Let's be honest, it can be a scary world out there. Sometimes it can be difficult to deal with because breaking news events and reminders to protect ourselves are 24/7. Unfortunately, safety cannot be ignored, especially in the supply chain. 3PLs and warehouses cannot pick and choose their focus. As a business leader, you must face the reality of a variety of situations that could impact your livelihood, starting with the protection of your business, your employees, and your customers.
Many factors can come into play when determining the best way to protect your 3PL or warehouse from security threats. Whether the intended targets are your employees, equipment, operations, facility, or finances, it's important to know how to spot possible vulnerabilities and address them to the best of your abilities. In this multi-part series, we start off with one of the most common concerns for any business.
Theft is defined as the taking of another person's property or services without that person's permission or consent with the intent to deprive the rightful owner of it. As it relates to business, theft can come in many forms including the unauthorized appropriation of finances, company-owned property, or customer inventory. Believe it or not, distribution centers are often more at risk from internal theft than external burglary. Company employees, regular visitors, and contractors have access to your warehouse, and some can have sticky fingers. While it is important to note that living in a state of constant paranoia is not a healthy option, learning to spot red flags is the key to lowering your risk.
All distribution centers take responsibility for protecting their customers’ products as part of a warehouse/client partnership. Therefore, a warehouse should have protocols and systems in place to ensure that inventory is secured and tracked properly to reduce the risk of theft. However, if thievery does occur, a warehouse should be able to identify when, where, and how it happened as well as solve the problem immediately.
Warning Signs of Potential Inventory Theft
- Stock levels don’t match what is in the system. If you uncover multiple instances where your warehouse management system (WMS) software inventory levels and reports do not match what’s actually on the shelves, you could have a thief.
- Inventory discrepancies happen on certain days. So maybe you’ve noticed a problem with inventory, but not every day. Or that the discrepancies only happen when certain employees are working. That is a sure warning sign worth looking into.
- Staff rumors of theft. Whether you call it shop talk or office gossip, every warehouse has its internal grapevine of information. If you hear employee rumors of theft happening, investigate immediately.
- Important documents are missing or duplicated. If backup receiving or shipping documents are missing or have been duplicated, this could be a red flag that someone is trying to cover up potential thievery.
- Inventory is regularly found near exits. Does inventory belong near exits? Not if it isn’t being received or shipped out. If you regularly encounter random products sitting around near exits or loading dock areas without corresponding labeling or documentation, someone could be placing it there to be casually picked up and walked out the door later.
Theft Prevention Methods
- Conduct employee background checks. Whether or not you have had previous issues with theft of any kind, conduct background checks on all new hires. That way you can avoid employing people that have a history of stealing.
- Awareness of policies and procedures. Every warehouse should have a standard set of policies and procedures when it comes to ethics and handling customer products. Raise awareness for policy adherence and, when applicable, enforce termination due to theft.
- Limit inventory access. Limiting access to inventory is not an easy task for any warehouse as it can disrupt daily operations. However, if you are able to cage or restrict access to products that typically are considered ‘high-demand, high-theft' potential to only certain individuals per shift, it reduces your loss risk.
- Regular cycle counts. To keep an eye on your customers’ inventory, conduct regular stock cycle counts. These can be performed daily or weekly with the use of your WMS software and corresponding mobile devices to scan what is on the floor.
- Maximize managerial visibility. “When eyes are on the floor, nothing goes out the door.” Management visibility reduces an employee’s opportunity to steal.
- Utilize security cameras. It’s a proven fact that security cameras help deter crime as well as document issues. Let your employees know that cameras are in the facility for their safety as well as for overall warehouse security.
The most common forms of financial theft from a company are embezzlement and pilfering of petty cash. Kept unchecked, this could adversely affect a company, possibly taking it into the red.
Types of Financial Crimes
- Undercharging Customers. While most often seen in a retail environment, undercharging a customer can occur in the distribution industry. An employee could undercharge vendors, friends, and family members for your services, effectively stealing company profits for their gain.
- Ghost Supplier(s). Embezzlement happens with the creation of a ghost supplier more often in a warehouse situation. This occurs when an employee sets up a ghost supplier (who is actually the employee) and creates a paper trail showing seemingly legitimate transactions with the fake business. The employee then makes payments to the fake ‘supplier’ and cashes your company’s checks.
- Unauthorized Refunds. A fake refund can be issued to a non-existent customer, with the money going to the employee committing the fraud.
- Fictitious Bad Debt. This is a tricky scam. It occurs when an employee deposits a customer’s payment into their own bank account and then records the receivable as a bad debt which is eventually written off by the company.
- Payroll Fraud. A bold embezzler may even add fictitious employees to the company payroll and funnel the money to themselves through fake identities.
Embezzlement Red Flags
Whew! That’s a pretty hefty list of how your 3PL or warehouse can be the victim of financial crimes (and we didn’t even mention stocks), but what are the warning signs to look out for?
- They don't want to take their vacation. If a cunning worker goes on vacation, someone else will most likely pick up their slack, right? That is the last thing that employee wants to happen because their deceitful ways may come to light.
- They volunteer or make excuses to work overtime. Typically, an accounting department’s day stops at 5:00 p.m. If an employee constantly needs to work overtime or volunteers for it whether needed or not, you might want to check it out. A crafty employee may appear to be a dedicated hard worker all while skimming off company accounts.
- They suddenly purchase more extravagant personal things. Are they sporting a new car, designer clothing, jewelry, or expensive toys that they normally wouldn’t have? That’s a huge red flag your money may be slipping out the door.
- Petty cash needs to be replenished more often. Enough said. Someone may have sticky fingers.
- They spend a lot of time with a particular vendor. Vendor communication is necessary for many reasons, however, if you find that a particular employee is spending a great deal of time with a vendor when their work doesn’t require it, that might be worth investigating. That employee could be working with the vendor to scam your company financially in a 50/50 split or something similar.
Protect Your Finances
Now that you know what to look out for when it comes to embezzlement, how do you protect your company?
- Conduct background checks and highlight policies. Any new hires with financial responsibilities should undergo a background check by human resources prior to starting. This could weed out the bad seeds. Also make sure there are regular reviews of policies and procedures as they relate to finances.
- Divide financial duties. All financial tasks should never go to just one employee. In an optimal environment, it is best to have several employees handling both accounts receivable and accounts payable duties. Management should also approve all purchases and payables over a set level. If red flags arise, it will be easier to spot the fraudulent employee by their records and lower your theft risk.
- Secure methods of payment. Since warehouses rarely deal in cash, other forms of customer payments should be secured. These include protecting customer and supplier bank information, checks, and credit cards from unauthorized individuals and making deposits daily.
- Update system security access regularly. Update and require new system login information on a regular basis and implement multi-factor authentication.
- Limit access to petty cash. Lock it in a safe at the end of the workday and only allow select employees access. You should also require receipts for each time cash is dispensed.
- Be aware. Walk your facility regularly to observe daily financial operations. Cameras may be considered excessive by many professionals, but in some environments, they are a necessity. Employees are less likely to commit fraud when they know they are being watched.
3. Company-owned Property
Internal theft of company property is more common than one might think. Even taking a pen or stapler home from the workplace is considered petty larceny. Theft of company property ranks among the highest type of theft a business can experience. As a warehouse owner or manager, you may be saying, “My employees would never steal property from me.” Think again.
Commonly Stolen Items
- Tools and equipment. Now someone is not likely to ride a forklift right out your door, but theft of more concealable tools and equipment can happen. Examples include tools like wrenches or hammers, drills, tape guns, safety supplies, and measuring devices.
- Office supplies. The typical pens, staplers, tape, batteries, Band-Aids, coffee, cleaning products, and light bulbs are among the most popular items stolen.
- Paper products. Packs of printing paper, post-it notes, labels, paper towels and plates, toilet paper, and notebooks fall into this category.
- Technology. Warehouses spend a lot of money on technology only to find it walking out the door with no way to track it. Items may include laptops, computer accessories, mobile devices, printers, scanners, and headsets.
- Sensitive documents and data. Losing your competitive bid proposals, banking information, or customer list to an outside source is detrimental to any company. It can be especially damaging if a disgruntled employee downloads your pricing and customer lists and then goes to work for your competitor! Your business files should be protected.
Tips to Prevent Theft
- Tool and equipment cribs. These are useful for daily check-in and check-out of company equipment. All items should also have affixed serial numbers in the form of barcoded asset tags that are recorded by your warehouse system.
- Supply manager. To better track office and paper supplies in your facility, institute a requisition process rather than a ‘serve yourself closet.’ A quick weekly inventory of items should also be performed.
- Technology. All technology should have model and serial numbers logged with an up-to-date tracking system in place to show which employees requisitioned or were assigned which items. Note any abnormalities in missing equipment and accessories or frequent requests to replace “lost” equipment.
- Protect your information. Keep all important company information and sensitive documents under tight constraints with limited access other than by management. Set policies on sharing company data or require non-disclosure agreements where applicable. Be sure departing employees no longer have access to your systems by closing their accounts or changing their passwords.
The Importance of Insurance
While the best protection against theft is prevention, having the proper insurance coverage can help your warehouse recover any losses. Certificates of insurance are usually required by companies doing business with 3PLs as well.
There are varying types of policies available for theft of inventory, company-owned property, and finances. For instance, consider a "commercial crime policy" to protect your financial health. IRMI defines it as a crime insurance policy that typically provides several different types of crime coverage, such as employee dishonesty coverage; forgery or alteration coverage; computer fraud coverage; funds transfer fraud coverage; kidnap, ransom, or extortion coverage; money and securities coverage; and money orders and counterfeit money coverage. Contact your insurance provider for a complete list of coverage options available to protect your company.
Subscribe now to be notified when Part Two, Physical Security, is posted by ASC Software with more valuable information and tips to protect your company. Remember, it is up to the company owners and trusted employees to keep your 3PL or warehouse properly protected from theft. Be sure to stay alert and not let any abnormalities slide.