Wrestling with Total Loss

In 2017, Adrian Beck, professor in the criminology department at the University of Leicester, published a piece in Security Journal outlining a new conceptual typology regarding loss. Beck argues that “shrink” is an antiquated term that lacks a clear definition in the retail industry. [Editor’s Note: Beck published a piece on the same topic with LP Magazine in November 2016.]

Beck’s piece suggests that, in lieu of the traditional “buckets” into which losses were traditionally placed—employee/internal theft; customer/external theft; administrative/paperwork error; and vendor/supplier fraud—we should instead focus on what he called “total loss,” or “events and outcomes that negatively impact retail profitability and make no positive, identifiable and intrinsic contribution to generating income.”

Within the store and supply chain, loss is categorized as either “unknown” or “known”, the latter of which is separated into “malicious” or “non-malicious” loss. Malicious loss (which is essentially intentional loss) is the result of weaknesses in systems.

Beck argues that focusing on knowable loss is more cost effective because these are problems that require a single fix, whereas unknown losses take resources and time to investigate. Furthermore, a concentration on known, non-malicious losses (e.g. errors, spoilage, etc.) is more cost effective than focusing on known, malicious losses, as criminals can adapt to overcome security measures, whereas known, non-malicious losses usually require a single fix. Furthermore, Beck argues that attempts to thwart criminals through product protection measures results in a diffusion of crime to other areas.

Indeed, there are several merits to the total retail loss framework. First, Beck correctly points out that loss prevention / asset protection should focus on overall enterprise success. A ham-fisted approach to loss prevention can hamper sales and profits and make for an unpleasant shopping experience. Second, a failure to calculate shrink in a coordinated manner among different retailers means there are no reliable metrics to identify which solutions work and which don’t. Third, movement from brick-and-mortar to online sales means we must reimagine how we think of shrink in the future.

However, we should be careful not to neglect more traditional elements of asset protection in a drive to prevent total loss. Below are a few reasons why we still need to focus on traditional areas of loss prevention/asset protection:

Externalities: Positive and Negative
The total loss framework suggests that a focus on known, malicious loss is less cost effective than a focus on known, non-malicious loss. In support of this, supporters of total loss argue that security in one area will result in criminals moving to another area, a phenomenon known as crime displacement.

However, the verdict is still out on whether or not security measures in one area will result in a diffusion of crime in another. One study showed that cars with a LoJack vehicle recovery system were stolen 48 percent less often, though 18 percent of that theft was displaced towards cars without installed systems.

Moreover, there is some evidence to suggest that there is a diffusion of benefits to implementing security measures. A 2009 study of studies showed that, among 574 observations, displacement of crime was observed in 26 percent, while diffusion of benefits was found in 27 percent (Guerette and Bowers, 2009).

While there is mixed evidence on crime displacement, a removal of focus on traditional security or loss prevention measures may result in negative externalities. A 2014 study shows that high levels of external theft were related to high levels of internal theft, and that certain locations acted as “crime radiators” (Bowers 2014). Furthermore, recent research shows that people not only avoid, but will even go out of their way to frequent stores where they feel more safe and secure (Shannon, 2016).

The Human Element
Advocates of total loss argue that interventions in non-malicious losses are more likely to have a lasting effect than malicious losses, as “a malicious actor is constantly probing for weaknesses and opportunity.”

First, it is unclear that non-malicious losses are always more static than malicious losses. In the complex systems that characterize contemporary supply chains, elements of the system are constantly changing. Issues causing non-malicious loss may be as elusive as malicious loss.

By diverting AP/LP focus on non-malicious loss, this would almost necessarily remove focus from malicious loss. Imagine the damage that could result from a malicious actor constantly probing for weaknesses and opportunity when the guard’s attention is diverted. Furthermore, the costs that would result from removing focus from these malicious actors cannot be calculated in any reliable manner. While there is clear benefit to turning attention to non-malicious loss, there are clear risks as well.

Known Unknowns and Unknown Knowns
Beck argues that most loss prevention has traditionally focused on unknown loss, but that this focus is misplaced as solving problems with an unknown cause is a tougher challenge than focusing on those with a known cause. While I would question the assertion that traditional LP/AP focuses on unknown loss (as the root of much of the intentional loss is often known, but is difficult to prevent or stop), I would also question the utility of removing focus from unknown loss. While it is true that it takes extra resources to pin down the cause of unknown loss, understanding these threats may lead to improvements in operations down the road. This isn’t to say that problems with a known cause should not be addressed, but that removing focus from problems of an unknown origin risks those problems metastasizing into something much worse.

Security as Vocation
Finally, advocates of total loss argue that loss prevention professionals of the future should be the drivers of total retail loss, “owning” the entire spectrum of loss, from known, malicious loss (e.g., external theft) to known non-malicious loss, such as spoilage, accounting errors, etc. While these facets of loss should be accounted for and addressed, many of these phenomena can be much more effectively addressed through other departments within an organization. LP/AP as a vocation represents a defined set of skills, based in understanding illicit behavior. One wonders if phenomena as varied as loss from regulatory fines, bad debt, currency exchange losses should be included under the same banner as loss from theft or fraud. The skill sets needed to combat these forms of loss are different, and would require different specializations. By attempting to make total loss the purview of LP/AP, we may expand the purview of LP/AP into tasks for which other professions, such as accountants and engineers, are better equipped.

Frictionless LP/AP

While proponents of total loss make several of good points, rather than redefining how we imagine loss and combat loss, we can instead adopt those elements to make LP/AP professionals more attuned to the changing realities of the retail environment.

RFID and New Technologies
New dual-use technologies allow for better loss prevention while providing valuable marketing and sales information. RFID tags can provide data on sales, geographic tracking, and inventory, while allowing for product protection and tracking. Newer RFID technology will allow for better tracking of products, and better definition of “unknown” loss. This is merely one example of new technologies that can reduce loss while simultaneously boosting sales, facilitating marketing efforts, or improving the overall customer experience. Equipping LP/AP professionals of the future to understand how to better use these technologies, while similarly demonstrating their value for overall enterprise success, will help to create an environment where LP/AP goals dovetail with overall enterprise goals.

New Definitions or More Coordination
Proponents of LP/AP are absolutely correct: big data is changing the way retailers do business. While it would be foolish to deny that better conceptual tools will help us tackle loss more effectively, what is truly needed is coordination among many big players regarding how loss is measured. If every retailer measures loss consistently, this allows for more reliable comparison between loss metrics, and an improved ability to see what does and doesn’t work.

New Environments, New Solutions
Proponents of total loss argue that we must update how we conceive of loss to keep up with a changing retail environment. This is absolutely true. The movement of retail sales from brick-and-mortar stores to online sales will present challenges not seen before, including data security and fraud issues.

While new social media and data gathering and analyses tools have provided retailers with an abundance of data, often LP/AP professionals do not now how to effectively use this, or worse yet, how to guard it.

Furthermore, increasing ubiquity of self-checkout and mobile checkout provides new opportunities for retailers, but also new opportunities for criminals. While a focus on total loss may help to offset some of the losses that will inevitably come from adjusting these new environments, a renewed focus on combining data with better understandings of the behavioral aspects of criminal behavior will be necessary to meet these new challenges.

Rather than making LP/AP professionals “loss generalists,” we should focus on training LP/AP professionals to use both data analytics tools and advanced behavioral theory to better meet the new security challenges that will inevitably arise from these emerging domains.

In conclusion, proponents of total loss raise a number of interesting points, including the fact that LP/AP professionals must grapple with the changing face of retail. However, focus on areas of loss such as spoilage, currency exchange issues, and bad debt are better addressed in different professional domains.

Removing focus from the malicious element in LP/AP invites an increase in malicious activity and raises the possibility of other unforeseen consequences. Specialized training in LP/AP should focus on total enterprise success, and how LP/AP efforts can hinder potential offenders while improve overall operations. This means renewed focus on combining human behavioral theory with data analysis to be able to better use big data and address future challenges.

Citations

Bowers, K. (2014). Risky facilities: crime radiators or crime absorbers? A comparison of internal and external levels of theft. Journal of Quantitative Criminology, 30(3), 389-414.

Guerette, R. T., & Bowers, K. J. (2009). Assessing the extent of crime displacement and diffusion of benefits: A review of situational crime prevention evaluations. Criminology, 47(4), 1331-1368.

Shannon, J. (2016). Beyond the supermarket solution: Linking food deserts, neighborhood context, and everyday mobility. Annals of the American Association of Geographers, 106(1), 186-202.

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