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Loss Prevention

Shrink Stopper

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People who commit retail fraud are not particular: They will steal from any retailer any time they see an opportunity.

South African retailer Woolworths, whose product mix includes food, clothing, beauty and housewares and whose sales exceed $3 billion, is quite aware of this. According to Johan de Bruin, loss control manager, Woolworths was experiencing fraudulent activity at the point of sale.

Looking for a sophisticated technology that would combat fraud, management in 2008 began researching companies that had developed analytical fraud management applications.

“We believed that the majority of losses were occurring at the point-of-sale,” says de Bruin, “but our existing systems did not have the ability to identify losses and pinpoint the problems.”

Out of the six tools that management analyzed, Woolworths chose the POS solution from Waltham, Mass.-based Profitect, one of five modules in a comprehensive suite that targets shrink, waste and margin loss.

The implementation began last March with an initial rollout to 13 company-owned stores and focused on three areas, de Bruin says: shrink in food and apparel and fraud reduction. In less than three months, more than 550 cases were logged, with 20 percent resulting in action being taken and items being recovered. Shrink was reduced by 10 percent in that period, he adds.

Given those early results, Woolworths began a full rollout to all company-owned locations in May 2010, and the rollout was completed two months later.

In the six months since the system went live across the enterprise, shrink was reduced by more than 20 percent. That’s clearly “a tremendous benefit to Woolworths,” de Bruin says. “We had already identified thousands of cases that were further investigated with losses recovered, and we are experiencing record results for loss reduction in apparel and general merchandise.”

Woolworths uses other LP tools, but “a significant part” of the success the retailer has experienced “is from the Profitect solution and business changes related to it,” de Bruin says.

Another area of great improvement is in-store card fraud. “The same fraudulent cards were being used across different stores,” says de Bruin. “We now are detecting them and blocking them from further use. Calculating the savings is based on what was likely to have been purchased — we estimate that to be a substantial amount per month.”

Sophisticated POS applications
While POS systems typically come with some basic analytical tools for detecting fraud, those tools are not as sophisticated as a rule engine-based analytical application designed specifically to sniff out fraud at checkout.

“A typical POS is an operational system,” says Omer Matityahu, COO of Profitect. “We use very powerful analytics and rule engines to flag business rules which represent potential error or fraud. There are no POS systems that have these features built in.”

Each store-level POS sends a batch file of all transaction data nightly to the dedicated Woolworths server. Woolworths sets the parameters for the dozens of predefined patterns used by the rule engine.

Woolworths’ LP analysts pull suspicious activity daily, “forwarding what is relevant to store management teams,” de Bruin says. “The store teams use that data as part of a set of tools on the loss control Intranet site.”

Woolworths has “incorporated shrinkage as a measurement for all store management and staff,” he says, “and they are all being rated on criteria KPI.”

The retailer also launched a shrinkage reduction compensation plan. “If you save X dollars, then you get Y dollars, with a cap,” de Bruin says. “We have gone from central management to localized store management, who are responsible for their own P&L.”

The corporate analysts work with local store management on a regular basis. “We have a loss control blueprint and we do [store-] specific things according to our LP plan, which is being audited by corporate,” de Bruin says.

Breaking sweethearts
Woolworths is also using the Profitect software to detect and prevent sweethearting, in which a cashier allows a friend or criminal partner to walk away with merchandise they have not paid for.

Because Woolworths uses bags with scanable barcodes, the rules engine has been programmed to detect whenever a cashier uses more bags than necessary: If a cashier rings up five items, but uses 20 bags, it’s very likely sweethearting is taking place.

Matityahu notes that a retailer can typically achieve a return on its investment in four to six months. Implementation, says de Bruin, was quick and efficient due to the teamwork between Profitect and the Woolworths IT organization.

“Profitect’s relationship-building skills are excellent, even during hard discussions,” de Bruin says. “They really understand our systems and they were very skillful in integrating with our systems and processes.

“The way people work together to implement the program is also critical,” he says. “Objectives need to be crystal clear … [or] the importance of the project gets lost on the business users.”

Woolworths may consider moving forward with other Profitect modules once it has a full year’s worth of POS data, but de Bruin characterizes the effectiveness of the POS module by describing the results of his team as “the best I have seen in the over 23 years that I have been in this business.”

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