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Anti-scam tech takes on thieves

New technology aims to help pick up on employee theft, which is estimated to have cost U.S. retailers $15.4 billion last year.

U.S. retailers are increasingly turning to software to reduce the billions of dollars lost to theft and various scams each year.

A typical heist goes like this: A customer walks up to a cash register with three items and is asked to write a check for the total, $17.59. The cashier scans all three items, but secretly voids the last item, which costs $7.59.

The customer hands over a check for $17.59 and leaves with the items. Later, the cashier takes $7.59 out of the till and pockets it.

The end result: The customer walks away thinking the goods are paid for, and the cash register total shows no discrepancies. But the store is out both $7.59 and the item that was never paid for.

That type of scam can end up costing retailers millions of dollars. And unless a store has a reason to suspect a cashier, it's difficult to catch, as the discrepancy will show up as a missing item, which could be attributed to shoplifting.

"It's not just someone walking out of a dressing room with a shirt," said Doug Grabowski, director of design and development at Tallan, an information technology consulting firm. "Things are a lot more sophisticated. In a large chain, when you're dealing with hundreds of thousands of receipts, it doesn't make sense to do it all by hand."

Retailers use a variety of methods to fight "shrink," as it's sometimes known, using background checks on employees, education programs and closed-circuit television, for example. High-tech methods of control are becoming more popular, according to the report from the University of Florida. Fifty-seven percent of companies surveyed use bar coding and scanning merchandise, and 74 percent set up systems to flag suspect transactions at the point of sale.

The trap
To combat theft, retailers are increasingly setting up software traps to nab wrongdoers.

Essentially, retailers throw all of their transaction logs into a big database, and the software runs a series of rules looking for problems. For instance, the software can be set up to measure a host of criteria, such as the number of voids and returns, sales volume and percentage of voids in comparison with sales. Retailers set up rules based on their specific criteria and are able to track performances of the store and individual employees such as cashiers.

There has been a significant evolution from the '70s to now. Back then, (anti-theft) weapons were a pack of smokes, a strong cup of coffee and binoculars.
--Ernie Deyle, vice president of asset protection at CVS, a drug store chain

The market is a niche one, and some retailers build their own software to handle the job. Others use specialized software from companies such as Retail Expert, Triversity, NSB Retail Systems and Datavantage. The software capabilities commonly include sales auditing; tracking gross sales and returns; monitoring policy violations and other transactions; extracting data; performing queries on specific questions, such as showing all voids over $100; and data mining, combing through the database for suspicious entries that don't pop up under the other queries.

"Clearly every retailer has a need for (loss-prevention software) and every retailer has some form of loss-prevention or sales auditing process," said Paula Rosenblum, retail research director at AMR Research, an independent research analyst firm. But she said it's not always a priority in IT spending.

"Before, you had to suspect something was wrong, or comb through reports and notice that things weren't looking right," said Retail Expert CEO Garrett Knight. But this new software "combs through transaction data on its own and finds exceptions."

The tools also monitor the back end, allowing retailers to track inventory as it arrives from warehouses and is distributed to stores. Newer tools, like radio frequency identity tags, are also appearing. This technology consists of small chips that are affixed to products and that can be tracked wirelessly.

Retailers who use radio frequency ID tags can, for instance, scan shelves every so often to check on the inventory that is there. They can also use the tags in warehouses to monitor where inventory is being shipped and moved around, to track goods that may be "lost" and eventually end up in the gray market, said Jim Crawford, retail analyst at Forrester Research.

Retailers are still exploring the tag technology, and most are only conducting trials now. But Crawford thinks the tags, which can be as small as about 1.5 inches by 1.5 inches, have the potential to tackle more than preventing loss. Companies may not be able to justify the expense of using the technology for just loss prevention, just inventory management or just customer satisfaction, "but if you add them together it starts to make sense," he said.

Other new technologies allow retailers to integrate data from closed-circuit televisions with the transaction logs. So if a loss-prevention specialist notices a high level of returns processed at closing time in one store, for instance, he or she can play back a videotape and watch what was taking place.

Slow change
But while retailers are making changes, they're not doing it as fast as you might think, said Ernie Deyle, vice president of asset protection at CVS, a drug store chain. Retailers face technological and philosophical hurdles in adding new protection.

"Loss prevention is always looked at as an expense, it doesn't generate any sales," said Deyle, who formerly served as global leader for profit recovery and shrink management at Cap Gemini Ernst & Young, a management and IT consulting firm. "But if you really think about it, loss prevention, if (retailers) have their ducks in a row, can add in anywhere between 1 percent and one and a half percent back to the bottom line."

In a tight economy, that can make a big difference. But even retailers who have been willing to spend on the technology have had a bit of waiting to do. Until a few years ago, some companies, such as larger chain stores, couldn't exploit loss-prevention software because the cost and technological requirements made it difficult to implement.

For a chain like CVS, which has more than 4,000 stores, the latest loss-prevention software requires several servers and high-speed connections linking between stores and the home office.

But once all that is in place, the software can take over.

"There has been a significant evolution from the '70s to now. Back then, (anti-theft) weapons were a pack of smokes, a strong cup of coffee and binoculars," Deyle said. But the new software is the "single greatest loss prevention tool we'll implement in the next year or two."