Learn more about the common types of Theft & Fraud and way to combat and prevent them.
What is Loss Prevention and Asset Protection?
Loss prevention, also referred to as Asset Protection, is a coordinated effort by a company to take proactive steps that will help reduce shrink and increase profitability. While typically associated with theft and fraud prevention, loss prevention also extends to day-to-day operations and logistics, such as reducing administrative errors, preventing unnecessary waste, or identifying supplier issues.
Loss prevention responsibilities may also include sales-related activities, such as identifying sales reducing activities, and boosting promotional performance. Loss prevention may also include Case Management, which primarily focuses on incident and investigation documentation.
What Are The Basic Forms of Loss?
Shrink, or shrinkage, refers to any unknown or unaccounted loss of inventory. It is the difference between the optimal sales profit from the expected inventory and the actual profit earned from sold goods. Examples of shrink include: internal or external theft, fraud, waste, human error, inefficient processes, and vendor issues. In its simplest form, shrink can be calculated as follows: Shrink Value = (Optimal value of products) – (Actual value of products).
Internal Theft and Fraud
Internal theft and fraud refer to the practice of dishonest employees intentionally stealing from the company they work for. This is also known as employee theft. Internal theft can take many forms, but some of the most common include: sweethearting, product theft, gift card scams, drawer skimming, and customer collusion.
External Theft and Fraud
External theft and fraud occur when someone from outside the organization intentionally steals from a company. External theft occurs in many ways, such as shoplifting or self-checkout fraud.
Waste, or spoilage, can be defined by items that are damaged and/or unsellable. This is often caused by inefficient processes within the supply chain or at the order point. Common types of waste include spoiled food items, damaged packaging, or excess volume.
Loss Prevention and the Omnichannel
Omnichannel models are necessary, but are not necessarily profitable
Over 79% of household budgets that are designated for online shopping have remained online even after stores reopened post-lockdown. However, digital journeys are susceptible to significant margin loss. This loss is due to the additional costs associated with fulfillment, including packing, shipping, and storage. Retailers lose an average of 3-8 margin points when consumers utilize a digital journey to make a purchase.
Additionally, omnichannel operations are not optimized. According to one research report, 37% of retailers say they have optimized Ship from Warehouse, while only 16% have optimized BOPIS, 26% Ship from Store, and 27% Local Delivery.
In omnichannel, shrink can occur at all levels
From ecommerce to BOPIS, curbside, and BORIS, companies are susceptible to shrink at every level and in turn, must develop an overarching loss prevention strategy that accounts for shrink across business functions.
Third party delivery services
Third party delivery services can be difficult to monitor without having proper systems in place. They can also have a significant impact on inventory management. While an organization cannot always have a finger on the pulse of inventory when working with third party delivery services, deeper research can be performed into potential providers and partnerships can be intentionally limited to only include companies that have sufficient loss prevention protections in place.
Much like the loss of tangible goods in a retail space, the omnichannel allows for a variety of opportunities for fraud. Common types of omnichannel fraud include:
Retailers and grocery stores are still optimizing these relatively new channels and the controlling losses will continue to be a challenge. This dictates that loss prevention be viewed as an evolving practice and not a one-time solution. As technology continues to evolve, new systems will need to be created in order to stay ahead of areas for potential loss.
What is Total Retail Loss?
Total Retail Loss (TRL) is a concept that helps retailers understand existing and future risks and make targeted investments to improve their bottom line. This relatively new concept recognizes that loss happens across all business units, including store operations, management, supply chain operations, IT, and more. The TRL approach identifies the total amount of loss across all operations so actions can be taken to recognize, address, and reduce loss. Retailers can now analyze loss across the entire organization from internal and external perspectives, from store level, supply chain, corporate, and vendor operations.
History of TRL
To provide background into the history of TRL, Professor Adrian Beck joined forces with the Retail Industry Leaders Association (RILA) in 2016 to propose the idea of “Total Retail Loss” in his paper, Beyond Shrinkage. This concept was a breakthrough in the LP field and introduced TRL to a wider audience. Beck and RILA reconnected in 2019 to publish a follow-up piece titled, “Total Retail Loss 2.0: Moving Beyond the Theory'' that explored the retail industry’s adoption of the concept and offered ways to overcome the challenges of adoption. The paper also provided both an introductory framework and high level tips on getting started.
Beck outlined how modern retail operations have numerous opportunities for loss throughout operations and until they implement the Total Retail Loss (TRL) concept, losses will continue to eat away at profits.
How To Measure TRL
As Beck interviewed retail executives for his study, it became widely understood that unless the loss is measurable, it is difficult to understand its impact on an organization. The TRL concept offers multiple ways to measure loss, including the impact of assets, cash, and margin losses on a business’s profits. Beck includes over a dozen types of losses to calculate, including pricing errors, delivery errors, insurance claims, stock liquidations, and vendor charges. These factors help organizations reveal the extensive opportunities to measure TRL across retail business units.
Primary Components of a Loss Prevention Program
From the executive team to in-store cashiers, all employees at an organization will be influenced by the implementation of loss prevention programs. Taking into consideration how every employee and outside organization, such as law enforcement or insurance companies, will either influence or be impacted is necessary for the program to reach its full potential. Having members of a team on-board for a loss prevention program is helpful in achieving the adherence to program requirements; creating incentives and aligning the goals of the program with the goals of employees is a beneficial way of generating wide-spread support.
There’s a broad range of technology available to support both an organization’s day-to-day needs and overarching plan for loss prevention. Examining the use cases of each piece and understanding how it will impact a loss prevention program is vital to its success.
The origins of loss prevention consisted mainly of tools like cameras and clunky asset protection devices. In recent years, the development of new tools like electronic article surveillance (EAS) tracking and radio frequency identification (RFID) technology allow LP teams to adopt a more exhaustive approach to their loss prevention strategy.
Policies and Procedures
Developing a loss prevention or asset protection program is most useful when it is carefully documented and communicated with appropriate training and education materials made widely available. Strong procedures open the door for organizational leadership to establish a baseline for LP metrics and iterate to improve on them over time.
The 3 A’s of Loss Prevention - Analytics, Alerts, and Action
Loss prevention analytics provide multifaceted and detailed insights into the operations of an organization to give Heads of LP the information they need to assess the current state of the business. Popular analytical tools utilize exception-based reporting and machine learning to support the functions of loss prevention and asset protection. As every company comes with its own set of unique needs, loss prevention analytics tools can be tailored to the requirements of the business and offer tools like predictive analytics, prescription resolution plans, and customized dashboards.
Because efficiency is a key indicator of success in loss prevention, automatic alerts save businesses significant time by sending notifications when unusual activities occur. Not only are alerts valuable for catching irregularities and signs of potential loss before they get out of hand, they also remove the need to sift through millions of POS records to catch individual occurrences of these events. If an alerting system can be combined with analytics tools, it will allow for a comprehensive overview of losses and assets that will allow an organization to take calculated action as needed.
To best combat theft, administrative errors, fraud, and other common factors of loss, analytics and alert systems can be leveraged to take decisive action. If acceptable thresholds for loss are exceeded, prescriptive actions can be automatically delivered to managers to provide them with step-by-step documentation on how to mitigate these issues with full regulatory compliance. These actions may include improved training processes or increased accountability.
Risks of Having an Underdeveloped Loss Prevention Strategy
Loss prevention has become increasingly important with the recent uptick in profit loss due to fraud. Organized retail crime (ORC) costs retailers $68 billion annually in lost products, according to a 2021 report. In addition to consumer theft, employee theft is also on the rise, motivated by challenging circumstances with personal finances. Lastly, inflation has led to increases in costs on everything from inventory to fuel, making nearly all goods more expensive. Although retail sales were up 17.9% in 2021 over 2020, retailers are not experiencing the same increase in margins.
As a result, the risks of having an underdeveloped loss prevention strategy are especially consequential.
Lack of insights
An underdeveloped strategy can lead to a lack of insights into where the greatest areas of loss are occurring within an organization. Without knowing where the damages are coming from, it’s difficult to accurately assess the situation and find the most effective course of action.
A strong loss prevention strategy demands decisive action and solutions that are able to mitigate fraud in the short term and prevent further problems in the long term. The risks of having an underdeveloped strategy vary in severity, but in the event that fraud or theft is taking place, the consequences can add up quickly.
Time to solution
If the systems an organization currently has in place take too long to determine the source of profit loss, the extended time between identifying the issue and creating a solution will create further losses and become more difficult to solve the longer the problems subsist.
Benefits of Loss Prevention
#1 - Mitigate Fraud
By implementing a comprehensive loss prevention program, fraud can be mitigated by identifying and stopping employee or third-party theft before the behaviors escalate. Identifying patterns of those behaviors early on gives companies the opportunity to adjust policies, train employees, and terminate fraudsters or vendors before the issue is repeated.
#2 - Discovering Hidden Sources of Loss
Hidden sources of profit loss are often found by analyzing common fraud schemes, training processes, and procedural issues. Understanding the sources of loss creates an opportunity to build prescriptive courses of actions to both remedy the current problems and set systems in place to decrease the likelihood of profit loss in the future.
#3 - Become an Authority in Operational Insights
Loss prevention professionals play a key role in the profitability and long-term health of a company. According to one research report, 81% of loss prevention or asset protection professionals agree that their team is often or always the go-to resource for fast, accurate reports about any operational issue.
Having an extensive LP program in place provides coverage across organizational departments, including supply chain, in-store activities, eCommerce, health and safety, and vendor management.
How To Build An Effective Loss Prevention Strategy
While the best loss prevention strategy will be one that is customized to meet the demands of an industry and unique needs of the specific organization, there are core principles that can be found in any strategy that act as a good place to start.Identify Loss Patterns Early
Automate data analysis procedures to catch patterns of profit loss early. This should be a foundational piece of any loss prevention strategy, as doing so will promote more effective allocation of resources. There are several ways to identify patterns early, with one of the most valuable being to target common employee profit-draining activities and testing automation activities to expose those irregularities in the data. Once the trend has been identified, procedures can be refined and metrics can be put in place to track performance.Refine Procedures and Track Performance
Defining procedures for handling cash and tracking online revenue reduce the risk of cash loss stemming from theft or error. The inability to manage cash flow is often an early indicator of poor operational efficiency, so it’s valuable to refine procedures early on and track performance on a consistent basis.
Additionally, it is important to establish programs that promote accountability and hold employees at all levels to a certain standard of performance. To stay organized, companies should create a cash flow dashboard or a set of custom reports that allow managers and executives to collaborate and stay up to date on the procedural behaviors of the company.Use Data To Improve Training Procedures
Data can be used to improve training procedures by analyzing sales, performance, and loss prevention metrics to create a training protocol around the concept of the “ideal employee.” One of the best indicators of employee success can be found through identifying the top performers in a company and understanding what habits, routines, and actions they are embodying in their role.
Labor costs are a major operating expense that can be maximized by boosting productivity across a workforce. Data can be combined with labor planning to create the most potent processes for optimizing the productivity of all employees in an organization. There are multiple elements to the productivity equation, all of which hinge on the goal of getting the most value out of a labor force. It’s important to make sure that productivity measures do not open the door for profit-draining pitfalls, such as overstaffing, understaffing, or “stolen time.”Implement Procedures For Manager Follow Up
Following up on areas of identified loss are just as important as discovering the issues that are taking place. Creating a standardized follow-up workflow provides managers with a clear course of action to remedy problems without requiring frequent intervention from higher levels. It is also helpful to track the incident history of employees to more easily identify recurring issues.Create Accountability By Clearly Communicating Policies And Repercussions
Strong communication is key when developing a loss prevention strategy. One of the most common challenges faced by organizations is a lack of alignment between operational and employee goals. When organizations take the time to understand the goals of employees, operations teams can tailor incentive programs to help drive the desired results.
On the other end, implementing clear repercussions for employee activities that cause profit losses allow organizations to create clear standards and hold team members accountable.
It is important to understand that there is a fine line between optimizing efficiency and coming across as overly strict or unreasonably overbearing to employees. In order for a workforce of any kind to thrive, it is the responsibility of operations teams to find ways to drive the intended outcomes while maintaining employee morale.
Continue to Refine The LP Strategy
As new areas for improvement are identified and prescriptive actions are put in place, organizations will be able to track the progress of LP programs over time. It is useful to look at loss prevention as a long-term endeavor that will include frequent iterations as further data and insights become available. Continue auditing loss prevention reports to maximize profits over the long term and strive to find areas to fine-tune processes that will improve profit margins by reducing loss at every level.
Loss prevention is an ever-evolving practice that requires frequent iterations and sustainable solutions in place to prevent profit loss over both the short and long term. In order for an organization to maintain operational efficiency as it scales, the need for implementation of a comprehensive LP program is clear. Focus on finding solutions that combat the basic types of loss. Create a holistic approach that covers both in-store loss as well the increasingly common opportunities for loss across the omnichannel. Understand the primary components of a loss prevention program and allocate resources to researching and understanding the most effective path for putting a solution in place that is tailored to the unique needs of your organization.
If developed with a strong focus and implemented across an organization, loss prevention and asset-protection measures will allow companies to limit loss and maximize profitability in service of long term success.
Learn more about the common types of Theft & Fraud and way to combat and prevent them.