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Managing Inventory Theft

Furniture World Magazine


Although theft of goods is on the rise in furniture retail establishments nationwide, it is a problem that is too often ignored.


As many of our readers know, this series of articles on freight, warehousing and delivery are based on the real world of furniture retail operations. This one is inspired by a conversation with a retailer whose business failed due to inventory thefts exceeding one million dollars. Just a few years earlier, sales exceeded ten million dollars and were on track to double that in several more years.

This retailer started from scratch with a great marketing plan. Rapid growth put pressure on their two small warehouses. A brief review of their operation at that time resulted in a recommendation to put in place stronger operations management procedures and to consolidate two congested warehouses into a larger facility with systems and room to handle anticipated growth. While they had purchased a well known big-ticket software system, they did not implement systems and operations procedures needed, nor did they acquire adequate space.
When the business failed they had four out-of-control warehouses and an organized theft ring composed of employees and outsiders that was stealing them into bankruptcy and a Going Out of Business Sale.

This business failure could have been avoided by attention to the basics of warehouse management plus the controls recommended in the three part series that began in the August/September 2001 issue of FURNITURE WORLD by Jim Blanco of Blanco Forensic Documents and Fraud Prevention Services (posted to the “Operations Management Index” on www.furninfo.com). Reading that series is highly recommended, especially the October 2001 section on merchandise scams. He states that employee fraud results in annual losses of 400 billion dollars. This article will focus on some additional safeguards that can help your business to avoid these types of losses.

Although theft of goods is on the rise in furniture retail establishments nationwide, it is a problem that is too often ignored. Most of your products are easily sold by thieves or are stolen by employees to meet specific requests from their friends or associates, or even to furnish their own houses! Your sales associates may be unknowing helpers or even be part of the gang, working with shoppers who are “just looking”. While even the largest entertainment centers have been taken, theft of electronic products, accessories and smaller furniture pieces are typical. Since you cannot operate your warehouse like a bank vault, what steps can you take to protect your investment?

Your first line of defense is to make sure that one individual doesn’t control receiving, inventory, disbursements and adjustments. Be especially aware of the trusted employee who works long hours and doesn’t take their vacation.

There are two types of theft. The first is the rare mass theft where thieves either hijack a truck or break into a warehouse. Pilferage or disappearance is more common. Pilferage may involve collusion between truck drivers and warehouse people who load "extra" products on the truck when shipping or receive less than the full quantity of material off an inbound shipment. They may also load the orders obtained through their fellow thieves employed as sales people. My experience over many years shows that employee theft is a much larger problem for furniture retailers than theft by outsiders.

There are multiple ways to defend against theft and pilferage. One is a combination of physical deterrents and systems that make it difficult to break security. Another defense is to attempt to confirm the honesty of your employees.

Electronic warehouse security systems to protect your building when it is unoccupied can be supplied by a wide range of devices. These include window and door monitors, movement sensors, sonic alarms and even closed loop video cameras. Possibly even more important is external security with adequate lighting of exterior walls so thieves don't have the cover of darkness in your parking lots and dock areas. You may also consider a gate to prevent access to the rear of the building. Whenever possible, employee parking should not be against the building.

Management's lack of concern for security is a major factor in thefts by warehouse and delivery people. A primary cause of theft is poor attention to the value of pre-employment screening. Personal interviews, drug screening, reference checks and background reviews all have merit. The absolute minimum is a series of phone calls to verify employment dates and to ask whether previous employers would rehire this person. Expect some companies to only disclose the dates of employment and the job title in today's “sue everybody” environment. You therefore, may want to use honesty tests that disclose attitudes of people who are likely to steal. These tests typically take less than an hour, can be scored quickly and are low cost.

Management can also reduce the risks of employee theft by always driving around the back of the building when coming and going, checking the dumpster and walking through the warehouse at random times. Insist that your managers do the same. It takes so little time but shows employees that you are alert. Cycle counting and periodic inventories are essential.
Multiple warehouses present an easy opportunity for easy thefts when they are not manned full time and various employees have keys. One warehouse lost $30,000 in leather sofas in one month!

Some thefts occur through a joint effort of warehouse receiving staff with trucking or shipping personnel. Receiving counting requires absolute accuracy. Many retailers receive from a copy of the purchase order and mark off the count received and also count off from the carrier's packing list. The receiving tally is the start of the audit trail. This document must contain the required information plus any exceptions such as overages, shortages and damage discrepancies. These must be noted and fully documented. Always count twice before signing once!

When everything is processed, all the receiving paperwork should be clipped together and sent to accounting to be matched with the invoice, freight bill and original purchase order terms. Receiving is both a material handling and auditing process. Bottom line, you must know you have the material ordered, the quantity ordered, received within the acceptable dates, acceptable quality and an accurate record of the transaction. Today’s bar coded warehouse management systems have numerous features that provide control... but they are only effective when they are used consistently.

It may become necessary to use undercover contract employees to detect serious thefts by your employees. Undercover employees can help to inform you about on the job drug sales and other illegal enterprises.

Review how you handle returned goods. Many furniture retailers’ procedures are inadequate.

For example: An entertainment center is picked up from the customer and never makes it back into inventory. There are several possibilities.

•It makes it back to the store and even though it is fully satisfactory, it is written off as scrap and consigned to donations.

•It may have been entered into inventory but was actually dropped off somewhere else on the way back. If you have the same person picking up the unit and entering it back into inventory, your risks are increased dramatically. The lost unit will only show up when you are out of stock or take inventory. Then it will probably simply be written off as a discrepancy.

To prevent this from happening, all returns should go to a designated area, be reconciled daily and be reviewed by a second person.

Bottom-line, hire the most honest people you can find yet maintain a healthy skepticism that they will always be honest. Maintain adequate controls and take time to walk the warehouse and check the facility outside regular hours.

Daniel Bolger of The Bolger Group helps companies achieve improved transportation, warehousing and logistics. Questions can be directed to Mr. Bolger care of FURNITURE WORLD at dbolger@furninfo.com.


Furniture Theft, Employee Fraud

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