EDITOR'S NOTE: This is the second in a series of articles discussing a strategic approach to formulating a targeted loss prevention program. The first part appeared in the July/August 2005 issue and can be found in the Archives section of the magazine web site.
I remember walking into the corporate office for the first time. It was my first day at work...a new company, a new position, a new city. I was somewhat intimidated because of the size of the building and the number of associates. I also could not help but notice the age of many of the executives who appeared to be so much older than me.
I arrived at 6:00 a.m. sharp. I wanted to be early, to make a good first impression. After finding my desk, I sat alone for the first hour. Soon the time passed and I made my way to the boardroom for my first meeting. It was nice to see some familiar faces. A number of them had interviewed me just a few weeks before.
After some housekeeping notes, the senior vice president of operations looked in my direction and formally introduced me. He then said, plainly, that I was brought on board to build a professional loss prevention department. More importantly, he said that my immediate task was to develop programs designed to minimize inventory shrink, bad checks, and cash losses, which he described as being out of control. He was insistent that everyone in the room cooperate with me. He then dropped a bombshell as he announced that I was going to develop six to ten loss prevention programs in the next ninety days.
Prior to accepting my new position, I had never formally developed a single loss prevention program on my own, let alone implement a strategic plan for an entire company. I had certainly executed plenty of programs at the store, district, and regional management levels, but had never fully developed a single one on my own. Until that moment I did not realize the responsibility and accountability I now had. Sick to my stomach, I could not wait for the meeting to end so I could go back to my desk, shut the door, and call my old boss for help!
This article will focus on step two of the six steps to a successful loss prevention program. The process includes the following:
- Step 1â€”Problem identification
- Step 2â€”Program development
- Step 3â€”Program execution
- Step 4â€”Comprehensive awareness programs
- Step 5â€”Auditing for compliance
- Step 6â€”Measurement
Over the past few years I have been continuously impressed by the number of senior executives who want to expand their vision and include loss prevention as a vital part of their business plan. We read about it, listen attentively as they speak out about it, and in some cases see them commit to it in press releases and annual reports. The reason for this is obvious. To be truly successful and maximize the profitability of their companies, they have learned that the difference between a successful or failing year could well depend on their inventory shortage and gross margin results.
What is vision?
A vision is a picture of the future that provides clarity and direction through leadership. Whether the vision comes from an individual or a team of associates, people from within the organization must embrace the vision before it can become real and accepted. If it is not shared and embraced by the entire organization, the enthusiasm for the concept will not last.
How do loss prevention executives create a vision?
There are no right or wrong answers to this question or the visioning process, but it is important to note that any strategic plan in loss prevention must be aligned with the company's overall objectives in order to have any chance of success. In addition, most loss prevention executives understand that the vision for their department must be continually emerging, especially with the onslaught of new technologies that are entering the marketplace.
It is also important that loss prevention associates at every level understand that no condition will have a stronger impact on their program or careers than the attitude and support given by senior management. Early in my career this concept had been difficult for me, personally, to accept. After all, like most loss prevention executives, I would pride myself on hiring some of the best people in the industry
and giving them state-of the-art-tools (technologies) to attack shrink and loss. I was always adamant that we in loss prevention were driving shrink...were we not? I have come to realize however, that without senior management's commitment toward the prioritization of shrink prevention, a company's loss prevention program will never be executed to its potential, or worse, not meet its financial objectives. When this occurs, programs are dismantled, people quit or are replaced, and everyone begins asking the same question: How do we build a professional department that can impact our shrink/shortage problem?
One thing is clearâ€”proactive loss prevention executives seem to have a clear vision of what their department will or should look like, and, more importantly, the people, programs, and technologies they need to attack loss wherever they find it. And while there are many loss prevention initiatives that fail to sustain themselves over time, proactive executives have found ways to consistently execute their programs by targeting the root cause and measuring their consistency of execution.
In the beginning, most programs are nothing more than a wish list of technologies or tools that a senior-level loss prevention executive would like to have. In fact, they are hollow words until they are put down in writing, reviewed with key members of the organization, then presented in front of a group of senior executives for approval. This is necessary as capitol expenditures and a budget will be needed to fund the new initiates. Unfortunately, depending on position, most loss prevention associates never see this process or how important it is in developing and executing a professional program.
The question most often asked is, "How does one know what programs or technologies are needed, and, once identified, how do you select the right ones that can achieve the desired results?"
In phase oneâ€”problem identificationâ€”we reviewed multiple ways to identify critical threats, especially those that have the largest negative impact on a business. Once defined and measured, the process of identifying a program or countermeasure becomes clear, especially if the severity of the loss can be measured. Only then can the programs that must be developed and executed be prioritized for presentation to senior-level executives who will ultimately approve or reject them.
Successful LP executives seem to consistently identify and measure the severity of critical threats facing their business. It also does not hurt when these same problems and issues are being brought to the attention of the senior management team. The key to success here is identifying what threats are real, which ones are perceived, and how they can be accurately measured and confirmed. Without measurement (metrics), the likelihood of receiving capitol expenditures and the support from senior staff will be unlikely. And even if approval is given, loss prevention resources could be targeted in the wrong areas.
Take for example the case highlighted in the previous article involving contracted cleaners and overnight crews. As you may recall, these individuals were stealing tens of thousands of dollars in merchandise each week because a store acquired through acquisition did not have a functional alarm system. At first glance, the countermeasure seems obviousâ€”fix the store's alarm system. Unfortunately, it is much more complex than that. This single case became a red flag because of the methodology used, the severity of the loss, and the ease at which this group compromised the store.
Was this an isolated incident? Could this same problem be occurring in other locations? Were we monitoring store openings and closings? Did we know if our store systems were being alarmed at night? Did this new group of stores, acquired through acquisition, have alarm systems that were functional? Had any others been compromised over the past thirty, sixty, or ninety days? These questions and more had to be asked because of a single internal theft case.
The answers received were disturbing and revealed a much larger problem. The vast majority of alarm systems were not installed or programmed properly. No one was monitoring opening and closing reports because the capabilities were not there. In fact, most stores could not alarm themselves even if they wanted to. Making matters worse is that no one knew how many stores were armed compared to those that were not, which created another exposure, the safety of the associates working inside between 11:00 p.m. and 7:00 a.m. What would happen if an overnight burglary occurred and the burglars ran into our associates? The solution, of course, was fix the alarm system. But the scope of the problem as identified was much more severe because it affected all stores acquired through acquisition, not just a single location. This was eventually verified and statistically measured through a manual process of tracking internal theft cases involving overnight fill crews that were increasing at an alarming rate.
As a result, new systems would have to be installed, which meant an alarm scope of work had to be developed. Equipment and manufactures would have to be identified, and a vendor selected that could install and monitor these stores located throughout the U.S. How would we decide what stores would be upgraded first and last? What would happen if someone were injured in a store burglary that was not upgraded, and we knew they did not have a functioning alarm?
That was only the beginning. How do we measure quality of installations? How do we ensure proof of deliveryâ€”are we getting what we are paying for? Are the systems operating the way they were designed? Who is going to train store personnel on use? Who will issue alarm codes? And more importantly, who will manage this process, especially with the high turnover and relocation of store personnel?
Seems like a lot of work over a single internal theft case, but it had to be done in order to prevent reoccurrences in all stores and protect the associates inside. At the beginning of the year, overnight crews accounted for 26 percent of all internal theft cases in the acquisition stores. After the systems were upgraded or replaced, they dropped to one percent.
To top performing loss prevention executives, these types of problems and their solutions become second nature. Within weeks of starting a new job or assignment, they begin to develop their strategic plan based off the problems they have identified and measured. Before long, a list of solutions or programs based on the frequency and severity are identified and prioritized. These same programs will be aligned with the company's corporate strategy and vision, which may include reducing inventory shortage, protecting customers and associates, improving morale, or decreasing payroll.
How do loss prevention executives know which vendors to select, what programs are effective, and what problems to expect if they execute them?
They know this because they have continued to stay up-to-date on retail loss prevention best practices. In fact, many will adopt an attitude that their department and the programs they develop will be state-of-the-art and best of class in the industry. In addition, they seek out and develop relationships with their peers who have a reputation for implementing state-of-the-art programs that are also viewed as cutting edge.
What programs typically come under immediate consideration?
- Reorganizing the LP department
- Risk assessment program by location
- Alarm system upgrades
- Digital CCTV
- POS exception-based monitoring
- Loss prevention by environmental fesign
- Anti-shoplifting strategy
- Training and certification program
- Loss prevention case management system
- Audit program
- Pre-employment screening
- Refund program
- Distribution center controls
- Electronic article surveillance (EAS)
Remember, these solutions are hollow words at this point and will not become full-blown programs unless approved and embraced by all levels of management, especially the senior staff. Only then can work begin to develop and execute them. And although it would be impossible to comment on all of the above, we can look at two programs that are critical to any organization and what must be taken into consideration, when developing them.
It's a People Business
Proactive loss prevention leaders have recognized that their success or failure will almost always fall on the shoulders of the people they attract into their department. Those who have been truly successful have not only managed to attract top talent, but have been able to keep it by growing it from within.
It is not accidental that first on our hollow list is "loss prevention department reorganization." Whether reinventing a loss prevention department, building a startup program, or taking over one that has been ineffective, everything seems to evolve around the organizational structure of the department. Once finalized, the focus will shift on people and the need to hire them.
Smart, confident executives will always strive to hire people better than they are. They search the industry to hire individuals that are so extraordinary, that if they bring them into the organization, they will most likely be creating the day-today challenges, rather than responding to them.
These same executives look for world-class learners who are professional, have a track record of success, and above all have an insatiable desire to become smarter, in all areas of the business, not just loss prevention. They have the ability to figure out what needs to be done better, quicker, and more efficiently than their predecessors, and they can clearly communicate this message to their immediate supervisor or their operational counterparts. Unfortunately those executives that are insecure tend to hire just the opposite types of people, and it shows in their department's performance or lack thereof.
Preparing a loss prevention organization chart, although challenging, is not difficult. Attracting and developing the talent needed to execute the department's strategic plan/vision is. How does this get accomplished?
1. Set extremely high expectations and standards for the people in the department.
2. Set the expectation that professional development is not optional; it is a necessity.
3. Place a strong focus on cutting-edge technologies and programs.
4. Encourage diversity from within the organization's talent base.
5. Develop a succession plan that focuses on promotion from within.
6. Hire one, work them like three, and pay them like two.
Exceptional loss prevention associates at any level want to work for organizations or leaders that set extremely high standards, promote professional development, place a strong focus on cutting-edge technology, encourage diversity, and promote from within. It also doesn't hurt to pay higher salary and bonus than your competitors. Those that follow the six points above can afford to pay their people more . . . much more . . . because they will have attracted the best people in the industry who will do twice the work as a marginal performer. They will also have less of them, which will be noted by everyone in the organization, especially at budget time. Simply put, exceptional talent will do more with less and achieve incredible results.
I am continuously amazed at how many talented individuals are in our industry waiting to be recruited or promoted from within. They possess all the skill sets described above, but for whatever reason have been overlooked and never given an opportunity to be successful or take on added responsibility. For the record, most of my personal success has come from identifying these individuals, especially those in stores who I could promote into positions of more responsibility. Once promoted, they become extremely loyal to the department, its mission, and, more importantly, the company. In the end, if you hire good people they will not push you out, they will push you up.
Creating a Culture of Honesty
A number of years ago I attended a workshop at a major loss prevention conference that was promoting POS exception-based technology. During the workshop, the director of loss prevention reviewed and discussed the need for the technology, how they worked with information technology (IT) to install it, and the measurable results achieved after implementation. The graphs and charts depicting the large increases in front-end theft cases were truly impressive. Probably the most interesting slide, however, depicted the increased number of loss prevention associates that had been hired to detect, investigate, and resolve these cases. In fact, an entirely new loss prevention organization chart had emerged depicting "investigators" as a result of the new POS exception-based software program. This, it was explained, was due to the large increase in employee dishonesty cases that had to be investigated and resolved.
I have always felt that no single factor distinguishes the role of a successful loss prevention executive as clearly as his or her ability to create and communicate a coherent vision of their department's purpose and direction. As I sat through this workshop, it became clear to me what the purpose and direction of this individual's department wasâ€”generate associate dishonesty cases, specifically at the point of sale. Not only had this become the purpose and direction of the department, but the cases themselves were also being used for the return on investment (ROI). This included both the purchase price of the new software as well as justification for the additional staff.
I wondered if generating large numbers of internal theft cases aligned itself with the company's strategic vision set forth by his executive group? As stated earlier, I have always felt that the strategic plan in loss prevention must align with the company's overall vision of improving the business. And although I did no know for sure, I would guess that increased sales, reducing employee turnover, increasing productivity, decreasing payroll, and increasing employee morale were all on the executive management team's list. One could argue that the vision of this particular LP executive may actually be in direct contrast to his company's executive management team.
Please understand that I am not being critical here. In fact, as a loss prevention executive, I understand the need for POS monitoring tools and the role they play in reducing inventory shortage. In fact, I have been fortunate to work for companies that have given me an opportunity to assist IT in developing them internally as well as purchasing them from outside vendors.
Creating a foundation for true loss prevention, however, must go further than installing software and catching dishonest associates. In fact, increasing the perception of detection has long been noted as the single most effective prevention method in our industry. POS exception-based software, for example, does little in preventing internal theft if those at-risk do not know it has been installed. In this case, the cashiers, service desk attendants and even salaried managers were the "at-risk" group. The same can be said of controls. They do little in preventing acts of dishonesty if those they are targeting have no idea they are there.
Because the number of internal theft cases was driving the ROI, it was actually in this executive's best interest to keep the new software program a secret to the at-risk group. In my opinion, this is shortsighted and what could be described as a one-dimensional reactive response to combating front-end shrink. It may also explain why these types of programs, like many others in our industry, fail to sustain themselves over time.
Perhaps a better way to attack the problem would be to identify the root cause. And although I could not be sure, I would guess that because large numbers of internal theft cases were occurring on the front end, there were issues involving lack of controls at the point of sale. I already knew that an awareness program targeting the at-risk group had not been developed or executed, because I asked. This meant cashiers were not aware of the capabilities of the new POS monitoring system, let alone that it was being used by a newly trained group of loss prevention investigators. I also learned that this particular company had no formalized preemployment screening program, either criminal background checks or integrity testing, for newly hired associates because of the cost associated with these programs. I was informed this would be a human resource issue and would not involve the loss prevention department.
As I sat through the final minutes of the presentation, I could not help but think about how many stores had been disrupted by the installation of this software. In some cases, ten to fifteen cashiers, per location, were identified, terminated, and prosecuted. This had to leave an under-staff situation on the front-end. I also could not help but think how many parents received calls from their teenage sons and daughters, as they were being arrested and charged with theft, or in some cases worse, embezzlement. How many of them would have to carry these criminal convictions with them for the rest of their lives?
Had the installation of the new POS exception-based software helped this company or hurt it? More importantly, had the program actively engaged the associates in working with loss prevention and their individual stores to minimize front-end shrink, or had it turned them into adversaries? I will let the readers decide.
Like most LP issues, front-end shrink is a multifaceted problem that needs multifaceted solutions. And although a quick one-dimensional fix will be effective in the short term, it may not have the long-term results a company might expect.
If the program was executed in conjunction with tighter controls at the point of sale, an aggressive awareness program targeting the at-risk group, shrink committees formed in each store to help identify and resolve front-end shrink, and a pre-employment screening process designed to weed out those with deviant behaviors, the financial impact could be dramatic and sustainable. In addition, turnover will go down, morale will go up, and productivity will increase.
One word of caution for anyone looking to implement this multifaceted approachâ€”if executed properly, employee dishonesty cases will not increase, they will decrease, oftentimes dramatically. What will follow, however, will be a measurable decline in inventory shrink as the process of creating a culture of honesty on the front end emerges.
Armed with information from the first two steps, it is now time to proceed to phase three, which some would argue is the most important step of all, program execution.
DAN FAKETTY is the former vice president of loss prevention for Harris Teeter. He has over twenty years experience in retail loss prevention, including positions as director of LP for SuperKmart and regional LP manager for Shopko Stores. Faketty is the former chairman of the Food Marketing Institute loss prevention committee, has served on the National Retail Federation's advisory council, and is a member of the editorial board of LossPrevention magazine. He is currently developing a retail loss prevention degree program through Northern Michigan University. Faketty can be reached at 704-301-7811 or firstname.lastname@example.org.