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Changing Behavior—Moving Exception Reporting Beyond Loss Prevention

Many retailers today are exploring different ways of maximizing the use of loss prevention technology such as exception reporting  by exploring other opportunities to use these tools as a means to support the retail operation. This article explores how one loss prevention department worked closely with their retail partners, adding value through the cooperative use of loss prevention technology. 

It’s all about the people in your stores. POS systems have been around for a long time. Exception reporting tools have allowed loss prevention departments to manage with data for years. We’ve tracked shrink numbers and other trends, but at its root the metrics and processes put in place must translate back to the associates in your stores and how they interact with the customer. How can you change their behavior?

Famous Footwear is a 900-plus store specialty shoe chain that is a division of St. Louis-based Brown Shoe Company. It has one of the best retail shrink rates in its field. As a percent of sales, retail shrink rates were one-third less than what they had been eight years ago, and those rates have been declining steadily. By all means available to measure, the LP team was doing its job very effectively.

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But, can an LP team have an impact on other areas of the business? We wanted to try to make the whole company, not just LP, more efficient.

Beginning with a Single Step

Famous Footwear had a proprietary exception reporting system called FACT (Forensic Accounting Crime Tracker), but it was not easy to use and it took forever to get information to us. It did not let us look at associate behavior over time, so we couldn’t monitor specifics like the amounts and the velocities of exceptions over time. We could not determine how often they were occurring with a specific individual, in a specific store, and at what dollar level. The FACT system was clearly past its prime, so we began searching for a more robust loss prevention exception reporting application.

Equally as important, though, was a vendor that could help us implement an exception reporting tool that went beyond loss prevention and operated in a more cross-functional role. We were looking to deal with our losses on a global level and not just from a loss prevention perspective.

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After a lengthy search and due diligence, Famous Footwear selected to partner with Datavantage and to implement its XBR Store Analytics exception reporting tool. XBR is widely known in loss prevention, but we knew that over time we could expand its use into other areas of the company, such as human resources, operations, and merchandise allocation, as well as apply it to other divisions within Brown Shoe.

Creating A Climate Of Honesty

The asset management team at Famous Footwear takes a holistic approach to loss prevention. We see the role of the loss prevention department as creating profit for the company—not just catching shoplifters, not just prosecuting associates who steal, but also putting LP resources to work where we can add the greatest value. To do this we had to change behavior. Otherwise, we would get the same exceptions time after time. For us, changing behavior means altering the whole environment to support improvements in policies, procedures, POS system, associate education, and marketing.

Using the new system as a “secret weapon” would have greatly reduced its impact on behavior. Instead, we started a real buzz about the application before it was even introduced into our LP process. We used a series of teaser emails that automatically launched mini-PowerPoint presentations, letting field personnel know that a new technology was on the way to help them. They were lighthearted and did not dwell on the “how” or the “why.”

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We emphasized that the new application would help us ensure integrity, instead of threatening to uncover dishonesty. One of the key elements, still in use today, was a logo we designed that says “XBR Validated.” It appears on many of the reports we circulate so everyone knows that the contents have been thoroughly examined and are true. Even associate contest rules and results bear this logo, so associates know that the entries and results are examined to eliminate the cheaters. The announced winner will have won fair and square. Not only does this save the company money by curbing cheating, but also it allows the contest to do what it was intended to do—motivate associates to excel.

Small Victories Add up Over Time

After taking a few months to master the application and see initial results, we began to use our new exception reporting system as a tool for identifying the largest opportunities. In order to make this come alive, we had to examine root causes. Results have exceeded expectations. We wanted to create exceptions that could help drive the profitability of our business. As we started delving into it, we found there are things we can fix systematically, behaviorally, and procedurally that can actually drive sales, improve margins, and help increase the speed of checkout for our customers.

Famous Footwear set key performance indicator control points to identify areas where profits were being eroded. These were not necessarily theft issues, but rather areas where profits were leaking away. From the results, we were able to determine that an unusual amount of latitude in coupon redemption and discounting of product was occurring. Three particularly noticeable problem areas were:

  • Loyalty bounce-back coupon redemptions (from a marketing program that was designed to motivate shoppers who signed up for a customer loyalty rewards program to come back for additional store visits),
  • “Coupon Zero” (a default register key for coupons that would not ring properly at POS), and
  • Price overrides.

What we learned was that you have to be compassionate to your people on the front lines and not put them in awkward positions. Because of some of our corporate-driven initiatives, associates are often placed in the position of choosing whether or not to, “bend the rules” in order to save a sale. They are rewarded for sales, and they are expected to make the customer happy. By changing the situation so that they don’t have to make a choice, you dramatically change the behaviors and cut your losses.

Fixing a Problem. As a case in point, we identified inappropriate redemption of the loyalty bounce-back coupon as a widespread and costly problem. Through analysis and several discussions with field managers, the LP department identified problem scenarios, among them a situation where customers sign up for a loyalty card using a brochure at the register.

In the brochure is a prominent coupon announcing, “$5 Off Your Next Purchase.” Frequently customers filled out the form during the sale transaction and handed in the $5 coupon expecting the discount on that transaction, unaware of or ignoring the fine print that stated that the coupon would not be valid until their next purchase.

In almost one third of the cases, the associate chose to redeem the coupon rather than explain to the customer that the coupon could not be used on that transaction. Therefore, cashiers were discounting what should have been a full-price transaction, and, at the same time, they were losing the opportunity for a second sale because they had given away the $5 bounce-back incentive that might have brought a customer back for another visit.

The LP department worked with other departments to see that the environment changed. Associates were trained in how to respond to the request. The POS system was altered to help prevent the discount on the original transaction. And the brochure and coupon were altered to better communicate the terms of the discount.

The number of infractions dropped 40 percent in a matter of months. By using exception reporting to bring focus to that problem, Famous Footwear has improved its margins on the initial sale, without any decline in enrollment numbers, and generated the traffic through additional store visits that have generated incremental dollar sales. In this way, we are actually using the exception reporting tool to drive sales and to train and educate our store associates.

Changing Perspective. About a year after we initiated that change, we looked at the loyalty program from a different perspective. This time we examined participation. We took a sampling from those associate accounts with the most activity and discovered that nearly 20 percent had some form of associate abuse. Associates had been encouraged to participate in the program so that they would be familiar with it and would speak highly of it to customers. Our analysis showed that some associates had earned surprisingly large rewards; perhaps $25 where before that person had earned $5. Investigation showed many associates scanned their own cards if the customer was not a loyalty program participant. Some associates persuaded themselves this was acceptable behavior, while others clearly knew it was wrong, as evidenced by their opening up fake loyalty accounts using legitimate or fake addresses.

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With such widespread abuse, we worked with HR, field operations, and marketing to make associates ineligible to participate in the program. We refocused the loyalty program on its initial intent of building loyal customers.

In the near future we will be issuing a new procedure, through the POS system, that will prevent associates from using a discount coupon or reward certificate in conjunction with their already-generous associate discount.

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An LP department cannot expect to achieve results like this working alone. You need to motivate other departments to work with you. We didn’t take an aggressive stance or imply that they were at fault. We collaborated to devise a solution that solved the problem and supported the people in the field.

Impacting Margins

We are trying to be a progressive LP team. We were already working to control and stop associate theft, but we were ready to go after the larger, global profit-erosion issues that, when controlled, could help us significantly improve our margins. We felt that if we had an exception reporting tool designed to address margin-control issues within and beyond the traditional loss prevention realm, we would certainly generate real benefits down the road.

Sometimes to change behavior you need to first identify conflicts in policies and procedures. For example, through exception reporting, the LP department noticed a large number of discounts were given using “Coupon Zero.” Surprisingly, that was a code that was unfamiliar to the marketing department. Research revealed that the code was used at the POS if an associate chose to honor an expired coupon; a policy that was communicated poorly in various sections of the procedures.

Store associates were doing what they were measured on—trying to accommodate customers and drive sales. But by accepting expired coupons, the cashiers were discounting products needlessly, negatively impacting revenue and profits. Since the POS system and the manual supported the override choice, the stores used it. Once the issue was identified and brought up for discussion, the LP department worked with the other home office groups to achieve a consensus decision. The groups involved determined the best policies, revised the procedures, and re-educated the associates.

The new procedure reduced the trend by 62 percent and saves the chain significant dollars each week. In addition, not accepting expired coupons helps to drive better store-level recognition of our current marketing promotions.

A similar process of identification, research, discussion, and revision has helped Famous Footwear rein-in price overrides as well. One of the easiest routes for a cashier to take to steal is to under-ring an expensive item by doing a price override. We don’t want people to use the price override key very often, because if you use it, you can get too comfortable, and it can tempt people to do things that become detrimental to your operations.

We needed to find out what caused the legitimate reasons for price overrides. Were they policies, pricing changes, marketing promotions, POS limitations? We discovered through the exception reporting analysis several of the main legitimate reasons that associates were hitting the price override key, including

  • To ring up a transaction that included a gift with purchase. Cashiers were instructed to override the price of the gift to bring the payment of the gift down to zero.
  • To ring up some discount promotions, such as offering multiple items at a special low price or “Two For or Multiple Sale” promotions.
  • To ring up many of our clearance markdowns. We realized that about 40 percent of our markdowns are done via price overrides.

Again we showed our results to operations, marketing, HR, IT, and other corporate functions, explained our concerns regarding over-use of the price override key, and worked cross functionally to change our operating procedures on the POS.

Removing the need to select the price override key is a significant win for us. Price overrides was our single biggest ROI area of impact from unacceptable uses. We knew that breaking the habitual use of any form of price override would build a climate of honesty in the store by not having cashiers use that key unnecessarily.

Plus, when 40 percent of your markdowns occur as a price override, it’s a huge volume of dollars that greatly obscures the real out-of-the-ordinary transactions that exception reporting looks for. By changing cashier behavior at POS, we can now get a hit on the true exceptions, understand whether we have a training problem, a policy procedure issue or possibly fraud, and follow up from there.

ROI Is More than Dollars

One of the most effective ways to change behavior is to get out into the stores and sit down with store managers to probe into the root causes of higher levels of exceptions and profit-erosion issues. Exception reporting enables us to flag and monitor stores as well as individuals. We often meet with people and hear justifications like “We were just trying to drive the business, and we thought this was the right thing to do.”

While we’ll often find some fraud, we are also on the watch for things occurring that might be related to training or policies or procedures. We strive to make sure we don’t put associates in a spot between trying to do the right thing for the customers and negatively impacting the business. And that awareness has been one of the biggest benefits of our move to the new exception reporting application. Sure it’s a tool for loss prevention, but if you also use it for your entire business, it becomes even more valuable. It creates tremendous awareness and lets you focus on true exceptions and allows you to drill down to identify and address root causes.

Today, almost two years after implementation, Famous Footwear has realized a substantial return on investment. We received a full payback in about six months, and there are still many cost-saving opportunities on the horizon. But we couldn’t get results like this without partnerships and buy-in throughout the company. Now we are often asked to consult HR policies as well as operations and marketing programs before they are published—the time when loss truly can be prevented.

 

The power of exception reporting keeps the LP department focused on the simple things we do best—problem solving—but at a whole different, larger level of scope. We still address issues of associate theft, but changing the environment around the behavior gives us much bigger results.

Through intent and consistency we will drive margin and top-line sales with the understanding that the true measure of our success is revealed in the customer experience. We continually find that the use of exception reporting is limited only by imagination.

 This article was first published in 2005 and updated January 2016.

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