Despite LP technology advancements, retail shrink is on the rise. A retail theft survey from Jack L. Hayes International reports that in 2004 alone, 27 participating retailers lost more than $4.7 billion to shrink. This is a tough problem for retailers, and it's even tougher to solve. Because most retailers survive on, let's just say, challenging technology budgets, LP solutions often are completed in stages or built upon over time. Pathmark, a $4 billion, 141-store supermarket chain, is no exception. What sets Pathmark apart from other retailers implementing LP technology is the time frame in which it swiftly evolved its LP solution, a short couple of years. In an effort to combat loss, Pathmark initially implemented an exception-reporting system and then integrated it with BOB (bottom-of-basket) visual scanners to reduce overall loss and, ultimately, reduce store turnover rates.
The LP Advantage Of Digital Video
For approximately 12 years, Pathmark sporadically used exception-reporting software that combined POS transaction data with video for LP. It originally used a product from CA Technology (CAT) called DBS, which overlaid video recorded via VCRs with POS transaction data. CAT later developed StoreVision, a software-based system that streams data from POS transactions into a SQL database and links corresponding video using time stamps. In 2006, Agilence, Inc., a provider of event-based video analytics, purchased CAT, which led to the evolution of today's Agilence StoreVision product.
The retailer chose StoreVision because it feeds a database containing information such as beginning and end transaction times, dollar amounts associated with product scans, price-check events, voids, refunds, and cash drawer openings/closings. "We preferred the database platform to competing systems that search on data contained in transaction logs, because in most cases, transaction log data lacks the event details we wanted to report on," says Pathmark's Assistant VP of LP, Pedro Ramos. "Additionally, by combining video with POS data, we wanted to provide employees with indisputable proof of behavioral patterns."
Pathmark didn't experience the heightened benefits of the video and POS data combination until digital video storage evolved. "About four years ago, we converted our 17 highest-risk stores to digital video," says Ramos. "In those stores, we used StoreVision to create event-based queries based on specific KPIs [key performance indicators], such as overall shrink, cashier over/short activities, and front end employee turnover. We monitored the KPIs at all stores and realized that the 17 locations using StoreVision had better KPI scores 100% of the time, most likely because store managers approached employees when query results displayed questionable activities." At that time, approximately 40% of Pathmark's stores used no LP technology, and the rest of the company used outdated LP software that provided little benefit. Due to consistent shrink reductions at the 17 sample stores, Ramos convinced his organization that technology was driving benefits beyond shrink to cashier over/shorts and turnover. Therefore, Pathmark deployed StoreVision at all store locations.
Increase Internal Training With LP Solution
Before deploying the solution to all stores, Ramos sought to improve the way Pathmark handled cashier exceptions. Disciplinary action without StoreVision was challenging because cashiers handle a few hundred customers a day, so it was difficult for them to recall specific transactions when questioned. "We erroneously increased our turnover rates before StoreVision," says Ramos. "Cashiers consistently showed up with exceptions that we deemed high risk, such as voids, age clarifications, overrides, price checks, and refunds, and if the behavior continued, we eventually terminated them."
Cashier-related shrink is on the rise. The National Supermarket Research Group 2003/2004 Shrink Survey states that supermarket shrink remains steady at 2.32% of retail sales. However, the composition of retail loss in supermarkets is changing — cashier-caused shrink rose to 35% of total retail loss, while shoplifting fell to 20%, which is the lowest recorded rate to date. Knowing that much of Pathmark's loss was due to cashier-related events, Ramos wanted to use StoreVision for training as well as a disciplinary tool. "After evaluating high-risk exceptions and corresponding video, we found that most cashier-related exceptions were in fact training errors," says Ramos. "StoreVision enabled us to demonstrate what cashiers did versus what they should have done." As a result, disciplinary action gave way to training, coaching, and counseling, which reduced terminations. Due to reductions in POS errors and turnover rates, Pathmark calculated an approximate 18-month payback for the use of StoreVision throughout all store locations.
BOB Monitoring Catches Employee Mistakes
Although Pathmark experienced success with StoreVision, Ramos was unable to identify all areas of loss, such as BOB items missed at the POS. Therefore, in early 2006, after completing a POS software conversion (from IBM 4690 to IBM ACE) and a network upgrade, Pathmark installed Evolution Robotics Retail, Inc. LaneHawk visual scanners in some of its stores. "We selected LaneHawk primarily because it interfaces with our POS software, alerting cashiers of BOB merchandise that's missing from the current POS transaction," says Ramos. For more details on how LaneHawk identifies BOB merchandise, read the sidebar on "Reduce Bottom-of-Basket Loss."
LaneHawk identifies BOB packages and notifies cashiers via screen alerts. Cashiers either include the BOB item in the transaction by scanning it or choose to clear the notification. If cashiers clear items (choosing not to ring them up due to sweethearting or in error), LaneHawk records it. Additionally, because LaneHawk resides on the store network along with POS software and StoreVision, LaneHawk's events can be tracked through StoreVision. "After LaneHawk was installed, some of my auditors noticed new events coming from the POS," says Ramos. "Within a day, they were monitoring events such as BOB alerts [when items are missing from the POS transaction and found by the scanner, thus triggering messages to cashiers], BOB adds [when cashiers accept reminders and add items to transactions], and BOB clears [when cashiers ignore the alerts]. That same day, we found a negligent cashier performing several BOB clear transactions, which spawned an investigation uncovering a $1,200 diaper scam that led to her termination."
Not all BOB clear transactions indicate dishonest activities, however. Ramos says his LP auditors can quickly identify cashiers who hastily react to alerts and clear them instead of taking action. As a result, Pathmark provides cashiers with conclusive feedback, meaningful data, and video in the form of training sessions. "By using video to quickly refresh cashiers' memories, we reinforce the fact that our systems monitor them, causing improved behavior and fewer disciplinary actions," says Ramos. "Consequently, we further reduced our turnover rates throughout our enterprise."
Pathmark employs digital video to commend its employees, as well. When reviewing video, LP auditors capture images that reinforce activities handled well. For example, when an employee consecutively responds to BOB alerts, displays outstanding customer service, or positively reacts to prior coaching, images of employees behaving remarkably are posted next to the store time clock.
POS errors, while small in value, can add up considering their frequency. POS errors are lesser in value, however, than fraud cases. The Jack L. Hayes retail theft study reports that the average fraud case costs retailers $671. Ramos predicts that Pathmark's average POS error costs $11 per incident. Pathmark experienced far more POS errors than fraud cases. "Prior to integrating StoreVision and LaneHawk, we had approximately 14 POS errors for each fraud case investigated," states Ramos. "Now, we are at a 7:1 ratio."
Interface LP With Data Warehousing Software
Pathmark takes a somewhat conservative approach to implementing new technology. "Before purchasing new technology, we review our internal systems," says Ramos. "If internal systems can meet 60% to 70% of the benefits we want to achieve, we'll combine existing technology or modify existing systems before purchasing new." For example, Pathmark realized benefits of combining technology when it began using 1010data software for LP, after the software was originally brought into the organization for merchandising purposes. 1010data is data warehousing software that stores transaction logs and other pertinent store data. "We use 1010data to build trend analysis queries that identify items including below average order size and below average item values within an order [e.g. a health and beauty aid item that typically costs more, a meat/seafood item that is lower in cost compared with other meat/seafood items purchased within the same time period]," declares Ramos. "We continually develop new queries to identify suspect orders." When fraudulent transactions are identified, Ramos and his auditors use 1010data's data points from questionable transactions to build larger cases.
Centralized Auditing Reduces Labor Costs
Despite Pathmark's technology advancements, Ramos thought the company's LP processes could still be streamlined. Therefore, he instituted operational changes that streamlined efficiency. Ramos realized LP and auditing were two distinct disciplines. Consequently, he broke traditional LP culture and turned the exception-reporting function over to the Manager of Internal Audit, Barbara Finn-Drennan, who runs the store audit department. With the chain's network capabilities, he centralized the audit function for all stores prior to transferring it to Finn-Drennan. Ramos sought to maximize his payback, so charging the audit group with the initial data mining and the LP group with field investigations best achieved the retailer's goals. "In the past, having store managers monitor exceptions and LP for their stores seemed logical, but after upgrading to Agilence StoreVision 3.0, which allows enterprise-wide monitoring, we thought it more cost-effective to centralize store auditing functions," says Ramos. "We had fixed hours assigned to store managers to monitor LP, so by centralizing the auditing process, we reduced store labor. Furthermore, we have the best auditors monitoring activities at all store locations, and we reallocated LP staff to positions we previously had difficulty filling."
Today, within minutes of Pathmark's auditors recognizing questionable activities, files are sent to field investigators. Investigators use gathered data when questioning employees, and if supplementary investigation is needed, centralized auditors complete additional research. Pathmark's LP cases often result in admissions because of the conclusive evidence the auditors obtain. Additionally, cases at Pathmark often are concluded within hours or days of initial discovery.
Pathmark also assists police officers with external investigations. The grocer supplies evidence to fraud cases involving stolen credit cards and credit card cloning, among others. "We can provide officers with irrefutable evidence within minutes of initial contact," says Ramos. "Because we monitor our entire chain of stores with StoreVision, we sometimes uncover larger fraud rings than officers anticipate. In the past, external cases took weeks to compile, and the evidence found would've been inconclusive."
In the future, Ramos intends to use StoreVision, LaneHawk, and 1010data for more trend analysis. "We're continuing to refine the use of data analytics, but we can expand the use of video to realize even more benefits," says Ramos. "We are considering the use of our LP products to improve operations, reduce coupon costs associated with abuse, and improve the performance at our POS. By providing video and data, we can identify wasteful activities and facilitate the streamlined processes at the POS. Additionally, by using video, we can reduce travel costs by enabling designers and industrial engineers to identify inefficiencies at the store level using virtual store walks."
Even if technology was brought into your organization for one specific function, consider its potential elsewhere within your enterprise. Pathmark selected StoreVision to combat shrink, but by combining StoreVision with other software, it now uses LP technology to improve training and coach employees. By integrating systems and sharing data among store locations and corporate departments, you can achieve more than you can while working in information silos.