Building the Foundation for a Strong Logistics Loss Prevention Department

Logistics loss prevention in the distribution center requires a multi-faceted approach.

logistics loss prevention

Once, a distribution center supervisor told me about their former logistics loss prevention manager. During management meetings, this fellow took great pride in informing the management team of his dedication and skills for discouraging potential warehouse theft perpetrators. He would recall the days when he hid in a dumpster during the entire Memorial Day weekend on the lookout for a suspected warehouse culprit. Mildly intrigued and wondering the outcome of this tale, I asked, “What happened? Did he apprehend anyone?” The supervisor informed me that nothing at all happened. He didn’t catch anyone, but wanted to prove a point that if you steal, someone will be waiting for you in the dumpster.

Continuing our conversation, I proceeded to ask, “What do you feel the role of loss prevention is in a distribution center?” He stated simply, “Hide in boxes and nail people.”

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Ah, the good old days. Hide in a box, check on the guards, and call it a day. In today’s multifaceted environment, this type of approach simply does not work. In fact, if this is the perception of loss prevention in your environment, your LP program may not be as effective as that of your peers, and you are potentially sustaining thousands or millions of dollars of inventory shrink and workers’ compensation expense each year. The loss prevention professional working in a distribution center today must not be viewed as the “cop” of the facility, but more as a highly trained, cross-functional management liaison for the DC leadership team.

What is Logistics Loss Prevention?

If you were to ask various loss prevention or operations professionals what constitutes LP in a distribution center, you would receive a variety of responses. Some may list security guards or alarms. Others may also include investigations and surveillances. Some may tie loss prevention with the cargo and logistics maintenance department.

In my opinion, the essential components of an effective logistics loss prevention department include, but are not limited to, the following elements:

  • Onsite loss prevention management
  • Safety and OSHA compliance
  • Knowledge of the distribution center operation
  • Control programs and physical security

One of the keys to eliminating the cop-like mentality is to tie the safety aspects to the logistics loss prevention function. When safety is included with LP, this provides an opportunity to soften and remove the “cop of the warehouse” stigma. This will help open the lines of associate communication on shrink-related issues, such as employee theft, because of the rapport established on safety-related matters.

Logistics Loss Prevention Management

Assigning the above-referenced responsibilities to loss prevention will require more than a contract guard service. A guard service, whether in-house or contract, will be a supplement to your logistics loss prevention program.

In order to achieve world-class results, you must have onsite loss prevention management. Ideal candidates will possess excellent communication skills, training capabilities, proven investigation experience, and the ability to be viewed as a part of the warehouse management team while maintaining independence. The LP manager should have a direct reporting relationship with someone outside the facility, with a dotted line to the director or general manager. Staff size is dictated by the  size and volume of the distribution center.

Safety and OSHA Compliance

If you could approach your CFO and announce that you could have a direct impact on improving your companies SG&A (selling, general, and administrative) expense, would he or she be interested? If so, a review of the current safety environment in your facility may provide an opportunity to identify potential cost savings while isolating process improvements that may improve the overall work experience for your employees.

Workers’ compensation, employee turnover, productivity loss, OSHA fines, and employee morale trends can all be tied directly back to safety and SG&A expense.

A Safety-First Attitude

The cliché “Safety First” approach is used today by many companies, but it does illustrate the basis for an effective safety program. The first time an employee enters your facility, safety training and OSHA compliance must be at the top of the list during new hire orientation.

Safety is all about tone and actions. People can talk about safety, erect a few banners, and be done with it. Talk is one thing. Backing it up with actions and accountability is another. Creating a strong commitment to safety does not happen overnight and is not the responsibility of one person. It is imperative that the entire distribution center team has accountability for safety. Safety should be as common to everyday culture as pallets and cartons are to a warehouse facility.

How do you accomplish this? Numbers drive an effective warehouse operation, such as cost per piece, payroll, productivity, billing size, and quality. These key performance indicators should also include safety numbers such as workers’ compensation costs, OSHA recordable injuries, and accident frequency rates (AFR). Managers, supervisors and hourly employees must not be only evaluated on operational performance, but also on safety metrics. Each year, attainable goals must be established to reflect continuous improvement from the prior year.

OSHA-Specific Training

Establishing goals and communicating the numbers is a beginning…but only a beginning. In order to reduce costs and improve safety, you need to implement and monitor a full, comprehensive safety program. Elements of the program should include OSHA training on topics such as:

  • Hazardous materials
  • Bloodborne pathogens
  • Power equipment
  • Confined space
  • Lockout/tagout
  • Personal protective equipment
  • Emergency evacuation plans

Failure to train and build core competencies in these critical areas can result in substantial fines by OSHA, ranging from the low thousands up to millions of dollars. No one will argue that OSHA training is glamorous or exciting, but it is necessary in order to avoid fines, reduce the risk of work-related injuries, and promote a safety attitude.

Accident Investigation Training

In addition to OSHA compliance, your safety program should also include training related to accident investigation for supervisors and managers. When an employee sustains an injury, the employee’s supervisor should conduct the accident investigation. The reasoning behind this is twofold. First, the supervisor is just as responsible for safety as for productivity, and, two, it is an opportunity to identify and eliminate potential safety hazards within the operation.

Many times when a safety issue is rectified, it will have a positive impact on productivity and employee morale. One role of logistics loss prevention is to ensure management knows how to conduct an accident investigation and to ensure they are being properly completed.

Safety Committees

Another valuable tool to consider for your safety program is safety committee meetings. Committees should be made up of hourly, management, and loss prevention employees. These committees should limit the mundane discussions of monthly injury statistics. Instead, with the committee in tow, you should venture out into the operation, review problem areas, conduct formalized housekeeping inspections, be visible to all, and publicize your results.

Safety Incentive Program

The committee is also a great resource in developing a safety incentive program for your facility. Safety incentive programs come in many forms, including an established benchmark in days without an injury, reducing OSHA recordable injuries by a certain percent, or meeting an established accident frequency rate (AFR) goal. A rewards and recognition program should be aligned with this program to recognize improvement and effort. You should discuss your present workers’ compensation dollar expenses with your risk management department to gauge interest in funding your program based on projected dollar savings.

Alternative Duty

One of the most significant costs associated with workers’ compensation is the weekly check an employee receives when they are absent from work due to a work-related injury. Numerous insurance industry studies have shown that for each day an employee is out of the work environment, the likelihood of that person returning to their position diminishes significantly. Alternate duty is a viable opportunity to keep the person in work performing a less physically demanding task. This reduces the workers’ compensation payout and greatly enhances the chances of the employee returning to their regular job.

Remember, safety responsibility for loss prevention provides an opportunity to establish positive working relationships with all employees. This will be beneficial in other aspects of logistics loss prevention.

Distribution Center Operation

How can one know what to look for from a loss prevention standpoint if they are not intimately familiar with the distribution center operation? An effective member of any logistics loss prevention department will have a full understanding of all operational areas. To achieve this, loss prevention must take the time to learn all aspects of the workflow, including receiving, order selection, inventory control, shipping, and transportation.

The best way to accomplish this task is to spend time in each area and perform the operational functions. This not only educates you but also helps you establish future working relationships.

Once a basic understanding is formulated, the LP professional should strive to understand the warehouse management system (WMS). Data and reporting information incorporated in a WMS system can be a tremendous asset if leveraged properly. Productivity rates, inventory transactions, billing information, and receiving errors can all be tied to potential shrink issues. This knowledge also elevates the reputation of loss prevention within the operations team. Not only are you competent in the operational responsibilities, but you can also tie actions back to results through data analysis.

Control Programs

Transforming your logistics loss prevention program from ordinary to extraordinary requires time, patience, and planning. Most employees are honest, hardworking individuals who want to do the right thing when afforded the opportunity. Policy and procedure, accountability and consequences, audits, and focus groups are the foundation of the world-class logistics loss prevention program. Development of control programs should be a partnership among the operations team, human resources, and loss prevention. This open collaboration establishes total ownership by all employees, not just the LP department.

Policy and Procedure

This area is an evolving dynamic process. Start by identifying safety and shrink issues. For example, the first line of defense you have in reducing your safety and shrink exposure is during the hiring process. A policy or procedure for new hires that includes a criminal background check, drug testing, and, in some cases, a credit check will identify undesirable candidates. Other policies and procedures you may want to consider include:

  • Access control
  • Bag checks
  • Alarm response
  • Locker inspections
  • Accident and theft investigation
  • Key control
  • Merchandise product removal
  • Bomb threats
  • Emergency evacuation
  • Many others based upon your operation.

Once a policy is documented and communicated to the work force, make sure a full understanding of noncompliance is discussed. Periodically review all policies and procedures to reflect any change in the operation or state and federal laws.

Audits

Creating the auditing component of the control program is best accomplished by determining which department posses the greatest shrink risk. Receiving, shipping, and inventory control will usually rise to the top of your list. Begin discussing past inventory shrink issues with your highest ranked department, seek their opinion and determine the level of loss prevention awareness.

When creating an audit, you want to ensure that you are covering all potential shrink areas. Below is a sample of questions that you might include for the receiving department. In this area, you want to focus on driver/employee collusion, paperwork errors, receipt of wrong product, damages, and concealed shortages.

Check-In Process

  • Has the driver checked in with the receiving office?
  • Did the driver present paperwork that includes trucking company, driver’s name, bill of lading number, product and quantity to be delivered, and purchase order number?
  • Has the driver been issued an identification badge?

Access Control

  • Are drivers escorted to and from the assigned door?
  • Are the drivers in a secured area when not unloading?
  • Are drivers unattended on the receiving dock?
  • Are receiving personnel inspecting trailers to ensure all products have been unloaded?
  • Are overhead doors closed and locked when not in use?

Receiving Process

  • Is the receiver inspecting the merchandise for damage, missing product, and out-of-date merchandise during unloading?
  • Is the receiver verifying case/pallet counts independently?
  • Is the receiver ensuring security of delivery paperwork?
  • Is the receiver notifying their supervisor of shortages or overages?
  • Did the receiver sign paperwork after verifying counts?

Do not limit yourself in the audit process. Evaluate other opportunities such as store returns, warehouse transfers, and damage processing to isolate other risk factors. Consider other nonoperational departments and functions such as maintenance, security guards, and petty cash to create an overall approach to limiting risk. Again the purpose of an effective audit program is to identify potential shrink issues and ensure compliance to operational processes. Information garnered from an audit can be utilized to recognize excellent work and factored in an employee’s performance evaluation. Celebrate the wins!

Focus Groups

Similar to the safety committee meetings and the integral part they have in elevating safety awareness, the same can be said for loss prevention focus groups. LP focus groups are also made up of hourly, management and loss prevention employees. Involvement is key. Some of the discussion points involve shrink issues, feedback on policies and procedures, and assistance in the audit development process.

Physical Security

Physical security in a distribution center consists of four core elements: security guards, burglar alarm, closed circuit television, and card access. A fifth element, electronic article surveillance (EAS), may be used depending on the type of product stored in inventory.

Security Guards

The presence of on-site logistics loss prevention management does not eliminate the need for security guards. In determining your security guard needs, you must assess the operation. Consider how many employees work in the facility, the number of employee entrances, your warehouse receiving and shipping volume, and the average number of visitors.

Based on this information, your staffing needs can be determined. An average 300,000-square-foot retail distribution center should staff two guards for each operational shift. One post would be located at the employee entrance and would be responsible for verifying employee badges, directing visitors, reviewing building alarms, monitoring exterior cameras, and conducting bag checks. Station the other security post outside the facility premises for trailer inspection of outgoing receiving or shipping trailers, seal number verification, assigning doors to delivery trailers, directing visitor traffic, and monitoring all other exterior distribution center functions. Establish a level set of expectations for yourself and the security guards by detailing the exact responsibilities in written post orders.

Burglar Alarm

A comprehensive burglar alarm system is not complicated for a distribution center. Place contacts on all entrance and exit points to include overhead doors, roof hatches, fire doors, and employee entrances. Fire doors and roof hatches should be alarmed 24 hours per day. Motion detectors and photoelectric beams should cover all exterior walls, including air vents. Cover any skylights with rebar or a motion detector.

CCTV

Closed-circuit television is not only a necessary tool from a physical security standpoint, but also serves as a practical component of your auditing program and accident investigation. The greatest vulnerability a distribution center may encounter is through the overhead doors in receiving and shipping. With this in mind, a CCTV system should provide full coverage of these operations. A properly designed system allows audits to occur without having to be on the floor. Other areas of interest include entrances and exits, guard stations, high-dollar items, trailer lots, and exteriors of the facility.

Restricted Access

A card (or biometric) access system not only restricts access from certain areas or at certain times, but it also provides useful information during internal investigations. The ability to match card access data against digital video may be used for time fraud or productivity issues.

Placement of access readers is based on the physical layout of your building. Employees and visitors should only have access to their individual work area. For instance, an employee working in the administration area may not need entry into the warehouse.

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EAS

If your facility carries source-tagged product, you may want to consider installation of EAS pedestals at your employee and driver entrances. This will not only alert you to the individual leaving with merchandise, but can also provide some unexpected results. For example, a few years ago, a delivering truck driver was returning from his run and stopped to return paperwork to the office. Upon entering the building, the EAS pedestal went off. The driver had stolen product from his delivery, placed it in his pockets, and forgot about it. It was the first time we ever apprehended someone for bringing stolen product back into the building.

All of the above systems are great tools in reducing shrink exposure, enhancing safety, and delivering a message to employees, visitors, contractors, and truck drivers about the commitment to physical security. For example, truck drivers who are aware you have good loss prevention systems are far more likely to try something at the less secure company down the street.

The role of logistics loss prevention has undergone many changes in recent decades. Responsibilities continue to expand, but the mission remains the same: Assist in the overall safety, security and productive operation of a distribution center, using a team approach while maintaining the appropriate level of independence.

If you follow these principles, you will build the foundation to a solid logistics loss prevention department.

This article was first published in 2003 and updated May 10, 2017. 

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