Walk into most distribution centers today and you immediately get that feeling that you're under surveillance. There's a reason for that: It's hard to find a facility that doesn't use an alarm system, brawny guards or closed-circuit TV cameras to deter intruders and keep a watchful eye on employees. So why are companies still losing six and even seven figures worth of goods each year?

The short answer is that they're aiming at the wrong target. Alarm systems are designed to protect distribution centers from external break and entry, not internal theft—which is how most inventory is lost. Video cameras might deter intruders but do little to stop employees bent on larceny.

The same applies to those uniformed guards, who may be able to stop outsiders from entering sensitive areas but typically aren't trained to recognize the most costly forms of inventory "shrinkage," as it's known. One company lost more than $70,000 worth of inventory to two employees—one a driver and the other a worker from the shipping department— even though it had guards stationed at the complex's gate to inspect all departing trucks. The investigation revealed that the guards were fooled by legitimate-looking shipping manifests that the employees had actually printed on their home computers.

Though executives are often reluctant to accept it, this type of internal theft accounts for most of their inventory shrinkage. Most prefer to believe that it's an accounting problem or a glitch in the warehouse management system. But the sooner they face the facts, the better. Because all too often, by the time they come to grips with reality, the theft has escalated.

Inside information
While using alarms, closed-circuit television and uniformed security personnel may help deter theft, we've found there are other strategies that are much more effective. One is to place a trained undercover investigator, who appears to be just another worker, inside the operation. Because theft is easily camouflaged as standard operating procedure in a distribution environment, it's generally necessary to gain an insider's perspective to detect it. By working alongside warehouse personnel, the undercover operative can observe the theft first hand (and may even be asked to participate).

Not long ago, a large distribution facility that was consistently off in its cycle counts contracted with us to place undercover operatives on the day and night shifts. One of the undercover agents, who was working on the receiving dock, observed another receiver pocket what appeared to be cash handed to him by a driver.

The investigator later observed the same receiver signing that driver's manifest for 88 cases of inbound product. When the investigator began putting the product into inventory, he took a case count and came up with only 84 cases, confirming his suspicions that he had just witnessed the receiver taking a cash kickback. That kickback was his payoff for signing for a full inbound load when the trucker actually kept four of the cases.

The next time that trucker arrived, the undercover investigator was on the scene to monitor the transaction and witnessed a similar occurrence. Over the next two months, we secretly videotaped several illegal transactions of this nature between the driver and the receiver, which turned out to be costing this company more than $8,000 a month.

Similarly devious (and equally silent) approaches to theft can occur within the shipping, returns, pickup and transfer functions. Without having someone on the inside, these forms of fraud could easily go undetected for long periods.

Another effective technique is establishing a toll-free tip line program for employees. Study after study has shown that honest employees don't want to work alongside thieves. However, most are reluctant to come forward, out of fear of having their identities leaked. The availability of a tip line that offers employees complete confidentiality is often the incentive an honest employee needs to come forward with his or her story.

In any given year, we receive hundreds of calls to our tip line from employees concerned about theft, collusion, fraud, substance abuse, sabotage and discrimination. Better than 90 percent of the calls are verified and result in terminations or arrests.

Keep an eye on the docks
Placing operatives inside the operation and establishing tip lines can go a long way toward deterring theft. Another good strategy is to establish sound loss prevention policies for inbound and outbound product. There are many steps companies can take to prevent and detect collusion on the shipping and receiving docks. They include the following:

• Always insist that drivers stay with their trucks. Allowing them to wander around the dock makes it too easy for drivers to slip products being staged nearby onto their trucks when no one's paying attention.
• Keep overhead doors closed until an arriving truck has completely pulled into the bay. And always make sure overhead doors are closed and secured before you allow trucks to pull away from your dock. These procedures will prevent workers from dropping product off the dock and retrieving it later.
• Periodically audit your outbound shipments. If you don't have checks and balances in place, there's no incentive for your dock personnel to remain honest. These audits are most effective when performed randomly.

These measures may seem harsh, but they're necessary. If you're serious about preventing theft you have to communicate that you have zero tolerance for shrinkage. Too many companies have accepted dishonesty-related loss as an unavoidable cost of doing business. This only makes thieves more brazen and exacerbates the problem. There's no reason to adopt a victim mentality when theft can be controlled.