If you started counting from one to one billion 24 hours a day, 7 days a week, nonstop, it would take you 95 years to finish. Isn't that shocking just how much even one billion is?
It's easy to throw around numbers about how big a problem organized retail crime (ORC) is to our industry to create a compelling argument about the gravity of a problem, but the question is:
Are we doing a disservice to the loss prevention industry by not being on the same page with how to define, categorize, or combat the growing ORC problem? Or at least sincerely examining the role retailers play in perpetuating this problem?
It's clear from attending two of the industry's largest trade shows recently, the Retail Industry Leaders Association (RILA) Loss Prevention, Audit, and Safety Conference and the National Retail Federation (NRF) Loss Prevention Conference in New Orleans, that the ORC definition and how retailers categorize ORC is still widely debated. This debate seems valuable considering it was only a few years ago that the acronym "ORC" was making its debut. And now the industry has moved on to tackle larger questions on the topic, such as the enormity of the problem, defining it across the spectrum of retail, and trying to understand the retailers' role in the problem.
Most authorities on the ORC topic are backing off the "$30 billion" figure for categorizing the issue. According to the NRF's seventh annual ORC survey, industry experts today are citing a "multi-billion-dollar problem" and recently NBC's Brian Williams stated that ORC is a $12 billion-a-year problem.
The purpose of this article is not to debate whether ORC is a problem. Nor is it to define exactly how significant a problem ORC is in terms of revenue. To argue these points with so many varying opinions would be like buying a four-door mini-Cooper—what's the point? The point here is to raise some questions for healthy industry debate such as:
- What role do retailers play, if any, in creating a demand for stolen product?
- Is "diverter" a bad word?
- What can loss prevention professionals do to ensure their companies know their supply chain is legitimate and has integrity?
Given the complexities of various categories of retail, this article will primarily focus on the grocery and drug store segments.
The Question—How Do You Know?
If you ask any retailer if they are buying their own stolen product back, the response will likely be a quick rejection that the notion is even possible. But, if you follow up with the even more important question—"How do you know your company isn't buying stolen product?"—the answer becomes more stammering.
Over the past three months, at three different industry events, three major retailers admitted in a candid forum that they have purchased stolen product or they specifically have found other retailers' product on their shelves. How does this happen? With these admissions, doesn't it make sense to question the notion that the "multi-billion-dollar problem" has to include the demand retailers could be creating?
"Most companies do not believe that this type of occurrence could ever happen," says Tony Sheppard, nationwide manager, organized retail crime at CVS/pharmacy. "But the individuals who make buying decisions need to be educated about the impact ORC has and how to identify possible suspicious transactions."
One retailer interviewed for this article places security tags on products that specify to call a hotline number if the product is purchased anywhere other than that exact retailer. This individual stated there has been more than a dozen occasions that their product has been purchased by consumers at competing retailers. Given these examples and the admissions of major retailers, there is more than enough evidence that retailers are purchasing stolen product that is ending up on shelves for consumers to purchase—not just online auctions or flea markets—thus creating demand for ORC rings to steal it.
There has recently been a groundswell of retailers considering their role in perpetuating the ORC issue primarily started by an article written by David George, vice president of asset protection with Harris Teeter, titled, "ORC—Are We to Blame?" in the My Turn section under Columns on the magazine website (LPportal.com/my-turn). George illustrates what he calls "the economics of ORC" in the chart shown on the opposite page. More and more retailers have begun to take actionable steps within their organizations to implement anti-ORC buying programs and other anti-ORC measures, such as super-duty security tags and laser tagging.
The Hive—Your Company's Diverters
Have you ever diverted money? You might come back with a resounding "No!" But you could have been diverted to an alternate route in traffic or your attention could have been diverted to a different topic. Why is the word "diverter" met with such negative connotations when discussing products? Webster's definition itself is not negative: Divert—to turn aside from a course or direction. Many of those interviewed for this article immediately made a distinction between "diverters" and "alternate-source suppliers," preferring to refer to their diverters as alternate-source suppliers on principle.
One way to articulate how diverting works is to imagine a bee hive with its intense activity. The hive is actually the United States and the bees represent activity between alternate-source suppliers and retailers' buying teams. It's an incredibly complicated industry with layers upon layers of people, both legitimate and illegitimate.
Michael Kresser, vice president with Food Marketing Group (FMG), an alternate-source wholesaler, states, "It's incredibly important that our clients believe in our supply-chain integrity. We are very proud of our policies and procedures that ensure we have the highest quality product, delivered on time, every time. We have our own team of inspectors that ensures our product is completely legitimate. We inspect everything from the dot matrix on the labels, the lot numbers, expiration dates, and even down to the glue used to prepare the boxes. We guarantee genuine product and that's why we've had such long-lasting client relationships." FMG employs a loss prevention professional with more than 26 years experience who continually ensures the physical security of warehouse premises as well as vetting the various warehouses FMG uses.
"Not only is buying stolen product a felony, we're also focused on the most important part—the product integrity and consumer safety," says Kresser. "If an alternate-source wholesaler engages in buying stolen product, there is no way to track that product if a possible recall happens. At FMG we always handle product recalls with the utmost efficiency, and it's a complicated process even for a totally legitimate product."
Kresser stresses the importance of the relationship between the alternate-source wholesaler and the retail buyer. There is a level of trust between buyers and diverters because diverting is such a complex industry, it is very rare a legitimate "company" would pop up with an unbelievable deal on a product and then be around for a long-term, professional relationship with that company's buyer.
"The whole diverting industry is under extreme pressure due to retailers pinching them to get the best price," says CVS's Sheppard. "Buyers may have been dealing with the same diverter for many years, but that doesn't matter if there has never been any due diligence to validate they are a completely legitimate alternate-source provider."
The bottom line is alternate-source providers, or diverters, are completely legitimate business enterprises that help retailers obtain and move product to the benefit of the consumer. If a retailer believes all diverters are purchasing stolen product, he has a fundamental misunderstanding of the industry and probably very little understanding about his own internal supply-chain polices or procedure.
The Wild Card—Your Buyers
Have you ever been totally sure you've won a Blackjack hand? Just when you're about to scream, "Winner, winner, chicken dinner," you bust. It was that sneaky ace the dealer had that did you in. Some elements in retail organizations loss prevention can't control. The process is complicated with thousands of different variables. Within the supply-chain process, retail buying groups seem like this wild card that can possibly throw a wrench into your well-laid plans of anti-ORC buying. But just like any amateur Blackjack player, there is a way to play what the book says when it comes to your buying team.
Retailers interviewed for this article stressed a few critical elements when it comes to partnering with buyers and why it's so important.
- Partner with your buyers just like you would law enforcement.
- Educate your buyers on the impact of ORC and why it's important to them.
- Know how they are compensated.
Keith Lewis, who retired as a task agent with the Georgia Bureau of Investigation in 2011 where he worked major theft cases, focusing on cargo theft for the past six years, explains there are two supply chains a company must be knowledgeable about—the legitimate and illegitimate. Even for the most honest diverters, as products move through this complicated web of suppliers, there is still the possibility that the diverter could be brokering stolen products and not know it due to fake bills of lading from sophisticated ORC rings that imitate manufacturers' packaging methods, even down to the outer box markings.
"Stolen truck loads move very quickly, and it's very difficult to track them due to public distribution centers where anyone can store and ship items with 'legit' bills of lading as well as the plausible deniability that accompanies this stolen product through the supply chain," says Lewis, explaining the difficulty in tracking and prosecuting those responsible for stealing large amounts of product and reintroducing it into the supply chain.
"Unfortunately, the only way for retailers to be completely sure they are not purchasing stolen goods is to buy directly from manufacturers, or at least deal with distributors who verify they only purchase from manufacturers," says John Hawthorne, senior loss prevention manager for Publix Supermarkets. "There are a number of very well-established, legitimate distributors out there. Some well-intended distributors may purchase product from sources other than the manufacturer and may not be aware they are selling retailers goods that were stolen further upstream."
But only buying direct from the manufactures would be a retailer's nightmare. What if they over-buy and have product left over? Are they supposed to eat that product (no pun intended)? What if diverters didn't exist and manufacturers truly had no competition when trying to get retailers the best price? With 98 percent of retailers utilizing diverters, this notion of only buying direct seems perfect in the loss prevention world, but definitely not a realistic proposition in the overall retail world.
"Law enforcement can't do it alone," says Lewis. "We must have educated buyers that partner with us to alert us when a deal seems too good to be true. Loss prevention professionals need to know exactly how the buyers in their companies are compensated because the more they are incentivized on the 'deal' they bring to the retailer, the more risk that retailer has of purchasing stolen goods."
"With 8,100 stores, our purchasing department is only a subsection of those we deal with on a daily basis," says Jerry Biggs, director of organized retail crime investigations for Walgreens. "But it is critical that you maintain good communication with that department. If you know those individuals, it's more likely you can trust them to know who they are dealing with on a daily basis, and they will be more apt to alert you to potential problems.
"Another important element when dealing with your company's buyers is to make sure there are guidelines set for purchasing policies and that you are familiar with those guidelines," continues Biggs. "I communicate with our alternative source buyers regularly. It comes back to relationships just like with local, state, and federal law enforcement. Your buyers are just as critical a partnership to have and maintain."
"Not only do we need to educate our buyers, it's critical to ensure your executive team knows the consequences of ORC and the risks of potentially purchasing stolen product—no matter the financial incentive," says Cathy Langley, senior director of loss prevention at Rite Aid.
Another retailer said it was critical for her to know exactly how her company's buyers were compensated.
"If your company's buyers are compensated or bonused off of the best deal they are bringing the retailer, that could be a risky proposition when faced with a stolen truck load of product for a great price," explains the retail professional with more than 15 years experience in the food and drug industry. "It's just human nature that financial incentives can turn some good people bad, and it just helps to know the background, so you can speak their language."
The First Action—Your Responsibility
Who could use more work to do? It's rare you hear someone complaining they are paid too much and do too little. Especially with the evolving role of loss prevention professionals into true business partners, there is shrink to account for, internals to investigate, external theft to prevent, and employees to keep safe. How much more can be piled on your already full plate?
Maybe just add a few more things—like supply-chain integrity. Why? Because many believe that impacting this segment of the ORC problem would dramatically help retail in all different areas, including external theft, ORC, shrink, employee safety, and even sales.
ORC experts interviewed discussed some very specific and tactical mechanisms to implement to truly reduce the retailer's role in perpetuating the ORC problem.
- Do your due diligence,
- Make surprise inspections, and
- Implement an anti-ORC buying program.
Ken Golec, retired federal senior special agent of the USDA Office of Inspector General, explains the importance of a detailed investigation when visiting these diverter's warehouses.
"To make things even harder to detect, there are some warehouses that are quasi-legitimate, meaning half of the warehouse deals with totally legitimate product from the manufacturer or another retailer that over-purchased, but the other half of the warehouse could be dealing in stolen product and acting as the fence for a staff of boosters," says Golec, who now runs his own investigations and consulting company out of Atlanta, Golec Investigations & Consulting. "These large-scale ORC rings are so efficient in covering their tracks and moving the product that price alone can't always be an indicator of stolen items. Once the product gets to a retail buyer for instance, the buyer may only be saving just a few cents per item and would cause no suspicion. This is why is it so critical that loss prevention professionals do their due diligence from within their companies, educating their buyers and making unannounced visits to these warehouses."
Kresser of FMG, an alternate wholesaler, concurs. "We always encourage our clients to conduct surprise inspections because we are proud to show our facility," he says. "We believe if the entire industry was policed better, there would be a professional standard that weeds out those poor performers that give our industry negative connotations."
"It's our responsibility as loss prevention professionals to educate our buyers on the importance of knowing where the product is coming from," says Sheppard of CVS. "It's imperative we educate our internal audiences as well as execute the tactical due diligence, such as conducting surprise visits and inspections of all the alternate-source providers a retailer may use."
Sheppard goes on to explain the critical elements he and his team look for when making these surprise inspections:
- Is all the product of the highest integrity?
- What is the condition of the warehouse?
- What type of product is coming into the warehouse? (Bonus packs, pallets, loose product, etc.)
- Are the products in the manufacturers' boxes?
- Do the products have mixed lot numbers?
- Do there appear to be cleaning stations or chemicals being used?
- Are there security tags or labels on the floor or in trash cans?
- What condition is the physical product in? (Touch it and see if you can feel residue or left over security tags.)
Sheppard also recommends conducting these visits with a member of the retail buying staff. The warehouse owners don't need to know you're a member of loss prevention.
"At times we will accompany our buyers to observe details about a warehouse others may miss," says Biggs from Walgreens. "It's very important to have feet on the ground and talk to the neighbors even. Another important element is to keep visiting the warehouses even after they've been deemed legitimate. Unannounced visits are always the best way to understand exactly what's going on."
Rite Aid also implements similar standards when vetting an alternate-source vendor, including standard business checks, talking to other customers they supply, and simply using the gut-check method when visiting the location—Does this feel right?
"It can also be as simple as doing a Google Earth check on the location before you arrive," adds Langley. "If the location is residential or there are other uncommon sites or dimensions, you might already have red flags."
The Next Step—Your Program
One method some retailers are starting to employ is laser tagging, one of the newest tools to fight ORC rings. However, the practice seems to inspire some debate on its effectiveness versus cost. One retailer interviewed who utilizes laser tagging stated they achieved a return on investment for the machine in just one week. This same retailer, when comparing sales year over year in the same period, cited a $2.8 million lift in sales. Take a look at the chart at left supplied by this retailer to demonstrate the drop in known ORC cases in one market. Note that the only ORC cases used in this example are reported and verified cases—no guesstimates.
How is this possible, some ask? The explanation given seems simple enough. If everyone can agree that repackage operations are solely intended to cover up stolen product, then laser tagging keeps product out of the repacking business. Why? Because ORC rings know they will earn less than they would for unmarked product.
Some opponents of this process tout some of the challenges, such as finding space for the laser machine, changing the flow of merchandise as it comes through the distribution centers, and answering the question, "How long does it take to laser fast-moving product?" It seems at least from the case study cited above, retailers have a duty to research these answers for their own operations for even the possibility of impacting ORC to this magnitude.
If retailers can't afford the latest security tag or invest in a laser system, it does seem there are some rather low-cost, internal steps that can be taken. For instance, Harris Teeter's David George outlines a straightforward, five-step process of setting up an anti-ORC buying program within retail.
- Meet with your executives and explain how buying stolen product creates demand for more stolen product.
- Get a commitment that your company will not purchase stolen product, which may entail revamping incentive structure for buyers.
- Communicate expectations to suppliers by establishing procedures for violations and sending vendors detailed letters.
- Create a "right to audit" clause in all supplier contracts that allows unannounced visits to supply warehouses.
- Audit for compliance by inspecting lot numbers after you receive product.
These steps could be implemented by even the lone loss prevention director without a team of resources. Other suggestions for that individual are to leverage your resources by partnering with other retailers in your same segment and educate your distribution center management so they can be an extension of your inspection team—checking for product integrity and lot number matching.
"Retailers need to do everything they can to prevent creating a demand for stolen product in order to help decrease the ORC problem," states CVS's Sheppard. Several of his colleagues concur, including Cathy Langley at Rite Aid.
"I agree that until all retailers start doing thorough audits of their alternate-source vendors and actually drop vendors that they feel have suspicious practices, it will be difficult to make a major impact against ORC," says Langley.
"Although the Harris Teeter program reduces demand for stolen goods, we can't do it alone," explains George when asked about the article. "It's going to take all of us to put integrity first and take a stand to do the right thing, rather than simply buying from the cheapest, unreliable, and low-quality source. We need to buy from reputable suppliers and at Harris Teeter, we accept nothing less."
So, are we to blame for ORC? This is a very complicated question given the multi-layered complexity of the commodity marketplace. Certainly, retailers are not to blame for the entire ORC problem. It is most professionals' opinions that the thieves will always find a way to beat the system—laser tagging or not, warehouse visits or not. But does that mean we don't plug the holes we know of?
The purpose of all of these interviews conducted, points summarized, and questions raised here is meant to spark industry debate and conversation, because if we're not talking, debating, and learning...then perhaps we are to blame.