In a previous article, “Do Your Employees Understand the True Cost of Lost Material?” we discussed the fact that many employees don’t realize the value of your stock inventory and may “borrow” products or take samples for their personal use. Unfortunately, there is another reason why material disappears: theft. Many distributors find it hard to believe that their employees or customers would steal. But unfortunately stealing, especially petty theft, is a very common reason for “inventory shrinkage.” And a distributor who doesn’t admit that theft is a problem, or a potential problem, is just burying his or her head in the sand.
Employee theft is not a new phenomenon. Nearly a hundred years ago, my great-grandfather owned a clothing store in Weston, West Virginia. He occasionally commented that he’d been in business for 30 years and had never sold a single handkerchief to an employee (these were the days before Kleenex).
Did the employees think they were stealing? Probably not. These were good people who never would have thought of taking money out of the cash register. But they didn’t appreciate the true value of inventory. They didn’t see the direct relationship between the inventory in the store, turning that inventory into cash by selling it to customers, and using that cash to pay employees and other expenses. As we stressed in the article mentioned above, employees must see all inventory shrinkage as an expense that reduces the amount of money available to pay wages and benefits. It takes money out of their pockets.
There are, of course, some people who are truly thieves. And sometimes a distributor inadvertently hires one. Thieves usually don’t see their long-term security tied to the success of the firm that employs them. Most often these individuals have a short-term goal: that is, getting as much material as possible out of the warehouse (without being caught).
Some distributors install security cameras and other theft-deterrent devices. While they are important tools in a retail environment, the effectiveness of these “hi-tech” solutions in a distribution warehouse is questionable. True, they may be a deterrent to some theft, but employees who are also thieves usually put considerable thought and effort into getting around these systems and continue to steal. At the same time, honest employees often feel intimidated and resentful as “big brother” continually watches their every move. These feelings often discourage good and loyal employees from giving their all for the company.
A better way to discourage theft is for management to create an atmosphere that encourages effective inventory management. Here are several policies that will help to solve the inventory shrinkage problems faced by many distributors.
Limit access to the warehouse. You cannot hold your warehouse employees responsible for the material in your warehouse if customers, truckers, salespeople, and other individuals can walk through the aisles, unescorted, at any time. Only the people receiving, moving, picking, and packing material should be allowed in the area where merchandise is stocked. After all, how many people are allowed to wander around the vault at your local bank?
Your salespeople may complain that they need to run out to the warehouse to check material availability because the stock balances in the computer are inaccurate. This may be true. Unfortunately, one of the major reasons why computer stock balances are inaccurate involves the number of people who have access to the warehouse. This is truly a “chicken and egg” situation: Your salespeople need access to the warehouse because your stock balances are inaccurate. Your stock balances are inaccurate because your salespeople (along with customers, vendors, truckers, and others) have access to the warehouse. This is a vicious cycle that won’t be broken until you implement business policies that are designed to maintain accurate stock quantities.
O.K., some distributors can’t keep salespeople out of their warehouse. Maybe they don’t have enough help, or maybe salespeople are responsible for providing after-hours service to customers. If your company is in this situation, be sure to implement a tool that allows salespeople to easily record any material they remove. In fact, many companies allow the salespeople themselves to develop the system to record the products they remove for emergencies, samples, or other valid reasons. This “system” is often just a clip-board hanging by the warehouse door. At one company, the following information is noted for each item taken (that’s not listed on an actual pick ticket):
| Date | Quantity | Item # | Reason | Taken By |
| 6-10-99 | 1 | A-1234 | Sample for Acme Construction | Jeff Miller |
| 6-10-99 | 12 | M-2356 | Emergency for Jensen Controls Will Bring Back P.O. |
Karen Becker |
Every day, a clerical employee will update the computer for each item listed on the clipboard. Management reviews these material withdrawals on a regular basis. Be sure to keep this system simple. Don’t give your salespeople any reason for not recording every piece of every item they remove from stock. In fact, let them design the procedures. Then they won’t have any excuses not to follow them.
In addition to controlling theft, there are several other reasons why limiting access to your warehouse is important:
- It takes time to run out to the warehouse to check stock. If a salesperson must run out to the warehouse every time she needs to check the availability of a product, how much time does she spend on her feet? How many fewer customer inquiries can she answer? Should you pay her by the mile rather than by the hour?
- If you check stock by physical inspection, you may commit material to one customer that was just promised, by another salesperson, to another customer.
- The person manually inspecting the on-hand quantity of an item may be unaware of additional quantities in other warehouse locations.
Pay your employees well. If you pay your employees more than they could earn at other distributors, and pay them based on how well they perform, you’ll probably be able to get the best people available in the workforce. When employees can see a direct correlation between performance and their compensation, they usually tend to work hard. And, if an employee doesn’t meet your expectations, there are probably many people (often trained by your competitors) waiting to take their place.
We’ve seen great results when the accuracy of on-hand quantities affects the compensation of all employees that have access to warehouse inventory. These employees are motivated to treat your inventory as if it was their own. It’s like having management constantly watching over your warehouse operations.
On the other hand, low-paid employees usually aren’t motivated. They can’t see a correlation between their performance and the compensation they receive. So why bother to put forth the extra effort necessary to do a good job? While at work, they tend to concentrate on what they must do “to get by” – that is, what they can get away with (possibly including theft) and avoid getting fired. Their lack of motivation is contagious and can easily become part of your corporate culture. And, in any case, they’ll be gone as soon as a better opportunity appears.
If someone is caught stealing, get rid of him. While most people don’t like big brother watching over their shoulder, they also don’t like people getting away with criminal acts. If someone steals, they are stealing from everyone who works for your company. After all, the money used to buy replacement merchandise is money that could have been used to pay higher wages or provide additional benefits. If you overlook certain indiscretions or continually give people a “second chance,” you are condoning behavior that is detrimental to the well-being of your company and your employees.
Inventory accuracy is a necessary element in any effective replenishment system. If your buyers don’t know how much of a product is in your warehouse and available for sale, there is no way they can accurately determine when to replenish stock and how much to order. You’ll end up with a “lose-lose” inventory: shortages of products your customers expect you to have in stock, and excess quantities of slow-moving items.