Retooling the LP Strategy at Home Depot

If you’re looking for the perfect loss prevention strategy, one that will resolve accounting errors, stanch losses to internal theft, and scare away thieves… You can stop searching. It doesn’t exist.

It’s true that some are more effective than others, and that some are better suited to one environment over another. Other approaches work well, but slowly lose their effectiveness over time as conditions change.

All this means that our methods, our approaches, and our tools have to be flexible enough to adapt to these changes and, in fact, to help us anticipate those changes and meet whatever ill they might bring.

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As effective loss prevention managers, none of that would be possible without a philosophical and financial commitment from our executive management.

To obtain that commitment, we have to make the case. And before you make the case, you have to be able to quantify the impact. In loss prevention, as in all things, you cannot manage what you cannot measure.

At the end of your presentation to management, if you have not demonstrated how your effort will have a positive, sustainable, and reliable return on investment, you will not earn that commitment. And whether you realize it or not, your plans for a loss prevention program are probably in a lot of trouble.

But developing an effective strategy, backed by all the right tools, doesn’t have to be so elusive. Getting started, however, requires some background.

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The Roots of Loss Prevention

The science of loss prevention can trace its roots to the advent of exchange economy, where people first fabricated or cultivated items not for their own use, but for sale to others. This specialization was more efficient at creating wealth, but it also required the creation of inventories. And where there is an inventory, there will be thieves and accounting errors.

As the owners of these inventories developed countermeasures to battle theft, the bandits found bolder and more imaginative methods of stealing. And this bred more countermeasures, including the development of ideas such as security, surveillance, deterrence, and even retribution.

And as the scale of these early merchants’ businesses grew, so did the task of accounting for their goods. Concepts such as payroll, taxation, credit, distribution, and even returns added new and confusing dimensions to the simple tasks of counting units and income. This led to the invention of double-entry bookkeeping in 1494 by the Italian friar Luca Pacioli.

It would seem that not much has changed during the last few thousand years. There are still merchants seeking to protect an inventory of goods, and there are still people trying to help themselves to that inventory. And, despite Pacioli’s invention, there are still discrepancies between documentation, invoices, and the actual product count sitting on incoming pallets.

For their part, thieves remain as bold as ever. Their most effective method remains the simplest—casually walking out of a store with unpaid items. But increasingly, shoplifters are employing technology (or turning our own against us), getting away not just with stolen items, but with apparently valid receipts and even a heartfelt “Thank you” from our own employees.

Again, the answer lies in countermeasures, from the simplest to the most technologically advanced. To stop them, we still employ concepts related to security, surveillance, and retribution. At Home Depot, for example, we strive for an effective balance between deterrence and detection. In other words, we’ll catch you if we haven’t already scared you away.

The truth is companies often don’t help themselves. New products, policies, merchandising concepts, and sales procedures open up new opportunities for pilferage. Items created to boost sales, for example, are designed without an eye toward loss prevention. Along with increased sales may come even higher shrink levels. For example, before Home Depot launched self-checkout stations in our stores, we subjected the system to tests by our loss prevention personnel. Not surprisingly, they found ways to defeat the system. Our equipment vendor took that experience back to the drawing board, devising new defenses against theft, and we tested it again. Still, we found a few cracks, but through this cycle of testing, LP helped create a system that, in terms of theft, is at least as effective as a conventional checkout lane.

At the same time, methods designed to save logistical steps or reduce paperwork can have the same deleterious effect. The simplest programming error can cause millions of dollars of inventory to vanish from one place and appear in another. Then you’re not just faced with shrink; you also have an equally serious problem, swell.

Ask an accountant which is worse. The answer is neither—both are equally bad, precisely because they are not zero.

Tracking Loss versus Developing Prevention

The process of battling new threats to combat losses is subject to a brutal shelf life. Methods and procedures that worked in August may be obsolete by September. It’s not just the inventiveness or desperation of thieves to blame, but the speed at which the retail environment evolves.

The Home Depot is the second-largest retailer in North America, generating more than $60 billion in annual sales in only its twenty-fifth year of existence. No other company has grown to such a level in so short a time.

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The implications for that growth are enormous, and they carry with them the seedlings of a lot of new problems…some small, some large. Almost everyone can name at least one example of a company that grew so quickly that it could no longer manage itself. It imploded and now no longer exists. These examples powerfully motivated the two men who founded Home Depot—Bernie Marcus and Arthur Blank.

And those examples continue to motivate our current CEO, Bob Nardelli, who last year frankly told the company’s 300,000 associates that what brought us to become a $50 billion company is not what will deliver our next $50 billion in growth.

There is an enormous transformation under way at Home Depot. Despite our enormous, enduring success, our more than 1,700 stores are being profoundly upgraded in every way. They are being remodeled and receiving new assortments and more exciting products, with the support of nearly two dozen new technology initiatives that touch the customer directly and indirectly. And, every bit as importantly, our staffs are getting new training and human resources support.

Loss prevention has a huge role in Home Depot’s continued success. With the application of new policies, procedures, and technology in just the last three years, our shrink percentage continues to improve. That movement becomes starkly significant when you consider that, for any company with $60 billion in sales, a single basis point of shrink represents $600,000 worth of unrecoverable loss.

To a great extent, the challenges encountered by loss prevention at Home Depot during the last three years stemmed in large part from our growth. Even loss prevention had become a victim of the company’s own meteoric success.

Without a proper understanding of appropriate staffing levels and the necessary tools to do the job, the function of LP had become primarily audit focused—more about tracking loss than developing prevention. Moreover, the company’s stores were managed by nine virtually autonomous divisions, plus Canada, each with its own buying office, its own advertising, and, among other things, its own approach to loss prevention.

This situation was purely a product of the blinding speed of our growth. A new Home Depot store, with a realistic potential to become a $40 million enterprise, was opening somewhere every forty-three hours.

In addition, Home Depot is a unique retail environment. It is not unusual to find $300 items that can be easily concealed and fenced, or for a cashier to ring up a $50,000 sale.

Gradually, methods that had worked before were now not working so well.

Tuning up a $60 Billion Car

With the massive centralization of our company into ever fewer divisions (there are now three, plus Canada), came a standardization of dozens of processes, the unavoidable application of best practices, and, for loss prevention, the opportunity to demonstrate the true value and potential of our contribution.

This is where we found ourselves making the case: demonstrating a positive, sustainable, and reliable return on investment. You can frame it in the context of a business plan, as we did. But whatever your method, you still have to be able to show the boss how he or she can spend a buck now, and get two bucks back tomorrow.

In a retail environment, if loss prevention is not thinking about sales, merchandising execution, and customer service, we’re not doing our jobs.

Our executive management placed an extremely high value on the loss prevention function at Home Depot, primarily because it deals with the sustainable elimination of preventable losses, and therefore improves the efficiency of the system. Think of it as a big tune-up for a $60 billion car.

This created a sharper focus than had ever before existed, along with the creation of an enormously creative and capable cadre of loss prevention professionals. This in itself became a powerful recruiting tool, just as a dominant sports team attracts star players.

Headcount in LP has grown fivefold, to more than a thousand highly qualified associates, stationed mainly in the field. Loss prevention managers are now assigned to every operational source of loss in the operation, to merchandising as well as to front-and back-end operations.

For Home Depot, this has been the most apparent aspect of transforming the loss prevention function from an auditing mentality to a leadership mentality—put the loss prevention managers where the loss can most effectively be prevented.

From Anywhere in the Store, Say “Cheese”

The most obvious product of this investment has been the installation of more than 40,000 digital surveillance cameras throughout our store base during 2003. These cameras afford loss prevention managers the ability to monitor key areas of our stores, including the exterior perimeter. The images are full motion and in color and, because they are in digital form, can be emailed to any recipient and viewed from any properly equipped office.

The cameras can provide us with an effective tool for a wide range of investigations, including shoplifting and other forms of fraud.

But their greatest value is in deterrence. A shoplifter is far less likely to test the environment knowing that surveillance cameras may be recording his or her actions. Should they be bold enough to try something, we will interdict and prosecute. Before long, the word spreads that Home Depot has become an impossibly hard and highly risky target for theft.

The 40,000 live camera domes include a number of pan-tilt-zoom platforms. We also have installed thousands more dummy domes, identical to the live cameras. No matter where you stand in a Home Depot store, you may count at least five domes within sight. And the bad guys don’t know which domes contain cameras and which are dummies.

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Loss prevention managers are now assigned to every operational source of loss in the operation, to merchandising as well as to front-and back-end operations.

But no single technology such as this will be a panacea. The surveillance system cannot leap from the ceiling and apprehend a thief. By itself, all it can do is provide us a warning or, from its vantage point, evidence. This technology is useless without aggressive measurements, improved training, and strategic execution that makes it part of an arsenal, rather than just a standalone tool.

What is the point of documenting a theft if you aren’t prepared to go out and apprehend the thief? If the system indicates the same item is being stolen repeatedly, what changes in merchandising and deterrence are necessary to prevent it? What behavioral training is being applied to identify suspicious activity so that you may witness and document the theft?

But also consider that the network of cameras can provide us with views of a store thousands of miles from an office. It can provide ergonomic data on customer movement and even the effectiveness of the placement of merchandising displays for sales.

Every display can sell more or less, simply by virtue of its orientation or location within a store. The questions for product merchants are, “What is the optimal orientation,” and “What is that optimal location?” Even for them, the surveillance cameras can be a highly effective tool.

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