Pharmacy 2006
“Protecting Your Bottom Line:
Strategies for Preventing Fraud and
Shop Stealing”
8 September 2006
Dean Newlan
Partner
Overview
+
Pharmacy exposures to commercial crime
+
Shrinkage and fraud
+
Why do people steal?
+
The ECR “Shrinkage Reduction Roadmap”
+
Strategies for controlling fraud in retail
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Commercial crime against pharmacies
+
Burglary (after hours “ram raids” increasing in frequency)
+
Armed robbery
+
Extortion (product contamination)
+
Theft of cash by staff (under-ringing of sales)
+
Internal fraud (other than cash theft)
+
Staff theft of inventory
+
External theft of inventory
+
Vendor fraud
Shrinkage
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Source: Efficient Consumer Response Europe / University of Leicester / Cranfield University
A Collaborative Approach to Reducing Stock Loss in the Supply Chain 2001
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Shrinkage – just another cost of doing business?
Australia /
New Zealand
USA
Canada
UK
ECR Australasia
2002
University of Florida
2004
Retail Council of
Canada
2004
Centre for Retail
Research
2005
Shrinkage rate
1.73%
1.65%
1.23%
1.38%
Employees
25%
47%
48%
36%
Customers
34%
32%
31%
44%
Vendors
12%
6%
2%
6%
Process failure
29%
15%
19%
14%
Total
100%
100%
100%
100%
These estimates are based on perception – nobody really knows the true
break-down as between staff / customers / vendors / process failure … all
that is known for certain is that the stock is not there!
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But if it’s only 1.73% …….
No
Shrinkage
Shrinkage at Australian
average of 1.73%
Sales
$100,000
$100,000
$106,120
Margin @
30%
$30,000
$30,000
$31,836
Shrinkage
nil
($1,730)
($1,836)
Gross Profit
$30,000
$28,270
$30,000
Lift in sales required to
cover shrinkage on sales of
$100,000
$6,120
6.1%
+ At this margin, at this shrinkage rate, you will need to make sales of $3.53 to replace every
$1.00 in stock lost to shrinkage – one item is stolen, you sell three to replace it
+ Out of every sales dollar, 6 cents will go to cover the cost of shrinkage
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In the US, security costs are
estimated to be .51% of turnover
Too little spent on
shrinkage reduction
$8000
(National Retail Security Survey)
Shrinkage loss
$7000
$6000
Equilibrium point
reached at $2900
$5000
$4000
Too much spent on
shrinkage reduction
$3000
$2000
$1000
$1000
$2000
$3000
$4000
$5000
$6000
$7000
$8000
Cost of Prevention
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Typical retail staff inventory thief
+ Employed for less than 12 months
+ Part-time
+ 20-25 years of age
+ Gender evenly represented
+ Commence stealing stock in first few weeks after employment
+ Frequently taught how to steal by a co-worker
+ Usually caught about 6 months after first theft
+ Not yet accepted by work group who are more inclined to “blow
the whistle”
+ Product stolen along “predictable gender lines”
Source: Fighting Retail Crime – Centre for Retail Research (UK) Report
based on interviews with security managers representing retailers accounting for 50% of UK retail sales
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Most commonly stolen “Fast Moving Consumer Goods”
1.
Razor blades
2.
Alcohol
3.
Toiletries
4.
Clothing and lingerie
Removable
5.
Batteries
Available
6.
DVDs, CDs, computer software
7.
Pills, vitamins, contraceptives, pregnancy testing
kits
Concealable
8.
Electric toothbrushes
9.
Instant coffee
Valuable
Enjoyable
Disposable
Source: ECR Europe
10. Meat
Source: Centre for Retail Research (Nottingham)
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A few shrinkage misconceptions




Shrinkage control is not core retail activity
Shrinkage is just a cost of doing business – we would be better off if
we focused on the top line
Shrinkage is inevitable
The best way to control shrinkage is to focus resources on
preventing customer theft

Line management are not responsible for controlling shrinkage –
that’s the job of the loss prevention department

Floor staff have no role in preventing shrinkage – they are there to
sell, not look after the stock
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A few facts about shrinkage
+ Internal stock theft is perceived to be a larger problem the larger the
organisation (smaller retails attribute larger proportion of stock losses to
customers)
+ Employee stock theft results in a significantly higher loss per incident
compared to external theft
+ Lower shrinkage rates are associated with:
-
Higher rates of pay;
-
Profit sharing schemes;
-
Lower staff turnover;
-
Lower numbers of part-time / casual staff; and
-
Strong leadership at store level.
Source: National Survey of Retail Crime and Security (UK)
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Staff fraud in the retail sector
+ On-line banking fraud
+ Unauthorised mark-downs (sweet-hearting for family / friends)
+ Refund fraud
+ Gift voucher theft or manipulation
+ Staff discount fraud (family / friends)
+ Loyalty card fraud (swipe own loyalty card)
+ Under-ringing sales
+ Credit card fraud
+ Lapping (substituting credit card vouchers for cash)
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Some examples of retail employee fraud
+
Theft of cash by store manager (claim cash register down, fail to ring
up sale and then retain cash)
+
Falsification of commission claims (identified by exception reporting)
+
Refund fraud – process refund on credit card when no previous sale
+
Store manager demanded secret commission for referring installation
work to a plumber, commission paid was added to the price of the job
and then on-charged to customer
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Why do employees steal stock?
Rationalisation
+
+
+
+
+
+
Natural perk of working in retail
Organisational culture
Example set by senior people
Perceived low pay scale
Organisation can afford it
Organisation overcharges
customers
Motivation
Opportunity
Cressy's Fraud Triangle
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Rationalising dishonest behaviour
10% of people never steal
10% of people always steal
80% of people will steal if given the
opportunity
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ECR Shrinkage Reduction Roadmap
Source: Efficient Consumer Response Europe / University of Leicester / Cranfield University
A Collaborative Approach to Reducing Stock Loss in the Supply Chain 2001
16
Steps to reducing shrinkage














Written company shrinkage policy
Adopt a “whole of business” approach to shrinkage reduction
High levels of intra-company co-operation – accurate measurement
Watch margin closely and investigate variances
Staff incentives program / profit share
Avoid blind spots in display areas / convex mirrors
Regular stock takes
CCTV (no dummy camera domes longer storage cycle)
Warning at entry to store
Staff training
Conduct regular shrinkage reduction projects
Electronic Data Tagging (EAS / RFID / Smart Cards / Source Tagging)
Realign sales staff responsibilities
Data mining to look for indicative pattern (location, employee, time of day)
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Fraud and corruption control – AS 8001
Fraud and Corruption
Standard
Section 2
Planning and Resourcing
2.1 Fraud and corruption control
planning
2.2 Review of the fraud and
corruption control plan
Section 3
Prevention
2.3 Fraud and corruption control
resources
2.4 Internal audit activity in fraud
and corruption control
3.1 Implementing and
maintaining an integrity
framework
3.2 Senior Management
commitment to controlling
the risks of fraud and
corruption
3.3 Line management
accountability
3.4 Internal control
3.5 Assessing fraud and
corruption risk
3.6 Communication and
awareness
3.7 Employment screening
3.8 Supplier and customer
vetting
Section 4
Detection
4.1 Implementing a fraud
and corruption detection
program
4.2 Role of the external
auditor in detection of
fraud
4.3 Mechanisms for
reporting suspected
incidents
4.4 Whistleblower
protection program
Section 5
Response
5.1 Investigation
5.2 Internal reporting and escalation
5.3 Disciplinary procedures
5.4 External reporting
5.5 Civil action for recovery of
losses
5.6 Review of internal controls
5.7 Insurance
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Steps to reducing fraud (other than staff theft)

Apply relevant parts of Fraud and Corruption Control as 8001-2003

Scrupulous control over on-line banking

Tighten internal controls

Fraud risk assessment

Data mining – look for indicators of fraudulent activity

Increase awareness of relevant managers and staff

Set the example as owners / managers

Job rotation / annual leave policy

Alternative reporting avenues (whistleblower line)
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Dean Newlan
McGrathNicol+Forensic
Telephone
Mobile
Email
61 3 9038 3151
0412 731 040
dnewlan@mcgrathnicol.com
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