Every year, retailers and other businesses lose inventory worth billions of dollars due to theft, inventory obsolescence, fraud and employee errors. That’s why it’s important for companies to adopt loss prevention measures — a set of strategies, tools and technologies that businesses can use to reduce problems such as shoplifting, employee theft, fraud and preventable administrative mistakes. In the retail industry, which typically operates on slim margins, reducing inventory losses plays a critical role in protecting profits. Loss prevention is also important for businesses in other industries, including restaurants, wholesale distribution, logistics and healthcare.
What Is Loss Prevention?
Loss prevention aims to preserve a business’s profits by reducing losses due to theft, fraud or operational errors. Loss prevention is widely used in the retail sector to address problems such as shoplifting and employee theft, but it’s also applied in other industries that frequently experience theft and fraud. Many retailers hire loss prevention teams that are responsible for managing day-to-day store security, investigating problems, developing loss prevention policies and researching technology solutions. Closed-circuit television (CCTV) video monitoring and analytics, security tags, point-of-sale systems and inventory control are among the tools that are employed to detect and prevent theft.
- Loss prevention aims to protect business profitability by reducing losses caused by theft, fraud or operational errors.
- According to the NRF, in 2021 the retail sector alone lost close to $95 million in sales due to shrinkage.
- External and internal theft are among the most common causes of loss.
- Proper employee training, a dedicated loss prevention team and technology can help combat losses.
Loss Prevention Explained
Businesses can experience a variety of costly losses, so companies often use several loss prevention tactics to protect their profits.
Inventory loss, also known as shrink or shrinkage, is a major concern for retailers and many other companies. U.S. retailers lose about 1.5% of their inventory each year, and in 2021 that represented nearly $95 million in lost retail sales, according to a National Retail Federation (NRF) survey. But the problems are not unique to the retail industry. Other businesses that suffer from inventory loss include wholesalers, transportation companies, restaurants, hotels and hospitals.
In retail, the biggest causes of shrinkage are external theft — theft by outsiders, including organized crime groups and individuals — as well as internal theft by employees and operational errors, according to the NRF survey. Ecommerce and omnichannel fraud are also problems, plus losses can occur while goods are in transit to stores and when they are stored in warehouses. Loss prevention, also known as retail asset protection, focuses on reducing all of these problems.
Many companies employ loss prevention managers and teams that aim to reduce shrinkage by relying on security measures at physical stores, company headquarters, local offices and warehouses. Some teams also focus on reducing ecommerce and omnichannel fraud. Loss prevention teams range in size from a handful of members at smaller companies to hundreds or even thousands of people at major retailers with multiple locations. Retailers often assess their teams’ performance based in part on their ability to reduce inventory shrinkage.
Loss prevention managers are often responsible for implementing policies to reduce fraud and selecting anti-theft technologies, as well as overseeing day-to-day store security and investigating problems. In addition to traditional approaches, such as employee training, closed-circuit television (CCTV) and item security tags, loss prevention teams may use advanced technology, including video analytics and license plate recognition, to detect theft and other problem behavior. Responsibilities may also include reducing losses due to inventory damage and protecting businesses from organized crime rings that have increasingly made aggressive attempts to steal merchandise.
Common Causes of Business Profit Loss
Many types of business losses can eat into a company’s profits. Here are six of the most common causes of loss.
Theft from external parties increasingly includes organized crime groups who steal large amounts of goods from stores and warehouses, as well as smaller-scale shoplifting by individuals. Another common problem is return fraud, in which criminals return stolen goods and in exchange receive cash or gift cards that they sell online. Retailers surveyed by the National Retail Federation identified external theft as the biggest cause of losses, accounting for more than a third of inventory shrinkage.
Internal loss includes malicious activities by employees as well as unintentional errors. Malicious acts that result in the loss of saleable inventory include theft, fraud and vandalism. Non-malicious problems include administrative and operational errors, such as making accounting mistakes or accidentally mispricing goods.
Typical examples of internal theft include employees stealing products or cash either on their own or in collusion with external parties, such as contractors. Internal theft can also result from “sweet-hearting” — when employees give away items to friends or ring them up for less than the sale price. Because many employees have privileged access to facilities, systems and inventory, internal theft can be particularly difficult to prevent and detect.
Operational and administrative errors.
Company officials may make unintentional mistakes that result in financial losses. For example, employees may incorrectly accept a product return because they don’t understand the company’s return policy. Staff members might mistakenly price goods too low, accidentally enter the wrong value at checkout or inadvertently overpay suppliers. Poor inventory management or accounting errors can lead to losses that remain undetected. Many operational errors occur because the company hasn’t developed clear policies, ensured that all employees understand them or implemented controls to enforce them.
Fraud related to online orders is a growing problem throughout the retail sector. People may demand refunds by making fraudulent claims that items were never delivered or were damaged in transit, for example. It can be difficult to detect repeat offenders because they can create multiple online profiles to disguise their behavior.
Criminals use a variety of tactics to impersonate a company’s suppliers and obtain payment, including generating fake invoices, email messages and phone calls. Employees at authentic suppliers may also commit fraud by falsifying invoices or other documentation to obtain additional cash.
Importance of Loss Prevention
The overriding goal of loss prevention is to contribute to the company’s profitability by reducing losses. The investment in loss prevention staff, equipment, technology and training should more than pay for itself by reducing problems such as inventory shrinkage. However, loss prevention can also provide other benefits. For example, if the company can reduce the amount of inventory that goes missing, the information in its inventory management systems will more accurately reflect what’s in stock, thereby reducing the chances that customers order products and later find out they’re not in stock. Accurate inventory information also supports better business planning and financial reporting.
Loss Prevention Strategies and Tips
Many businesses employ a combination of loss prevention strategies, including creating dedicated loss prevention teams, training employees and applying technology.
Education and awareness.
Any loss prevention strategy should include a focus on educating employees about the importance of loss prevention, problems to watch for and how to respond. For example, awareness programs can help employees spot shoplifters, explain what they should do when they see theft occurring and describe how to verify that product returns are valid. It’s helpful to reinforce these practices by updating awareness training at regular intervals.
CCTV and access control.
Security cameras placed throughout the store can act as a deterrent as well as enable staff to catch people in the act of theft. Cameras can also be placed in other locations where losses may occur, such as delivery and loading docks. Access control systems can help prevent unauthorized access to offices and other locations.
Electronic security tags attached to high-value items can deter shoplifting and alert staff if an item is stolen. When exiting the store, shoppers pass through a security gate that sounds an alarm if tags haven’t been removed. These tags are removed or deactivated at checkout.
Point-of-sale (POS) systems.
With POS systems, retailers ensure that only authorized staff can access cash registers and perform specific functions. For example, businesses can permit only senior staff members to authorize product returns. POS systems can also track register activity, helping businesses identify odd patterns, such as a customer requesting an unusual number of refunds.
Advanced video and security analytics.
Advanced technology is emerging that enables more sophisticated, automated detection and investigation of suspicious patterns of behavior. For example, artificial intelligence (AI)-based video analytics can check whether customers correctly scan items at self-checkout stations. License-plate recognition systems in parking lots can help retailers detect and identify suspects when they arrive or depart.
Store layout and organization.
Basic improvements to store layout can reduce the opportunities for unobserved theft. Clean, well-organized shelves and clear sightlines along aisles help employees monitor shopper behavior and quickly spot whether anything is missing. Locating cash registers near exits can also help reduce shoplifting.
Rigorous hiring practices.
Careful screening, including running criminal background checks and checking references, reduces the risk of hiring employees with a history of theft or fraud. Loss prevention training can be incorporated into the onboarding process to ensure employees are aware of its importance from the start.
Accurate, up-to-date inventory management enables businesses to monitor loss trends and quickly identify problems, so they can investigate and take action. For example, combining physical inventory counts with a solid inventory management system can highlight discrepancies between the information in the system and what’s actually on shelves or in warehouses. That helps businesses pinpoint trends, such as rising thefts of specific products.
Three-way matching helps reduce the risk of supplier fraud by verifying that vendor invoices are authentic and accurate. Three-way matching is an accounts payable process that involves comparing the supplier invoice with the corresponding purchase order and goods delivery receipt to ensure all details match. Manually conducting three-way matching can be labor-intensive, so it’s helpful to use software that automates the process.
Loss Prevention Examples
Retailers use tried-and-tested approaches as well as innovative technologies to overcome loss prevention and other inventory challenges. Here are some key examples:
Security tags monitor inventory.
By using radio-frequency identification (RFID)-based security tags to track inventory across its department stores, a leading UK-based retail chain reduced garment theft by an average of 50%. After a successful initial trial of the technology, the company implemented the system in dozens of stores, culminating in the use of more than 1 million tags across Europe. In addition to reducing theft, the technology has enabled the company to improve product availability and track its inventory much more accurately.
Video footage uncovers internal fraud.
A large retailer applied AI-based video analytics to spot and prevent internal employee theft in real-time. By examining older CCTV-based video recordings, the company identified multiple types of internal fraud that caused inventory shrinkage. The company used machine learning to analyze the recordings and identify patterns of suspicious behavior. This enabled the retailer to spot and predict fraudulent activities, such as employees issuing refunds when no customers were present in the store.
Labels pinpoint shoplifters.
A grocery chain worked with a label supplier to develop anti-theft merchandise labels that helped identify and prosecute shoplifters. The labels uniquely identify items as the grocery store’s property and are designed to remain attached under most conditions, providing the proof that’s required to seize stolen products and prosecute offenders. The labels proved so effective in early deployments that the grocery chain applied them to more than 1,300 items in more than 2,600 stores.
Transform Your Inventory Management With NetSuite
NetSuite provides retailers with a comprehensive suite of applications for omnichannel commerce, inventory management, financial management, customer relationship management, enterprise resource planning and more. NetSuite Inventory Management provides a real-time view of inventory across all locations and sales channels, supporting loss prevention initiatives while enabling businesses to optimize inventory levels and avoid stockouts.
Tighter control over the inventory life cycle helps companies reduce costs, speed delivery and improve customer satisfaction. Real-time dashboards and analytics enable companies to track and improve performance. NetSuite Smart Count helps businesses accurately monitor inventory by conducting physical inventory counts without freezing transactions, thus minimizing the impact on operations. Return merchandise authorization helps retailers verify warranty claims for product refunds, repair or replacement.
Loss prevention is an important concern not only for retailers but also for businesses in many other industries, including hospitality and distribution. By applying techniques and tools ranging from employee training to video analytics and inventory management, businesses can improve profitability by reducing theft, fraud and errors.
Loss Prevention FAQs
What is a loss prevention policy?
A loss prevention policy describes a company’s strategy and tactics for reducing preventable losses, including those caused by malicious acts and unintentional errors. For example, a loss prevention policy could outline the strategies used to prevent different types of losses, such as shoplifting, employee theft and ecommerce fraud.
How can you prevent loss in a store?
Business leaders can take many different approaches to reducing losses in a store. Common techniques include employee training, hiring in-store security staff, deploying video cameras and attaching security tags to products.
What happens when loss prevention comes in?
The actions that loss protection teams take depend on the nature and scale of the loss. Companies may aim to prosecute thefts of items priced above a predetermined value, for example. Loss protection teams may spend time investigating cases of internal theft or fraud before deciding on the appropriate action.
What is the role of loss prevention?
The role of loss prevention is to protect the company’s profits by reducing financial losses. Loss protection aims to reduce theft, fraud and unintentional errors that cost the company money.
What are the steps in loss prevention?
There are many different strategies for loss protection, each of which can involve multiple implementation steps. Executive buy-in is a key first step to obtaining the investment necessary to build an effective strategy. Companies may then identify the main sources of loss, whether they are external theft, internal theft or administrative error. Then businesses can devise and implement methods to address each type of loss. It’s important to maintain accurate inventory counts so that business leaders can track losses over time, monitor the effectiveness of loss prevention methods and adjust strategies as necessary.
What is a loss prevention example?
Many retailers use a combination of several methods to prevent losses, including employing in-store security staff, installing surveillance cameras and attaching security tags to items.