Cycle counts, or inventory reports, indicate unexplainable loss. Customers complain of short shipments that were thought to be complete. Employees suggest problems with co-workers, such as dishonesty or substance abuse. Gross profits are unexpectedly low.

These are all clues that there might be an inventory theft problem in a warehouse or distribution center (DC), says Barry Brandman, president of Danbee Investigations and an expert on warehouse shrinkage prevention (201-652-5500).

It's a problem that affects many companies in many industries across the United States. In fact, 'It's estimated that about one-third of all companies that go bankrupt, go belly up because they can't control internal theft. That's how significant of a problem it's become,' says Brandman.

Further statistics on warehouse theft are hard to come by, since it often goes unreported. Often, management prefers to explain missing inventory as an accounting error, a computer glitch, or human error - as in product simply being put away in the wrong location. 'It's very uncomfortable for [management] to think that they might have an internal theft ring,' Brandman notes.

What about locks, alarm systems, security cameras and guards? Completely ineffective, continues Brandman. Locks and security systems are only good for keeping intruders out, security cameras and tapes are rarely watched, and internal theft often looks like business as usual, therefore going undetected by guards untrained to recognize it.

Therefore, recognizing the warning signs for what they are, acknowledging that a problem may exist, and taking action to stop current shrinkage and deter it - instead of denying the possibility - are all key to guarding the goods.

Here are a few ways to determine the possibility of shrinkage in a facility, and how to reduce the chances of it happening in the future.

It's important to take inventory accuracy seriously, and to instill that mindset into all employees. Going to regular, scheduled cycle counts by location—rather than taking an annual physical inventory—can help identify which products, areas, and even personnel are most inconsistent.

The dock is often the area of the warehouse most susceptible to loss—up to six or seven figures, estimates Brandman—because employees who are in collusion with truckers, for example, will often accept short receipts or slip extra cases on outbound carriers.

'The theft looks exactly like standard operating procedure,' continues Brandman. 'You can't discern the difference between 28 cases going onto a particular truck for an order, or 32 cases going on, unless you're physically standing on the dock, counting every single case with a copy of the manifest in your hand.'

To counteract that, Brandman suggests surprise verification audits to confirm inbound and outbound quantities. The presence of management sometimes isn't enough. It's important for supervisors to actually count all shipments to confirm accuracy.

Another area to watch is trash removal. Clear trash bags make contents visible and ensure that good product isn't leaving the facility with actual garbage. Also, returned items that could be put back in inventory can be marked as damaged or trashed—another way that shrinkage can occur.

If a theft problem exists, Brandman suggests several steps to identify the perpetrators:

Use new state-of-the-art technology. This includes digital video systems that enable authorized management to view activity, both authorized and unauthorized, on a computer immediately with a high-speed Internet connection. Digital video clips can be instantly cued up to an exact time of day, and relevant clips can be e-mailed as attachments.

Hire an undercover operative to collect insider information. To everyone else in the warehouse, this person appears to be a normal employee. However, the operative reports on individual theft, collusion and fraud from an insider's perspective.

Institute a toll-free, anonymous tip line. Available for use by all employees, callers are identified only by a code number. They're asked to provide names, dates, places and methodology for the illegal activity.

Have an independent analysis of security conducted. Once vulnerabilities are determined, a program is designed that utilizes best practices to handle shipping, receiving, returns, access and egress control, hiring and screening.

Above all, having the distribution center under firm control and educating the work force that inventory accuracy is critical are likely the biggest keys to deterring shrinkage in the warehouse. In other words, if would-be thieves see an opportunity, they'll probably take advantage of it. So it's important to plan ahead to reduce the chance that your inventory will be compromised.

'It's always more cost effective to prevent loss than to respond after you've already been victimized,' concludes Brandman.

Click on the icon to read how a bad floor plan can promote shrinkage.