Employee Leakage: Unintentional Loss

While employee theft gets the lion’s share of attention in business circles, and supplier/shipper fraud comes a close second, retailers point to shoplifting as the primary cause of shrinkage. Yet, all three combined barely equal, if not fall short of the losses in business due to inadvertent shrinkage.

The term “leakage” is more apt, because the losses may be a slow, methodical trickle, but they seep away day after day, year after year, unnoticed. Theft tends to be seen more often than fraud, but many stories have made the news about fraud, particularly in non-profit businesses and the financial sector. Leakage, on the other hand, is like a sieve, with tiny hole after hole allowing the profits to drain away.

Leakage occurs in almost every facet of a business.

The receiving door often is the most frequent source of loss, even when the receiving door problems infiltrate into the back office. Of all problems, failure to accurately count incoming and outgoing stock, supplies and materials is the most common. Tracking of damaged, returned or incorrect/inadequate goods is next. In food service, quality control problems are seen more often at the stock room than on the sales floor. In machining and fabricating environments, misuse of supplies or raw goods is a major issue, but quantity and quality controls are essential to control damage and inferior input/output of goods.  Stock handling and rotation also contribute to back door problems.

Receiving door problems that migrate to the office include mispriced goods, back orders, wholesale pricing problems and stale-dated or low-grade receipts. Simply losing paperwork adds another significant headache to managing inventory.

In the sales office or on the sales floor, myriad opportunities for leakage occur. Poor scanning and incorrect pricing issues lead the way in retail settings, while portion control and poor preparation & handling are top problem areas in restaurants. Failure to follow up on orders out often leads to customer service issues with quantities and quality. In the rush to capitalize on a sle, price quotes often do not reflect cost issues.

Throughout the operation, soft cost controls and operating expense issues drain profits. Energy costs are most obvious, followed by banking/credit issues and management  of supplies not directly linked to production. Maintenance of equipment (or the lack thereof) cost businesses in premature wear but, more critically, can create huge problems when malfunctioning equipment stalls a production run.

In any business, leakage easily can cost 3-5% of revenues. In most cases, that is the difference between profitability and bankruptcy. Yet, the investment to implement simple systems generally is less than ¼ of any recovery, so there is negligible risk to investing in a good operating system evaluation of your business.