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Internal Shrinkage is Still Serious

Posted: March 26, 2006 03:51 PM

March 2006

Internal shrinkage is still a more serious problem than customer shoplifting.

We had a nasty surprise this week when one of our software clients telephoned for tech support.  The person whom we had worked with for several years wasn't there anymore, and in fact had been terminated for theft and embezzement.  According to our client contact, this misbehavior had almost put the store out of business.  They were equally shocked when they discovered that this had been going on, since they'd known and associated with the guilty party for more than ten years.

This is an old, sad story for many of our more experienced retailers.

At the GAMA trade show last week in Las Vegas, we heard two more stories of this type.  In one case, there was nothing unusual to report other than a trusted store manager had been stealing for several years "and had almost put the store out of business".  The thefts were discovered partly by chance and the owners were now working to get the store healthy again.

The other situation was more unusual.  The store in question uses a mainstream POS system which has been customized to fit their specific requirements.  The staffer was creating layaway accounts in the program, running them up to $500-$600 worth of merchandise and them emptying them out "by the backdoor" through their knowledge of the programming language the POS program was written in.

The thefts were finally detected when management noticed an imbalance between several totals in their system.  When they investigated more fully, they found that the supplier ID which was associated with the missing merchandise was a game competition ID for one of their employees.

In another instance, one of our software users discovered a major internal theft when they physically inventoried their entire store in the course of moving from one location to another nearby location.   Most merchandise categories were pretty accurate, but one game card category was off by several thousand dollars worth of merchandise.  One of their staff was known to be a dedicated player of this game system, but had never bought card product from the store -- but had bought a number of large card binders.

In general, for every dollar lost to customer shoplifting, we believe specialty comic and game retailers lose eight-to-ten dollars in internal theft or product mishandling.  If your store generates 10% pre-tax income, every $100 in losses represents the profit on $1,000 in gross sales!  If you haven't considered this before, you really should do so because this literally could put you out of business.

While good internal management systems can make it more difficult for staff to make larger thefts, in many cases you'll be well served in being able to detect theft early on before it represents large amounts of money.  There is no excuse for internal theft to go on for more than 3-4 months without alarm signals going off.

What not to do is best illustrated by what happened to one of our multi-store POS users about eight years ago.  We received a telephone call from them asking whether there was a known bug in POS which would act to create random refunds.  We assured them that this wasn't the case.  It turned out that they were experiencing 2-3 refunds a week at one of their stores, with a value of $15-$25 per refund.  Each refund consisted of one item, and because with our POS system a refund is really a negative sale, they knew what items were being refunded.  These items were not common items in the store, and could not be found in the store when they looked for them.

Our first question was, "well, have you looked at the refund slips that the customers signed?"  There weren't any.  The client had turned off the auto-creation of receipts because it was too much trouble.  The next question was "well, have you looked at the journal to see which employees made the refunds?  Maybe it was just one staffer?"  The client had the manager and the two clerks sharing the same user ID and logon password.

What we were able to do was look at the time of day the refunds were made.  All refunds were made between 1pm-2pm when the manager was at lunch, and when both clerks were in the store.  This indicated that the manager wasn't the guilty party.  Over the next three months both clerks were laid off without comment.

Turning off the security protections built into their POS system was a costly error.  Not only did they lose a minimum of $400-$500 in cash, but the cost of hiring and training two new clerks was significant.

We'll discuss ways to minimize internal theft and to make early-identification of potential misconduct more practical in a future column.

Best wishes,
Mel Thompson