Pay attention to back stock and storage areas. Back stock and storage areas should be extremely neat and organized with nothing out of place. Whether a retail store is conducting a physical inventory or cycle counts, we cannot expect accuracy if merchandise is unorganized or found in more than one area. Everything must be stacked or set in perfectly straight rows, labeled accordingly, and placed on the correct shelf. This is a necessary discipline so management knows what is expected of them and that substandard conditions will not be tolerated.

"Never underestimate the significance of following SOPs [standard operating procedures]."

Keith Aubele, president and CEO of the Retail Loss Prevention Group and Integrated Solutions For Retailers editorial board member

 

Aubele: First and foremost, develop a standard operating procedure (SOP) playbook that is built to eliminate shrink. From there, the following steps should be taken:

• Ensure store management and employees follow the SOP step by step.
• Conduct unannounced audits by LP/AP and internal audit to validate compliance.
• Utilize exception analysis tools to identify your greatest weakness/exposure to shrink and loss.
• Utilize inventory processes annually or biannually to get a scorecard on your inventory loss situation.
• Respond to high shrink outcomes with a systemic and structured approach to identify the loss areas.
• Teach and train all associates and managers on the cause of shrink, operational effectiveness, and the tools to avoid loss.
• Utilize an operations manager in your retail locations to ensure proper operations execution.
• Empower your LP/AP teams leaders in identifying and correcting shrink factors at every level.
• Hold training classes for every level of leadership in your organization to help convey the message on shrink, operational loss, causation, avoidance, and resolution. This includes merchants, buyers, operators, support teams, and store operations.

Of the categories of loss, what percentage is attributed to operational shrink?

Greggo: According to the National Retail Security Survey of 2011, research conducted by Dr. Hollinger of the University of Florida, operational shrinkage across all retailers who reported was 12.1 percent of total shrinkage. The rest of the breakdown is:

• Employee theft - 44.2%
• Shoplifting and ORC Theft - 35.8%
• Vendor Theft - 4.9%
• Unknown causes - 5.3%

This 12.1 percent number is less than the last few prior years where administrative loss, as Dr. Hollinger calls it, has hovered around 15 percent.

Aubele: My feeling is that we can attribute a large percentage of all shrink to operational breakdowns. Never underestimate the significance of following proper SOPs. It is a slippery slope once you allow or encourage people to bend or break the rules. It may fix a small leak in the pipe today, but you have just created a huge blockage, which will blow out your profit pipeline tomorrow. I have always said that a true retail operator needs to approach business with the motto “Impact tomorrow today.”