- WHITE PAPERS
Company leaders were puzzled how one location's inventory losses climbed out of control and be sustained for so long. What was particularly confusing was the location was supervised by an experienced Area Manager. The four other locations under his supervision were performing extremely well in controlling inventory and exceeding profitability goals.
Reviewing the usual suspects
Operational reviews of the usual suspects were conducted; cash management, inventory ordering, product handling, and this situation in a quick-service restaurant — portion control. None were perceived as contributing to the loss of inventory. The management team seemed well trained and the employees were in compliance with policies and procedures. It was a mystery. A loss prevention professional was called in for assistance.
The loss prevention professional
The LP professional confirmed that tight hiring practices were intact and the employees were well managed at the troubled location. Cash handling operations were reviewed for overages and shortages. POS reports were reviewed for exceptional patterns in voids, refunds, price reductions, and promos. No suspicious trends were noted that fraud was occurring. The back door and receiving operation was in compliance with company policies and procedures. So what was accountable for the inventory losses?
An exploratory interview was conducted with the store manager regarding the inventory shortages. The manager confirmed that operational policies and procedures were maintained by the staff and compliance was the rule. The manager displayed an air of confidence that seemed extraordinary under the circumstances of such poor profitability and inventory control performance. It was noted that there was no disciplinary action documented, nor subsequent action plans recorded by the supervisor for the manager to improve profitability. It didn't fit with the company's operational standards.
The investigator reviewed the daily inventory counts and noticed something peculiar. On a particular day of the week, the inventory case counts on higher end products dramatically dropped. Further review indicated that the pattern continued on the same day going back every week for several months. The indication was – THEFT!
A late night surveillance was set up at the location. In the wee hours of the morning, the store manager and two assistant managers from two of the other locations supervised by the Area Manager entered the location. They exited with cases of product and placed them in the trunks of the cars driven by the two assistant managers. One of the assistants was followed back to his location and observed entering with the product.
In the morning, alarm system activity reports of all five locations were reviewed. They showed late night entries on the same day each week for months. That particular day happened to be the day weekly inventory counts were conducted and reported to the office. Daily inventory counts of the four other locations were reviewed. On inventory count day, the four other locations showed substantial case count increases matching the losses at the first location. No product transfer documents were entered into the back office computer systems. A theory was developed.
An interview of one of the assistant managers was conducted. The assistant manager admitted to participating in the weekly late night escapades under direction of his manager. The manager was interviewed and confessed that he did in fact direct his assistant to bring the product into the store on a weekly basis and not enter it as a transfer. It increased their inventory without any debit, thus increasing profitability. The manager also implicated the Area Manager in the scheme. The manager of the second location involved in the late night inventory operation also corroborated the scheme and implicated the Area Manager. The theory was validated.
Hefty bonuses were paid by the company based on profitability. The Area Manager and his store management staff shared the substantial bonuses. Based on the significant losses, the manager of the first location did not receive a company paid bonus. The first location's inventory was sacrificed by the Area Manager for the good of the other four locations so the management team including the Area Manager would receive the bonuses. It was Robin Hood in reverse; taking from the poor and giving to the rich. The store manager of the badly performing store was financially compensated "under the table" by the Area Manager for sacrificing his inventory and company bonus.
The information collected in the investigation was reviewed with company executives. A total of eight employees were terminated including the Area Manager and all five store managers under his supervision. The managers were terminated because they willingly participated in the inventory scheme in order to receive associated bonuses. It was a bold move by the company to terminate experienced management staff. The blow adversely affected the operations of those five locations until their replacements via promotion and hiring were trained. The action reinforced the values and expectations espoused by the company. It was not the easy thing to do, but the right action to take.
If you are confronted with peculiar and unexplained issues with cash management or inventory control, look beyond the "usual suspects." Don't let the losses mount. If you can't figure it out, call in loss prevention professionals. They think differently than you do when it comes to identifying the problems and offering solutions. It's what they do.
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