Installing a Retail Asset Protection Model in a Wholesale Distribution Environment

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This article analyzes the implementation of an innovative retail asset protection program at Hughes Supply, a wholesale distributor of construction supplies. The company has undergone several organizational changes since this article was published, but this in-depth look at its history and asset protection functions can still provide valuable lessons to today’s LP professional.

It could have been a discussion about the theft of the latest designer jeans or the hottest new perfume with a movie star’s name. Scott Halterman, however, was talking about heists of truck beds piled with copper pipe: “High-value plumbing and other quality construction supplies are always in demand.”

As a regional asset protection manager for Hughes Supply, Halterman knows firsthand that the heavy-duty industrial products his company sells are every bit as much in demand as designer clothing or the sexiest consumer electronics. “There is a huge market for reselling stolen industrial supplies. Some contractors do know, but many more don’t know, they can be buying stolen goods,” Halterman said.

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Becoming a Giant…by Little Steps

Hughes Supply’s corporate history is interesting in itself, but it is especially relevant to understanding the accomplishment that the company’s current retail asset protection program represents. That’s because asset protection at Hughes Supply is an illuminating story about changing a mature organization and its culture, introducing cutting-edge technology into a traditionally low-technology environment, and having the courage to look outside its own industry niche for new ideas about asset protection.

Hughes Supply was founded in 1928 by Russell Hughes and his father, Clarence. It became a public company in 1970 and today is a Fortune 500 company trading on the New York Stock Exchange with $4.4 billion in sales in its fiscal year ended January 31, 2005.

After operating initially out of the Hughes family garage, for many years the company has had its headquarters in downtown Orlando, where it recently moved into a new 40,000-square-foot building in what is now called Hughes Square. In a diverse and highly fragmented $200 billion industry, the company is a long-term player—and leader. Hughes Supply was recently named the “Most Admired Company” by Fortune magazine in its “Wholesalers: Diversified Industry” category.

Hughes Supply is one of the country’s largest wholesale distributors of materials for building construction, repair, and maintenance. This includes products such as pipes, fire hydrants and water meters, plumbing fixtures and HVAC equipment, electrical supplies, electrical transmission and distribution equipment, building materials, and fire protection devices.

With strong internal growth and countless acquisitions of other local and regional suppliers, Hughes Supply has grown from a family-owned local Orlando supplier to a sprawling national company heavily concentrated in the southeast and southwest United States. It sells over 350,000 products purchased from over 10,000 suppliers, although the company points out that about 800 suppliers provide over 90 percent of its products. The company supplies its products through over 500 branches in forty states and serves over 100,000 customers.

Does Hughes Supply Have a Shrink Problem?

Allen Coleman, former corporate manager of asset protection and now a company consultant, quickly pointed out that external theft of Hughes Supply’s warehoused goods has never been a prevalent issue and that local break-ins at branches are quickly investigated as well as reported to the police. The vast majority of employees behave ethically. However, there have been rare instances of well-planned, well-considered employee theft at the branch level.

“Over the years, Hughes Supply has encountered inventory shortages at a few branches,” explains Coleman. “At times, the alarm bells did not go off, probably because a branch could have significant shrink, but still have extremely strong sales and profit. Our approach to loss incidents was primarily reactive in terms of bringing in investigators and contract security when it was really needed. We did not have a formal security function until about 15 years ago and no formal asset protection program until five years ago.”

Hughes Supply is not a typical example of a geographically dispersed, multi-outlet firm that experiences fast-paced growth over many years. While the construction industry is cyclical and interest-rate sensitive, companies like Hughes Supply always have longstanding customers who need to maintain, repair, and modernize their properties’ infrastructure systems.

Even more significant is that Hughes Supply is quick to boast–justly so–that much of its brand strength and basis for success is strong local service. (The company’s marketing tagline is “Solutions. Supply. Service.”) Many of its branches are well established and well known in their locales, with many branches having belonged to already successful companies that Hughes Supply acquired. This is part of what is truly great about Hughes Supply, but must also be managed carefully.

Inventory shrinkage at Hughes Supply and certainly at other mass wholesalers is distinctly different from losses in the retail world. Hughes Supply’s typical branch operation consists of an office and warehouse in about 19,000 square feet. The “stuff” of shrink at Hughes is the high volume of bulky supplies and materials and easy transportation at local levels. That’s why Halterman, who joined Hughes Supply in 2004 after holding retail LP positions at Montgomery Ward, Lowe’s, and Steinmart, pointed out that because of the scale of each local operation: “The average dollar loss per branch case is much larger than at a typical retail outlet. Also, the average tenure of employees committing these crimes is an astounding six years versus maybe six months, and often, much less in retail.”

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Installing Proactive Retail Asset Protection

Proactive asset protection at Hughes Supply pretty much parallels the company’s recent rapid growth through strong branch sales and major acquisitions. “We needed a proactive asset protection program as well as much stronger internal controls,” said Coleman.

In late 2000, John Paré joined the company’s legal department as associate general counsel for litigation. The new president, Tom Morgan, joined as president and chief operating officer in 2001 and then became CEO in 2003. In 2002, Hughes Supply committed to a five-year strategy, driven from corporate headquarters, to build a proactive asset protection program encompassing the company’s far-flung branch and distribution center operations.

Asset protection at Hughes Supply reports directly to Paré, who is now senior vice president and general counsel reporting directly to the CEO. “As the executive sponsor of the department, I am the champion of the asset protection function,” said Paré. “I also enforce the code of ethics at Hughes Supply. As a corporate lawyer who is a former criminal prosecutor, I have a perspective that, while probably unusual among general counsels, is immensely helpful in the asset protection arena. Our CEO has led the way in establishing our focus on ethical behavior, and we are creating a company culture that will not tolerate inappropriate behavior from any of our employees.”

The initial core concept behind Hughes Supply’s new asset protection program was to look hard at the retail world and its loss prevention practices. “One early realization was that branch shrink directly impacted the branch’s bottom line—not its top-line sales,” said Coleman. “Those unnecessary losses of profit dollars became a clear thorn in the side of top management. A second realization was that some of the preventive LP measures that were well-proven in the consumer retail world could be effective in our world.”

The first initiative under the new program was to identify the top 30 Hughes Supply branches in terms of the largest reported inventory variances relative to annual sales. As they had anticipated, many of those branches had records of fast-growing sales, which helped to explain why the loss issue had not been addressed earlier. Coleman and his small, but growing, regional group of asset protection managers launched numerous investigations. Only a small minority of branch locations was discovered at fault. “The significant benefits have certainly outweighed the costs of our group’s operations,” Coleman said.

The hard, proactive, retail asset protection work and investment was just beginning. The next and biggest challenge was installing a proactive retail-style asset protection deterrent against future losses. The new program is a mix of low-tech and high-tech, incorporating, tools, controls, and training. The new program elements include:

• Site surveys of branch locations to check, and upgrade where needed, basic locks, lights, alarms, and camera security
• Regular use of security officer services where branch managers consider it warranted
• Implementation of investigation case management software
• Introduction of a company-wide workplace violence prevention educational program
• Requiring pre-employment background checks and ethics profiling of branch manager candidates
• An external, anonymous call-in ethics hotline
• Required branch management asset protection training
• Active consideration of new technologies and approaches

Today, retail asset protection is a visible and positive issue at Hughes Supply branches and distribution centers. Asset losses are on a downward trajectory. Equally impressive is that, as Coleman said, “We have suppliers and even some competitors reaching out to us to understand our new program and the retail concept.”39_copy

The New Era: “Hughes Unified”

Arguably, one of the most significant aspects of Hughes Supply’s new approach to retail asset protection is that the shrink issue and asset protection program are being recognized as a significant component of the company’s strategic investment in internal controls. There is a long-lived body of conventional thinking that asset shortage is a security and loss prevention issue somehow a few degrees separated from a company’s internal controls, management accountability, and company culture.

On the other hand, Hughes Supply understands that internal shrink is a matter of internal controls and corporate fiduciary responsibility. Regardless of whether or not shrink reaches a dollar level that makes it technically “material” to a company’s financial health, losses of any kind directly undermine profitability.

In parallel with its investment in asset protection is Hughes Supply’s ongoing, much larger, investment in what it calls Hughes Unified. This is a new information technology framework designed to integrate all branch business operations and customer support into an integrated, enterprise-level, best-in-class operations management environment. It includes everything from customer order fulfillment, to inventory management and control, to logistics and distribution, to e-commerce with customers and suppliers, to accounts payables and receivables. The company said it is looking to expand the Hughes Unified platform to include all aspects of information flow, decision-making, financial management, purchasing, and data warehousing.

In addition to achieving operational efficiencies and improved customer service, Hughes Unified is reducing the chance of any misappropriation of resources and other inappropriate activities at any and all levels of the company. As Paré said, “We are providing our managers with the technology and other resources to improve their bottom lines, which includes reducing or eliminating shortages.”

Increased Visibility to Retail Asset Protection

It is fair to say that Hughes Supply is emerging as an excellent example of a long-standing and well-respected company that is reinventing itself. Coleman points out that ultimately Hughes Unified is about culture change. The challenge for any company—old or new—is to invest in new technologies and approaches to achieve operational improvement as well as preserve and build upon its traditional customer service strengths. Hughes Supply’s installation of so many aspects of classic retail loss prevention speaks volumes about its commitment to renewal.

This article was originally published in 2005 and was updated January 18, 2016. 

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