Loss Prevention (LP) involves formulation of policies, procedures and practices in organizations to prevent possible losses of inventory and other assets in a retail chain (LP Innovations, Inc. An Introduction to Loss Prevention par.1). Formulating effective programs to guide loss prevention concept can aid in reducing opportunities in which losses may take place and more specifically, adopt strategies to prevent losses instead of focusing on reactive approaches once they have occurred.
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Any organizations that suffer losses are losing incomes, which in turn affect their final profitability. Lost inventory needs to be replenished at costs to retailers. On the other hand, lost incomes cannot be replaced. Costs associated with losses directly affect profitability and inventory items in a company’s balance sheet. Lost profits affect the company’s strategies to acquire new merchandise, its expansion strategies, better employees’ compensations, organizational net incomes or increased EBIDTA.
There are several business reasons for an organization to adopt loss prevention functions. Loss prevention programs are suitable for any other form of a business. For instance, loss prevention functions can focus on sales department and long the supply chain. Hence, it is important for an organization to develop loss prevention functions around the supply chain, human resources and in any other department that may experience losses to prevent losses.
A number of factors may influence the type of loss prevention programs that an organization may implement. These may include the number of retail outlets, characteristics of the supply chain, types of goods sold or service areas, possible threats and other associated risks to an organization. Once an organization has established loss prevention functions, it is necessary to adopt effective evaluation systems in order to ensure that a retailer is profitable and not prone to some specific forms of preventable losses.
How losses occur
Organizations have reported several cases of losses but in certain categories that include internal losses, external losses and losses that take place through employees’ mistakes.
Internal losses are responsible for the largest percentage of losses in an organization, irrespective of size or business segments. These losses are usually associated with employee theft. While many may wonder why internal losses are the significant contributors to losses in organizations, in most cases, however, surveys have shown that employees steal from business the most compared to other stakeholders.
Employee theft takes place through several diverse ways. For instance, there is a simple pilfering of items, collusion with other employees and large mega thefts, which lead to massive inventory losses. These practices deplete stocks available for sales while eventually drain profits from a business.
At the same time, dishonest employees also manipulate activities at the point-of-sales to steal. Employees may take cash from the till, engage in fraud such as refunds, theft through discounts, loyalty reward programs and other well-orchestrated frauds. In fact, retailers can suffer double-dip losses that involve both cash and inventory at the same time at the point-of-sale in a single transaction.
Such thefts often result from acts of thefts that originate outside an organization. While external sources of losses could be limited and less relative to internal thefts, they also constitute a significant amount of losses to the retail industry yearly. Employees must understand how external theft takes place and appropriate methods to counteract them.
These processes require training, effective customer service, identification of potential areas of weaknesses and appropriate methods of protecting a company. It is necessary for an organization to investment in security solutions that can deter external thefts. These may include robbery and shoplifting prevention and effective ways of enhancing customer service and people management. Internal loss prevention strategies may also assist in reducing cases of external sources of losses.
Errors also contribute to losses in organizations. In most cases, losses from errors are related to paperwork, and they contribute to nearly 20 percent of losses every year. Employees at various departments cause these errors and thus related losses. Hence, employees are the main causes of losses in any organization.
Errors can take place anywhere in the supply chain. These errors may occur at any point along the supply chain, including product shipment and distribution. Errors could be noted in incorrect counting, inappropriate discounting or wrong records on sales. These errors may be trivial mistakes, but they have substantial costs yearly for any retailer.
Identifying a loss prevention problem
Losses may originate from several sources and occur for various reasons through diverse methods. Retailers, therefore, should look for potential indicators that a business is not doing well due to losses. Some indicators might include rising costs of inventory with flat or decreasing sales, missing items, empty stocks, reported cases of shoplifting, identified cases of robberies, lost inventory, losses noted when certain employees work, inappropriate cash register and certain high refunds, voids, discounts and other rewards and transactions linked to specific employees.
These are only few of the possible indicators that an organization could be experiencing a loss prevention challenge.
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Loss Prevention Strategies and Best Practices
Loss prevention has often been touted as effective across different industry reports and media channels through the realized success of certain adopted programs. Hence, loss prevention has become a critical element, and it determines business success in the retail sector.
While giant retailers may have mastered several approaches of mitigating losses, several small startups continue to struggle with loss prevention. Organizations that are successful in loss prevention have also demonstrated best practices and specific approaches. The most common approach to loss prevention is audit function.
Loss Prevention and Internal Audit
The strategy of auditing retail supply has become a crucial way to provide insights on effectiveness of any loss prevention programs. Retailers experience significant challenges on areas for auditing and specific audit measures to adopt for certain areas. Retailers may consider both operational audits and shrink audits across various departments (LP Innovations, Inc. Developing Effective Audit Programs par. 1).
Retailers should conduct inventory control and inventory audits to prevent losses. Physical tracking of the inventory is a cumbersome task for any organization. Nevertheless, retailers require effective inventory control and appropriate inventory audits in order to succeed. They should also conduct year-end audits.
This is appropriate for tracking business performances and losses throughout the year. Inventory accuracy, availability and efficiency are audit management practices to ensure reliability of loss prevention practices. These practices ensure optimal efficiency and low wastage.
Retailers should also conduct supply chain management audits regularly. This ensures that retailers have effective audit processes in place. At the same time, they can identify gaps and mitigate related threats if required.
Purchase management audits are required to evaluate costs of products and services sold. Therefore, firms would always like to track purchase processes. However, retailers may lack adequate resources to ensure constant monitoring of all processes involved in product sourcing and purchasing processes.
Operational audits focus on general areas of operations for the business. Such audits cut across the entire organization and focuses on areas like finance and management among other core areas of operations. Generally, operational audits focus on the entire organization to provide a general outlook of loss prevention programs.
Conversely, shrink audits are categorical and ensure that employees or organizations adhere to and follow guidelines created by governments such as accounting standards and practices and Sarbanes-Oxley among others. Shrink audits may also evaluate some elements of operational audits.
Operational audits may involve the evaluation of employees’ knowledge on retail supply chain management, security and deposit management among others. Operational audit acts as a checklist for an organization. Employees who conduct such audits should be highly knowledgeable and experienced to detect more obvious loss prevention issues. However, organizations may lack employees with deeper knowledge on audit issues and thus require external assistance.
Shrink audits offers relatively specialized approach on loss prevention practices for an organization. These audit activities go beyond the general approach to audits found in operational audits. Specifically, shrink audits look at areas of losses. They rely on data obtained from compliance audits. For instance, practices in shrink audit may require the auditor to review all data of merchandise obtained to detect any trends and patterns that could show possible fraud in an organization.
Shrink audits involve careful evaluation of information through discussions with relevant teams. There is no hurried review of data. For example, auditors may not simply assess employees’ knowledge on processes, policies and procedures for loss prevention, instead they must evaluate relationships with external stakeholders, including customers. Therefore, companies may get opportunities to improve their loss prevention and operational procedures and policies. At the same time, they will also understand the effectiveness of their loss prevention programs.
Based on results of audits, an organization can embark on strategies of enhancing loss prevention programs. Organizations need to understand the type of audit approaches that will work best for their supply chain. Audit approaches mainly depend on what results are expected.
Any organization that relies on internal teams to conduct shrink audits may not yield the intended results because some key indicators of losses may not be covered in the report. In addition, internal teams who conduct shrink audits may also compromise the quality of the report. Shrink audits explore highly sensitive elements of loss prevention, particularly financial reports and related practices.
Internal teams can effectively conduct operational audits to assess possible areas of weaknesses. For example, the team may evaluate aspects of customer service that could result into losses and make appropriate recommendations.
There are professionals or specialized firms that offer loss prevention programs to retailers. Such loss prevention programs lessen shrink and protect the company’s profitability. Nevertheless, loss prevention programs could be expensive for organizations. Indeed, a good loss prevention program requires precise, consistent and meticulous review of existing policies and procedures.
Yet, organizations find it difficult to maintain policies and procedures, particularly when internal teams have to work on widely distributed retail outlets and supply chain. Companies have to deal with loss prevention problems in a more consistent and better ways and prevent losses of incomes.
It is imperative for organizations to enhance audits for organization-wide efficiency. Today, various retailers depend on factory warehouses, retail stores and e-commerce platforms to store, distribute and sell their products. Retailers cannot effectively manage such supply chain with limited internal staff. In fact, the small size of a loss prevention department can result into challenges.
First, retail outlets may be located in different states, which contribute to significant costs of travel while shrink audits may be cumbersome to complete as scheduled. Shrink audits may need much time to complete for every given store. Internal loss prevention team may only focus on operational audits to review issues related to product pricing, store conditions and relationships with customers among others.
The external loss prevention team has to review specific policies and procedures with staff and audit members. Second, many retailers lack reliable data of loss prevention activities. Past audits are imperative for decision-making and identifying trends and patterns across various stores in the supply chain. A single audit may not be adequate for drawing appropriate conclusion. Therefore, retailers require regular audits to support decision-making and draw effective conclusions based on the observed patterns and trends over a long period.
Organizations have internal audit teams in their financial departments. In addition, they may also have loss prevention departments. In such situations, there could be conflict between these departments. Both units of an organization work to prevent losses and ensure compliance with government regulations.
Certainly, loss prevention should take lead in controls required in retail stores and inventory controls needed to avert losses. Further, Sarbanes-Oxley provides various components for organizations to ensure compliance and prevent fraud. Hence, loss prevention departments should handle loss prevention requirements.
While some individuals may consider the internal audit activities as extremely objective practices in organization, loss prevention, based on the reporting structure, may not always be considered in a similar manner. This could be challenging to some companies. On this note, it is imperative to note that internal audit and loss prevention functions have different areas of focus. For instance, one critical area of focus for loss prevention is the company’s store.
Loss prevention requires collaboration with various departments, including individuals who work with store associates. A working relationship is necessary to ensure effective assessment of various reports. This is a major different between loss prevention and internal audits. In fact, many internal audit departments are mainly found in corporate head offices and they usually audit centralized roles.
Loss prevention and internal audits may appear unusual in responsibilities, particularly when headed by a single person or run from one department. Loss prevention and internal audit functions should create a natural synergy (Lee par. 34). Both functions concentrate on ensuring organizational profitability and effectively run operations, which could be achieved within the company’s constraints with available resources and styles of management.
While internal audits and loss prevention may complete their roles rather differently, they have chances to collaborate more efficiently and accomplish much in their current operations. For instance, there are several elements of corporate internal audit noted from operational perspective, which could be solved through the expertise and experience of the loss prevention programs to support their roles and responsibilities.
Conversely, there are instances in which loss prevention functions require expertise and knowledge of internal audits to support their activities and evaluation processes.
Retailers can enhance loss prevention programs by adopting exception-based reporting systems. These systems enhance effectiveness, efficiency in monitoring and dealing with exceptional issues as they occur. Inventory management systems have evolved over time and they have become more effective.
Consequently, such systems offer better data for loss prevention, stores and inventory organization. Monitoring systems have enhanced loss prevention environment, increased performance, eliminated redundancy and increased organization-wide control for improved profitability.
New systems provide good auditing of collected information, exception reporting and abilities to control potential areas of weaknesses such as gift and credit card frauds, refunds and any other behaviors that may perpetuate losses. Individuals who use these systems require adequate training in order to realize maximum benefits in loss prevention programs.
Retailers need effective loss prevention strategies in place to handle potential losses through various means, particularly losses related to employees’ activities. It is not simple to determine loss prevention strategies in large organizations with several outlets in various states. Staffing needs for loss prevention is equally difficult to determine.
Therefore, it is imperative for any organization to review its loss prevention policies and appropriate recommendations based on highly technical aspects of the programs. They must consider organizational structure, resources, staffing, productivity and intended outcomes among others. Organizations must ensure that loss prevention programs are cost-effective and highly effective in planning, resource distribution, auditing, budgeting, and policy formulations.
Organizations that lack highly experienced and qualified staff on loss prevention may outsource such services (Harris par. 3). At the same time, they must understand the differences between internal auditing and loss prevention functions while acknowledging the synergy that these two units may create for the business to ensure compliance, controls and profitability.
Harris, Erin. “Outsource Loss Prevention, Reduce Shrink.” Integrated Solutions For Retailers. 2009.
Lee, James. “The Dual Role of Internal Audit and Loss Prevention.” LP Magazine. 2004.
LP Innovations, Inc. An Introduction to Loss Prevention: Loss Prevention 101. 2013.
—. Developing Effective Audit Programs: Store Audit Development: Operational Audits vs. Shrink Audits. 2009.