Loss Prevention And Protection

The 1990s were about efficiencies. At that time, many retailers focused on improving distribution systems and streamlining operations. As retailers become more efficient, they are focusing on less obvious areas of concern in their overall operations. Although shrink in a retail operation only accounts for 1% to 2% of a retailer's business, that loss goes straight to the bottom line. If you have $1 million in shrink, you are losing $1 million in pure profit. For this reason, loss prevention (LP) software is gaining popularity among retailers like G+G Retail, Inc. (New York), a junior specialty retailer that operates 563 Rave, Rave Girl, and G+G stores across the country.

Cecil Frazier, director of loss prevention at G+G Retail, used to play detective the hard way - manually. But with the help of Fraudwatch software from Triversity, Inc. (Toronto), the retailer has decreased its cash frauds and improved its inventory levels. In the following Q&A forum, Frazier and Addison J. Chan, VP of business development, loss prevention, and ASP (application service provider) solutions at Triversity, discuss how the benefits of LP software extend far beyond the cash register.

1. How many retailers are still using paper methods to track loss?

Addison J. Chan: Most of them. Using computer technology in LP is relatively new. Average LP staffs use CCTV (closed circuit television) or alarm technology, but they still use paper files to track suspicious activity. The key is to produce a package of evidence for the police. By using a product like Fraudwatch, the LP staff can help an investigator build a case against a fraudulent employee, and the amount of actual research is minimized.

2. How long would it take your LP staff to catch someone?

Cecil Frazier: The problem was our success was hit or miss. Unless we were in a store and witnessed the fraud occurring at the register, all we had to go on was monthly store reports. By the time we would receive a report, we were already 35 days or more past the day the crime occurred. We knew what to look for, but we needed to pinpoint it in a timelier manner.

3. What information is necessary for retailers to track loss at the POS (point of sale)?

Addison J. Chan: It is easy to recognize cash fraud and act against the fraud when cash registers don't balance. The LP department wants to know why registers balance at the transaction level. POS exception-based LP solutions are intended to find fraud even when everything balances. At the very minimum, retailers need a detailed transaction log (t-log). This contains item, pricing, and discount information, as well as item corrections and payment methods. Many retailers generate this information at the store level but don't pull it back to their head offices.

4. How difficult was it to track loss across 563 stores?

Cecil Frazier: I have looked at transaction reports for 10 years, so I knew what to look for and what the patterns were for specific stores. But, as we grew, it became more difficult to teach a new person how to look at a report the way I do. For example, in an average store, high numbers of returns would be a red flag for fraud, but certain stores might have a lot of returns because they don't have enough fitting rooms. Customers in those stores buy items, try them on at home, and then bring them back, causing honest returns. With so many stores, it is hard for a person to keep all that information in his head. Consequently, we weren't being consistent in determining our loss.

5. Why did you choose Fraudwatch?

Cecil Frazier: We were already using Triversity's POS software when the company approached us about its LP product. After a few initial discussions, I realized the company's software was in line with the information we determined manually. What we needed, and what Triversity offered, was an exception-based system that red-flagged suspicious patterns. Now, if our stores process 10,000 transactions a day and I only want to look at 10, I can do that. It was like the company built the exception reports based on my brain.

6. Can any size retailer benefit from loss prevention technology?

Addison J. Chan: Absolutely. And since the software is available via the ASP model, both small and large retailers find it an attractive investment. A popular way to approach it is to use LP software through an ASP first, almost as a staging environment. We take on the responsibility of hosting it for retailers, thus alleviating up-front software installation hassles while they learn how to use the software. Then, once they see some results, retailers can choose to purchase the system, which is just a matter of shifting the responsibility of the operation inside their firewall instead of farming it out to a third party.

7. How does the ASP model work with a loss prevention system?

Addison J. Chan: The stores' POS information is delivered to the system through a secure FTP (file transfer protocol) site. We convert the raw information into a format that is readable by our application, and it all happens without any intervention from the LP staff. The results are made available to the LP staff via encrypted Web pages that only the intended reader can decrypt. This way you don't risk turning an LP person into a bad IT person, or an IT person into a bad LP person. Everyone concentrates on his or her areas of specialty.

8. What other areas of the retail operation does LP touch?

Cecil Frazier: There are various levels of loss, but we decided to focus our initial efforts on cash frauds because we knew if we could get that under control, other areas would follow. Cash refund fraud and post-void fraud is a cash theft, but it ends up looking like a merchandise loss. When we sell an item through the register, the POS system no longer accounts for that item in inventory. If I commit cash refund fraud, I tell the system someone returned an item and that it is back in the inventory. Therefore, the register balances, but the inventory levels do not. Six months later, when I do an inventory check, I think I have a shoplifting problem or something is wrong with the inventory management, when in reality we are missing cash.

9. How are you justifying the cost of this software?

Cecil Frazier: We did a 60-store pilot program that began in October 2001. We took the 60 stores with the worst shrinkage levels and immediately we got a return on our investment. Previously, fraud cases could average $1,100 in recovery; now we can stop them at $129. Cases that would have taken five weeks to catch manually were caught in the first week. It was astronomical. In less than six months, the shrink in the 60-store pilot was reduced by 33%. I believe Fraudwatch had a lot to do with that return.

10. How did you make your employees aware of the program?

Cecil Frazier: Although we only piloted Fraudwatch at 60 stores, I announced it as a company-wide rollout. We placed posters in all of the stores forewarning them of the fraud-tracking software. There are stickers in all of the registers announcing that Fraudwatch is present. Consequently, I think the marketing affected the entire company, because the entire company shrink was reduced after six months, although we were really only focused on 60 stores. The software is now synonymous with internal controls among our employees, and we have only been at it since October 2001. We rolled out the software to the whole chain in March 2002, and I expect the mid-year inventory checks will show another reduction in shrink. The reports indicate registers balance more often, the percentage of cash refunds are down, and the merchandise we think is in the store is really there. Fraudwatch hasn't stopped the shoplifter from stealing, but it has stopped fraudulent activity at the POS.