The Retail Loss Prevention Tool Bag

Oct. 27, 2008
Retail loss prevention executives have a distinct advantage over many other corporate security personnel in that they can show companies their return on investment and their contribution to the bottom line.

Retail loss prevention executives have a distinct advantage over many other corporate security personnel in that they can show companies their return on investment and their contribution to the bottom line. Loss prevention can often provide clear measurements of actual loss reduction and productivity measures.

According to the University of Florida 2003 National Retail Security Survey prepared by Dr. Richard Hollinger, retail loss prevention executives reported that their companies incurred an estimated $33.6 billion dollars in inventory losses in 2003. This figure reflects the amount of merchandise lost to employee theft, shoplifting, vendor theft, and administrative and paperwork errors. It does not include the retailer's losses of cash due to employee theft, robbery, burglary, check fraud, credit card fraud and fraudulent customer injury claims.

Over the past three years Dr. Hollinger's Retail Security Survey has reported that inventory shortage losses as a percent of sales have declined, as shown in the chart below. Although different survey respondents participate each year, this study provides us the best available information on inventory shortage trends. The adoption of advanced loss prevention technology solutions is probably the greatest contributor to the reported yearly improvements. Let's survey the loss prevention technology landscape to identify the new and improved tools in the LP executive's tool bag.

Digital Recording/CCTV
Retailers have begun to take full advantage of digital video technology to reduce theft, check and credit card fraud and to combat fraudulent liability claims. By connecting cameras to their computer networks, retailers can now remotely access stored or real-time video to investigate specific events. The ability to view any store on the network at any time helps loss prevention executives identify theft and fraud, and it also opens up options in arenas beyond loss prevention. Some retailers use this capability to identify operational deficiencies in stores.

Interfacing the digital video system with the other systems, such as alarm systems and point of sale cash register systems, enables it to couple video with real-time events. As an event occurs, the system can alert a user via e-mail or pager on a real-time basis. Retailers' current uses of digital recording are just the tip of the iceberg. Tying the tool to receiving, time and attendance, cash office, distribution systems, price change systems, or inventory control can provide retailers the opportunity to impact loss as it occurs or even in a predictive manner.

Advances in video software technology will impact the loss protection practitioner's ability to investigate and resolve incidents of theft in real time and after the fact. Imagine if an organized retail crime group came into a store and methodically began to remove merchandise from an entire shelf, rack or series of peg hooks. The changes within the scene captured by intelligent video systems would alert loss prevention to immediately respond. Other advances in video software technology will enable the investigator to discover changes in video scenes and then quickly backtrack to identify the cause of those changes and the people involved. The ability to use digital video systems for object tracking and identification are here now.

POS Exception Technology
The point of sale (POS) or merchandise return is a significant area of retail loss. Retailers use POS systems to not only track sales but also to track inventory on hand. Sales and return data logged into the cash register is vital for the retailer and the loss prevention practitioner. Losses at the POS may occur by a number of methods, such as passing of merchandise without entering it into the POS, void manipulation, refund fraud, under-ringing the price of an item, check fraud, credit fraud, refund fraud and cash theft. To combat POS losses, retailers have integrated video with high-powered exception-reporting tools that allow them to quickly identify theft or fraud and react to it. No longer do retailers need to personally see the incident occur, or wait for the bank or a customer to call them to report a loss. Investigations now begin upon the first or second identified irregularity. If the system reports a cash shortage or a high number of voids tied to a specific sales associate, it will alert an investigator. POS exception systems can even initiate an alert if a certain credit card is swiped in the POS reader, and then subsequently hand keyed later by the same sales associate.

Credit Card Authorization Technology
Retailers continue to seek new channels for sales, and one of the fastest-growing retail segments is Internet sales, or e-commerce. Most retailers are no longer just bricks and mortar. Many are clicks and mortar as well, and many others are just Internet sales without physical stores. This new opportunity brings with it new methods of fraud and loss. Protecting retailers and consumers at the point of purchase is critical for Internet transactions. In the past, retailers could validate a purchase by comparing the billing address to the cardholder address, but fraudsters have found a way around that system. Retailers are now using sophisticated fraud and attack detection software to identify known fraud methods and to quickly detect new fraud patterns.

Merchandise Return Authorization Technology
Return fraud costs retailers $13 billion a year. The KingRogers study "Customer Returns in the Retail Industry 2004" shows that retailers had an average merchandise return rate of 8.5% and estimated that 9% of those merchandise returns were fraudulent. Many retailers are realizing that impacting merchandise return fraud is a major opportunity to protect their bottom line. Implementing authorization systems rather than relying on people to enforce policies is vital to the retailers' success in deterring fraud. The newest evolution in merchandise return authorization systems is electronic capture of driver's license data coupled with validation of the authenticity of the driver's license. In the near future, a shared database, somewhat similar to those used for check and credit card authorization, will make it more difficult for the "bad guys" to profit from merchandise return fraud.

Employee Selection Technology
According to the 2003 National Retail Security Survey, an estimated 47% of inventory shortage was caused by employee theft. While this may be arguable, employees do have greater access to inventory than customers. More important, employees know how the retailer controls the inventory. To combat the losses caused by employees, retailers are proactively attacking the problem before it becomes a problem. In other words, they are much more careful about whom they hire. Retailers have begun to use electronic hiring kiosks that speed up the hiring process while including key components such as integrity testing and background screening. They use shared databases to identify employees that have been involved in theft or fraud while employed with other retailers. The kiosks make this information available while the applicant is completing the application form.

Shared Intelligence Management
As more retailers capture data through case management systems, there is increased interest in sharing that data within the industry. Today case management systems are far more advanced than just an on-line file folder. Systems today enable the integration of video, reporting, analysis tools, and the ability to tie incidents together in order to identify suspects. Regardless of the type of case management system, shared databases are designed to accept information from very simplistic to very sophisticated case management systems.

Electronic Article Surveillance & RFID
Many retailers have used electronic article surveillance (EAS) as an essential component of an inventory shortage prevention program. Enhancements to EAS technology enable retailers to better manage these systems by allowing them to more accurately track the times, types and responses to alarms.

What began with EAS may evolve into exciting features of RFID (radio frequency identification) throughout the retail supply chain. Today RFID is being used at both the pallet and master carton level within some areas of the supply chain. It will eventually become affordable enough to uniquely identify each item in the entire supply chain, from point of manufacture through inventory tracking and point of sales systems, to the validation of the authenticity of a merchandise return.

The opportunities for security to take advantage of this emerging technology are exciting. For example, investigators will be able to identify ownership of merchandise stolen or diverted from the supply chain. EAS will become a component of merchandise managed through RFID technology within the store or building.

Supply Chain Integrity
Prior to 9/11, shippers, carriers and retailers were concerned about cargo theft or the illicit removal of products from the supply chain. Today, while that concern has not diminished, of equal or even greater importance is the illicit introduction of things like weapons of mass destruction or bioterrorism into the supply chain. A WMD could be detonated before the container carrying it arrives at the retailer, or it could be discovered after it arrives at its destination. The impact of such a disaster would be of significant magnitude to the supply chain, the brand and image of the retailer, and the nation's economy.

C-TPAT (Customs-Trade Partnership Against Terrorism), Operations Safe Commerce and the Container Security Initiative are examples of programs and processes enacted since 9/11 to improve the integrity of the supply chain. The technology for tracking the whereabouts of containers carrying cargo has been around for a number of years. This technology has more applications for managing logistics assets than it does for the security of the cargo. Today, however, covert cargo tracking technology has emerged, allowing the shipper, the carrier and/or the retailer in-transit visibility of their cargo anywhere in the supply chain. For example, an investigator might place one of these devices inside a carton being shipped via a highway carrier inside a 53' trailer. If the cargo is removed from the container, the tracking device follows the cargo, not just the container.

The supply chain is another area where shared investigative intelligence databases are making a meaningful impact for their members, from manufacturers/shippers, carriers, to retailers and other end-users.

Risk Analysis Technology
Various risk analysis technologies exist to provide retailers better management over their supply chains and their stores. These technologies enable the retail loss prevention practitioner to better allocate security resources, both capital and human, to maximize protection, efficiencies and productivity. Each of these improvements in operations directly affects the retailer's bottom line.

Retailers want customers who want to spend money in their stores and on the Internet. Customers want to shop where they feel safe, where they can find the merchandise they are looking for and it is available at the time they want it, where prices are kept low because the retailer is proactive in controlling losses, and where they are not exposed to identity theft risks. The relationship between the customer and the retailer is based and built upon trust.

Loss Prevention is key in creating and maintaining that trust. New loss prevention technologies enable the retailer to prevent and identify losses much more efficiently and protect the precious customer the competition is attempting to lure away.

King Rogers, CEO of KingRogers International, retired in early 2001 after almost 17 years as vice president of assets protection for the Target Corporation. Mr. Rogers has served as chairman of the International Mass Retailers Association Loss Prevention and Audit Committee and is currently on the board of the National Cargo Security Council.

Ben Guffey, CPP, is president of KingRogers International. Mr. Guffey has more than 26 years of experience in retail loss prevention, including 22 years at the corporate LP director or vice president level. He was the vice president of loss prevention for Kmart Corporation and Richman Gordman Stores. He served on the National Retail Federation Loss Prevention Advisory Board and the International Mass Retail Association's Loss Prevention Steering Committee.

Anne Markle, vice president of KingRogers International, was director of assets protection operations and director of loss prevention for the Western United States for the Target Corporation. As the director of operations, she oversaw technology, merchandise protection, corporate security, background checks, operational integrity and shortage reduction, expenses, training and communication.