Pharmacy 2006 “Protecting Your Bottom Line: Strategies for Preventing Fraud and Shop Stealing”

Pharmacy 2006“Protecting Your Bottom Line: Strategies for Preventing Fraud and Shop Stealing” 8 September 2006 DeanNewlan Partner

Overview Pharmacy exposures to commercial crime Shrinkage and fraud Why do people steal? The ECR “Shrinkage Reduction Roadmap” Strategies for controlling fraud in retail

Commercial crime against pharmacies • Burglary (after hours “ram raids” increasing in frequency) • Armed robbery • Extortion (product contamination) • Theft of cash by staff (under-ringing of sales) • Internal fraud (other than cash theft) • Staff theft of inventory • External theft of inventory • Vendor fraud Shrinkage

Source: Efficient Consumer Response Europe / University of Leicester / Cranfield University A Collaborative Approach to Reducing Stock Loss in the Supply Chain 2001

Shrinkage – just another cost of doing business? These estimates are based on perception – nobody really knows the true break-down as between staff / customers / vendors / process failure … all that is known for certain is that the stock is not there!

But if it’s only 1.73% ……. • At this margin, at this shrinkage rate, you will need to make sales of $3.53 to replace every $1.00 in stock lost to shrinkage – one item is stolen, you sell three to replace it • Out of every sales dollar, 6 cents will go to cover the cost of shrinkage

In the US, security costs are estimated to be .51% of turnover (National Retail Security Survey) Too little spent on shrinkage reduction $8000 $7000 $6000 Equilibrium point reached at $2900 $5000 Shrinkage loss $4000 Too much spent on shrinkage reduction $3000 $2000 $1000 $1000 $2000 $5000 $8000 $3000 $4000 $6000 $7000 Cost of Prevention

Typical retail staff inventory thief • Employed for less than 12 months • Part-time • 20-25 years of age • Gender evenly represented • Commence stealing stock in first few weeks after employment • Frequently taught how to steal by a co-worker • Usually caught about 6 months after first theft • Not yet accepted by work group who are more inclined to “blow the whistle” • Product stolen along “predictable gender lines” Source: Fighting Retail Crime – Centre for Retail Research (UK) Report based on interviews with security managers representing retailers accounting for 50% of UK retail sales

Razor blades • Alcohol • Toiletries • Clothing and lingerie • Batteries • DVDs, CDs, computer software • Pills, vitamins, contraceptives, pregnancy testing kits • Electric toothbrushes • Instant coffee • Meat Most commonly stolen “Fast Moving Consumer Goods” Concealable Removable Available Valuable Enjoyable Disposable Source: ECR Europe Source: Centre for Retail Research (Nottingham)

A few shrinkage misconceptions • Shrinkage control is not core retail activity • Shrinkage is just a cost of doing business – we would be better off if we focused on the top line • Shrinkage is inevitable • The best way to control shrinkage is to focus resources on preventing customer theft • Line management are not responsible for controlling shrinkage – that’s the job of the loss prevention department • Floor staff have no role in preventing shrinkage – they are there to sell, not look after the stock

A few facts about shrinkage • Internal stock theft is perceived to be a larger problem the larger the organisation (smaller retails attribute larger proportion of stock losses to customers) • Employee stock theft results in a significantly higher loss per incident compared to external theft • Lower shrinkage rates are associated with: • Higher rates of pay; • Profit sharing schemes; • Lower staff turnover; • Lower numbers of part-time / casual staff; and • Strong leadership at store level. Source: National Survey of Retail Crime and Security (UK)

Staff fraud in the retail sector • On-line banking fraud • Unauthorised mark-downs (sweet-hearting for family / friends) • Refund fraud • Gift voucher theft or manipulation • Staff discount fraud (family / friends) • Loyalty card fraud (swipe own loyalty card) • Under-ringing sales • Credit card fraud • Lapping (substituting credit card vouchers for cash)

Some examples of retail employee fraud • Theft of cash by store manager (claim cash register down, fail to ring up sale and then retain cash) • Falsification of commission claims (identified by exception reporting) • Refund fraud – process refund on credit card when no previous sale • Store manager demanded secret commission for referring installation work to a plumber, commission paid was added to the price of the job and then on-charged to customer

Why do employees steal stock? • Natural perk of working in retail • Organisational culture • Example set by senior people • Perceived low pay scale • Organisation can afford it • Organisation overcharges customers Rationalisation Motivation Opportunity Cressy's Fraud Triangle

Rationalising dishonest behaviour 10% of people never steal 10% of people always steal 80% of people will steal if given the opportunity

ECR Shrinkage Reduction Roadmap Source: Efficient Consumer Response Europe / University of Leicester / Cranfield University A Collaborative Approach to Reducing Stock Loss in the Supply Chain 2001

Steps to reducing shrinkage • Written company shrinkage policy • Adopt a “whole of business” approach to shrinkage reduction • High levels of intra-company co-operation – accurate measurement • Watch margin closely and investigate variances • Staff incentives program / profit share • Avoid blind spots in display areas / convex mirrors • Regular stock takes • CCTV (no dummy camera domes longer storage cycle) • Warning at entry to store • Staff training • Conduct regular shrinkage reduction projects • Electronic Data Tagging (EAS / RFID / Smart Cards / Source Tagging) • Realign sales staff responsibilities • Data mining to look for indicative pattern (location, employee, time of day)

Fraud and corruption control – AS 8001

Steps to reducing fraud (other than staff theft) • Apply relevant parts of Fraud and Corruption Control as 8001-2003 • Scrupulous control over on-line banking • Tighten internal controls • Fraud risk assessment • Data mining – look for indicators of fraudulent activity • Increase awareness of relevant managers and staff • Set the example as owners / managers • Job rotation / annual leave policy • Alternative reporting avenues (whistleblower line)

Dean Newlan McGrathNicol+Forensic Telephone 61 3 9038 3151 Mobile 0412 731 040 Email dnewlan@mcgrathnicol.com

Pharmacy 2006 “Protecting Your Bottom Line: Strategies for Preventing Fraud and Shop Stealing”