A Primer on LP in DCs

A Primer on LP in DCs

The control of losses in a distribution center is not that much different than in a store. The sources of loss are essentially the same. They may, however, manifest themselves in different ways.

Having attended loss prevention seminars and read the professional literature over the past 30 years, I have found that with the exception of technical advances, there is really very little new under the sun. Much can be gained, however, by attending seminars and perusing the literature, since one is bound to learn a new twist to an old idea or simply have the memory jogged about something long forgotten in need of dusting off and resurrection.

This article will review the major areas of distribution center losses and suggest techniques to identify and then eliminate or minimize them.

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Sources of Loss

Sources of loss, whether in stores or warehouses, are centered around three primary areas: external theft, internal theft, and paperwork errors. (I include vendor fraud as part of external theft.) Losses from any of these sources may occur if the means, opportunity, and motive for theft all exist simultaneously. The key, then, to loss reduction or prevention is the removal of the means to steal, the opportunity to steal, or the motive to steal. Since motive is the toughest and most nebulous of the triumvirate to deal with, efforts should be concentrated on controlling means and opportunity. This approach is equally effective against external theft, internal theft, or paperwork errors or manipulation, which leads to inventory and profit losses.

Some years ago Ernst & Young’s “Survey of Distribution-Transportation- Warehousing Trends in Retail” reported nearly two-thirds of the life cycle of general merchandise is spent in a warehouse and/or in transit between the vendor’s shipping point and the retailer’s shelf. While the trend toward computerized inventory control and automatic ordering/reordering systems has undoubtedly shortened this period, the importance of transit and distribution center security in a retail environment cannot be over stated.

As a foundation for examining techniques to prevent losses, we must accept the premise that the following four points are keystone ingredients to loss prevention:

  • Hiring qualified, honest, and quality personnel
  • Maintaining rigid standards
  • Constant supervision and auditing
  • Establishing a sense of ownership and responsibility for loss control on the part of all employees

These fundamental management concepts must be applied intelligently and appropriately to establish an effective loss control environment. In these tough economic times, no-cost, or at least, low-cost solutions to loss prevention must be made a priority.

For example, techniques such as those listed all present the potential for low-cost, but effective loss prevention tools.

  • Improved disciplines
  • Psychological deterrents
  • Controls and audits
  • Maximizing existing LP programs
  • Use of equipment rather than people

So let’s get specific. How can we really achieve better loss prevention in a DC environment? By applying the same fundamentals used in stores: Deny, Deter, Delay, and Detect those attempting theft.

External Theft

In a store, shoplifting is the primary source of external losses. In a distribution center, with its population limited to employees and authorized visitors, the primary threat comes from burglary and cargo thefts. Cargo thefts are not so much from hijacking of trucks, but rather from item thefts at the point of shipping, delivery, or points in between.

With regard to burglaries, the adequacy of physical security and burglary deterrents must be evaluated, including:

  • Perimeter fencing,
  • Lighting,
  • Alarm systems,
  • Parking controls,
  • Building design,
  • Key control,
  • Closing procedures, and
  • Pin lock usage.

Cargo thefts require examination of items such as:

  • Driver access
  • restrictions,
  • Driver logs,
  • Seals and seal controls,
  • andTruck/trailer distress  and intrusion alarms.

It is my belief that the best deterrent to cargo theft from trailers is a tight, closed-loop seal control system. Such systems may include a different color seal for each day of the week, with each seal serially numbered. Each seal should be accounted for at each opening of the trailer, including empty trucks returning to theDC at the end of the day.

I said earlier there is really nothing new under the sun except for advances in technology. A good example of applying technology to truck seals is the electronic seal, which generates a random seal number electronically every time the seal is broken. Such a device makes alterations or manipulations next to impossible.

Another technological development is the GPS/satellite/cellular-based distress/robbery/location alarms now in use throughout the country and even on shipping containers. As loss prevention practitioners, we must be constantly alert to new technology to increase our effectiveness.
Completing a comprehensive security survey of your distribution center is a logical starting point for an evaluation of your warehouse security. An excellent source for comprehensive checklists for security surveys can be found in Risk Analysis and the Security Survey by James F. Broder, CPP, published by Butterworth-Heinemann.

Internal Theft

While not the easiest of the theft triumvirate to influence positively, influencing one’s motive to steal or not to steal can be addressed. Perhaps in no other theft scenario does the exercise of good management practices have a more direct influence on losses than that of employee theft. Loss prevention, while the responsibility of the entire work force, must start at the top. Senior management sets the tone and their involvement, support, and setting of example is critical to an effective LP effort. A successful LP program requires employee understanding, awareness, and support.

No one can argue that the prevention of employee theft begins with the selection and hiring process. Adequate applicant vetting is critical.

After hire, new employees must be trained and given managements expectations for their behavior standards promulgated by the organization’s rules and regulations. The expectations of management must be thoroughly understood by all employees. An understanding of the rationale behind these rules must also be provided. A system of fairly administered discipline must be in place to enforce the rules without any discrimination with respect to rank or position.

A method of surveillance should be in place to assist management in observing what is actually happening on the warehouse floor and back areas. Closed-circuit television is ideally suited for this purpose. Other methods such as undercover personnel may also be appropriate, depending upon individual circumstances or loss history.

Other techniques can also help to establish effective disciplines and loss control. For example, an ID system not only serves to identify authorized personnel, but can also be used to control access to certain areas and/or specific work functions. Visitor badges are, of course, essential.
Restricting certain categories of personnel from entering specific DC areas may be appropriate. Many distribution centers, for example, do not permit common carrier drivers past “The Yellow Line” that separates the receiving area from merchandise processing areas. Other facilities deny such access with interior fencing.

Many other techniques may be considered, including:

  • Supervised trash removal,
  • Controlled employee parking,
  • Prohibiting open exterior doors unless
  • unloading in progress,
  • Supervised salvage and RTV controls,
  • Periodic employee locker inspections,
  • Package checks of exiting employees,
  • Pocketless coveralls for contract
  • janitorial personnel, and
  • An extraction/insertion program.

Finally, in addition to the techniques discussed, it is essential that routine unannounced audits be performed to assure that the procedures you think are in place and working really are accomplishing what was intended when they were implemented.

Paperwork Errors

Unintentional mistakes and paperwork errors can be as harmful as outright theft. Employees quickly recognize when paperwork is handled in a sloppy manner or never reviewed or reconciled. Such a realization increases any insipient temptation to steal, since they recognize the business has no effective way to detect losses whether accidental or intentional.

One recognized and effective way to “keep everyone honest” as well as providing a means of detecting mistakes is the technique of introducing intentional errors in a controlled manner into the system being evaluated to see if, when, where, how, and by whom they are uncovered and reported to management. The seeding or extraction of merchandise, money, or control documents, coupled with occasional substitution of fictitious quantities in receiving or shipping documents will quickly determine if your control systems are working and how accurate your employees are in performing counts. Repeated intentional errors not discovered or reported are a real cause for alarm and remedial action.

It goes without saying that an accurate paper trail documenting receipt, movement, and shipping of merchandise, whether in the distribution center or in stores, is imperative. Without accurate and adequate manifesting of goods from the start to the finish of the distribution process, no loss prevention program will ever achieve full effectiveness.

Paperwork errors can be reduced by a positive reward for accuracy and awareness programs, which acknowledge and reward those employees who uncover profit-draining errors. The well-known caution about the separation of functions (e.g., never allow the accounts payable clerk to also reconcile the checkbook) applies equally to DC paper processing operations.


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