Introduction
Irrespective of the size of the company, from a single retail outlet to a multiunit chain of stores, and irrespective of the goods offered for sale to the public, be it high-end jewelry or a thrift shop, a wide variety of risks inherent to retail face management and must be addressed. At the risk of oversimplification, let’s briefly examine a single store which sells auto parts and review but a handful of the risks that must be considered:
• The receiving of incoming cartons of oil from a vendor can be less than the number reflected on the manifest. The missing oil creates a shortage which may result from a simple error or intentional theft by the shipper, or stolen from the shipper’s truck or trailer during its initial loading, an earlier delivery, or even during the current delivery.
• The store can be forcibly entered during the hours it’s closed, and goods can be carried out.
• The store’s daily receipts can be taken during a forcible entry, unless secured in a safe.
• The safe itself may be vulnerable to being carried out during a forcible entry.
• The store can be surreptitiously entered when it’s closed, without leaving evidence of a forcible entry by unknown means during which items are stolen.
• The many items of goods offered for sale can be stealthily stolen by customers (shoplifted).
• Goods can be pocketed by one or more employees and never paid for.
• Employees can sell items to friends or family members at discounted prices.
• Employees can sell items and not record the sale but rather pocket part or all of the sale proceeds.
• Employees can give away items to what appears to be legitimate customers but are in reality friends or associates.
The situations described here represent only a small sampling of the types of incidents which can easily drain profits and, in the extreme, threaten the continued life of a business.
Not included in these scenarios are criminal threats involving robbery, arson, credit card fraud, fraudulent and NSF checks, bomb threats, gift cards, returned merchandise fraud, as well as the potential for civil suits (with their concomitant damage awards) should merchants mishandle their response to such situations.
Two questions immediately come to mind: Who is going to deal with these problems? and How are they going to be dealt with? This book will provide suggested answers to both questions.
Who’s going to deal with these risks? Clearly, in a single store, the owner will need to address these issues, or in the absence of the owner, his or her “manager.” But what about the manager? We know of a manager in a ladies’ apparel store who “ran” the store, along with two part-time employees on Saturdays. The manager always arrived early in her station wagon and brought her own cash register. Half the sales were duly recorded on the store’s register, and the other sales she captured on her own. Needless to say, Saturday sales were never remarkable. One Saturday the owner happened to drop in and discovered what was happening.
How will the problem be dealt with? The answer to this question is equally if not more important, since errors may not only place the owner or manager in physical jeopardy but also subject him or her to potential civil liability.
We know of another situation, an auto parts store, wherein the owner admitted he was aware of the fact his long-time employees were stealing, but he allowed the thefts because the employees were judicious in the amount they took each week (the loss was “tolerable,” i.e., affordable). The employees were most diligent about protecting the assets of the store from outside pilferage. To terminate the current employees for dishonesty and replace them with “unknowns” was not an acceptable option for this owner. It was a business decision to stay with the status quo. While the authors would not opt for this option, it remains a business decision for the owner.
Single or even two-store operations can tolerate or survive criminal events if they’re not catastrophic; owners may survive a marginal level of theft which they consider “acceptable.” After all, hundreds of thousands of sole proprietor or family-owned stores have survived throughout the world with only a rudimentary knowledge of and/or without any particularly sophisticated security or loss prevention program in place. But how many didn’t survive? There’s no answer, except, perhaps, too many!
Clearly, though, big box single unit retailers and multiunit operations can’t achieve financial success unless the assets are protected in a systematic, professional fashion.
Before a retailer, large or small, can implement security and loss prevention strategies and the programs to achieve them, some fundamental questions must be asked and answered. These questions fall under two categories: (1) The impact of retail inventory shrinkage or cash losses not related to a criminal act, and (2) inventory shrinkage or cash losses suspected or known to have resulted from criminal victimization.
For clarification purposes, let’s define “inventory shrinkage.” This is the perfect time to ensure this most important retail term is fully understood and thereafter all security and loss prevention losses can be held up to and measured against the term. An “inventory shrinkage” or “inventory shrink” or “inventory shortage” is the difference between book inventory (what the records reflect we have) and actual physical inventory as determined by the process of taking one’s inventory of goods on hand (what we count and know we actually have). So, if our records reflect we purchased 100 bottles of wine, our sales records reflect we sold 60 bottles, and our inventory of actual bottles on the shelf reflects we have 35 bottles, we have 5 bottles unaccounted for, amounting to an inventory shortage of 5 bottles, or 5% shrinkage. We don’t know what happened to those missing 5 bottles.
Now, if during the night someone breaks through the skylight in the ceiling and steals our 40 bottles, we know they were taken. Hence, their absence is not a mysterious or otherwise unexplained disappearance but is considered a known loss but, nevertheless, shrinkage unless and until it is accounted for financially as something other than shrink.
When the Crime Doesn’t Affect Inventory Shrinkage
Our example of the nighttime burglary clearly is one crime which, while initially affecting inventory shrinkage, may eventually be financially accounted for in another category (e.g., known losses replaced by insurance or carried on the books as separate from shrinkage). The store suffers, by virtue of being victimized by a burglar, exactly the same loss as shrink from unknown causes, but the loss caused by the burglar is really more easily managed because we know how that loss occurred. Depending on how known losses are carried on the books determines whether or not they are included as shrinkage.
Say the sale of the 60 bottles was recorded on a POS terminal or cash register, and at the end of the night the cash, checks, and credit card receipts were placed in a bag in anticipation of making a bank deposit the next morning. During closing, a man enters, produces a gun, and demands the bag. In this case, the loss is certainly real, but such loss would never be reflected in the year’s inventory shortage, since the merchandise can be accounted for, and the theft of cash would be reflected in another financial account, but not as inventory shrink.
If the sale of the 60 bottles was handled by an employee who rang the sale but failed to put the money in the register and pocketed the money, the store again has no inventory shortage, only a shortage of cash. Cash shortages have nothing to do with inventory shortages. But if the same sales associate did not record the sale, but just pretended he handled the transaction correctly and pocketed the cash, we would have no cash shortage but would have an inventory shortage!
The bottom line is that the retailer is harmed and suffers a reduction of profitability whether the losses are in the form of cash receipts or pure product; the form of the loss, however, dictates that differing strategies of prevention are required.
Other forms of retail crime victimization which need attention include injuries to customers or employees as a consequence of crime, loss of goodwill or customers, business continuity issues if the store is a victim of an arson attack, and so on.
When Losses Affect Inventory Shrink
What is the shrink or shortage, in terms of a percentage of sales? 1%? 1.4%? 3%? Is it high or low compared to industry averages? Do we know what is causing an above average shrink? What can we do without further assistance to reduce these losses? Do we need professional help?
Before a retailer, large or small, can implement security and loss prevention strategies and the programs to achieve them, some fundamental questions must be asked and answered.
How much can the business afford to obtain professional loss prevention assistance?
What form need such help take?
How are the alternatives determined?
Does the local “merchant’s association” offer any solutions?
Assuming the retailer’s shrink is average or below, and the owner is comfortable with the level of shrink, perhaps nothing more need be done except to maintain vigilance and monitor the shrink for signs of emerging problems.
If, however, the shrink is excessive and above tolerable levels, action is indicated to both prevent further deterioration and reduce current losses.
For the average single-store operation and smaller multiunit businesses, often the most cost-effective approach is to bring in a security consultant for a one-shot review of the business and shrink reduction suggestions. Such an approach may be, depending on budget and business type, nothing more than a half-day walkthrough and discussion with the owner. Larger operations may require a more extensive review, beginning with the owner/manager (and perhaps others) answering a detailed questionnaire about various aspects of the business, followed by an extensive onsite inspection and interviews with both key executives and staff, and ending with a detailed written report by the consultant detailing his or her observations and recommendations.
For those large regional and national chains with existing security/loss prevention staffs, whose efforts senior management feels are less than effective or produce other unintended adverse consequences (e.g., civil damage suits or unfavorable employee reactions), the use of a security consultant is perhaps the only viable alternative.
In any event, narrowing down the causes of excessive shrink (and there are usually more than one) is the first step toward reducing it. This process will often also dictate the type and degree of response required: Will changes in internal policies be sufficient? Or will full- or part-time loss prevention personnel be required? Or does the solution lie somewhere in between?
Losses of cash or product from known criminal attack will probably require a totally different set of potential prophylactic treatment, generally requiring less investigative effort to determine the source and means of the loss and more directed toward hardening those weaknesses (whether physical or procedural) which permitted the attack. For example, consider a burglary which went unreported during its commission because of a failure of the alarm system to signal an intrusion. This situation is normally easily fixed. Once the system itself is determined to be functioning properly, a formalized and systematic procedure for daily testing can be initiated. This system should prevent future intrusions that go unreported to the central monitoring station, who in turn will request police to be dispatched.
How are the causes of loss identified? Aside from those which are obvious (e.g., robbery or burglary), most causes of shrinkage are more subtle and less obvious. Frequently, they require someone with some expertise in loss prevention to discover them and suggest appropriate means to correct the root causes of the problems identified. Aside from paperwork errors or other procedural aspects of handling the business’s financial accounting, more than likely, the causes involve some element of criminality.
Seeking Appropriate Assistance
At this point, the retailer has various options as to how and where to seek help:
1. He may approach a fellow retailer or members of any local retail group of which he is a member and make inquiry of them. However, he may be reluctant to do this, since he may not want to either disclose his problem and/or any shortage numbers. He might also simply make an inquiry as to whether any fellow members know someone who can help him with a problem described by him only in general terms. How quickly he will find a qualified person to help him using this approach is problematic.
2. He can consult the local yellow pages for a security consultant.
3. He can consult the local yellow pages for a private detective.
4. He can consult with any local police department crime prevention officer.
6. He can do nothing and hope the problem solves itself, an alternative not recommended since shrinkage from criminality normally increases over time rather than decreases.
Once a decision as to the approach to be taken is made, we suggest that the owner conduct interviews with at least two of the potential sources of help so that the best “match” is made and all the specifics of the owner’s expectations are understood and the costs connected with the help are fully disclosed and agreed to. Only after this procedure can an owner best select the person or organization to which he will turn for help.
Your authors wrote this book to provide a ready and complete reference to assist retailers of all dimensions in answering the two questions fundamental to security and loss prevention: Who should handle the problem? And How should it be handled? If we can, through this book, help retailers (and professional loss prevention practitioners) answer these questions and provide them with solutions to address their crime and loss prevention–related issues, while simultaneously warning of actions which lead to legal or liability problems, then we’ve achieved our mission.