Some internal loss may be unavoidable but data mining could help tackle process-based weakness, says Khuram Kirmani


It's a well-known fact in the industry that internal loss and shrinkage are problems that have been sapping the profitability of every grocery retailer since trading began. However, given the current economic climate, recent figures are particularly disturbing: in 2008, employee, supplier and internal error cost retailers a combined £11.5bn and accounted for almost 53.2% of all stock losses.

Retailers have successfully focused their attention on external customer merchandise theft, installing sophisticated systems to thwart thieves where possible. They are now also starting to tackle internal loss, which tends to be more invisible. Yet, theft is not always the biggest cause of internal loss. Process errors or weaknesses are as much, if not more of a problem than light-fingered staff.

Essentially, a process-based weakness is a non-compliance to store policy that results in a loss, for example, refunds taking place after the refund period allowed by the policy. Other process weaknesses can occur through simple errors when processing credit card payments, stock management and BOGOF offers and, of course, through training and paperwork. Loss arising from such processes can be both non-intentional (error) and deliberate (fraud) but without a clear understanding of where these weaknesses are, and the impact that poor process control can have, retailers are often left in the dark as to where profit potential is being lost.

But tackling internal loss should not just be about loss prevention, it should have its roots in revenue generation and ultimately contribute to the bottom line. To do this, retailers need to have the ability to 'distinguish the usual from the unusual' and look beyond just the fraud.

Extracting useful information to establish correlations or patterns is invaluable when tackling internal loss and process error, and data mining is one such way of doing so.

Retailers need to identify and nail down those invisible process weaknesses and abuse that sap profitability; paying attention to the less obvious areas that contribute to the bottom line will have real business benefits in the future.


Khuram Kirmani is CEO of IDM Software.