Minimizing retail shrinkage due to employee theft

Purpose – Employee theft is a major component of retail shrinkage. The purpose of this paper is to analyze the use of two methods, internal control and random inspections of the locations at which employees work, to deter employee theft. An inspection strategy is designed in which retailers try to minimize their costs while trying to prevent employees from stealing. Design/methodology/approach – We employ an analytical approach. The employees are assumed to be strategic, i.e. they respond to the decisions made by the retailer, and likewise the retailer is strategic. Consequently, game theory is used to model their interaction, and to obtain the best decisions for both the retailer and employee after taking into consideration the other's actions. Findings – The solution of the game depends upon various parameters such as the cost and effectiveness of random inspections and of the internal control system. The paper determines the optimal frequency of inspections, the total budget to be spent on inspections and the total expected retail shrinkage due to employee theft. The paper also shows the extent to which an effective internal control system and the recruitment of honest employees can benefit retail organizations in preventing losses due to employee theft. Practical implications – The paper provides normative guidelines for decisions such as the frequency of inspections. Retailers can limit employee theft but eliminating theft altogether turns out to be too expensive if the goal is to minimize organizational losses. The retailer should try to reduce inspection costs and increase their effectiveness. Adding honest employees helps the retailer, but note that adding just a few is not beneficial because organizational losses remain unchanged, but adding a larger number qualitatively affects the equilibrium outcome and lowers organizational losses. The paper describes when investing in better internal control systems is appropriate. Originality/value – The underlying assumption is of strategic retailers and employees. This gaming analysis brings a new perspective to examining retail crime problems than has been hitherto the case. This work follows in the tradition of the economics of crime literature, which views crime as a rational choice decision made by potential offenders. The study examines employee crime in the context of retail organizations, and provides several new insights. Although the idea of random inspections is not new, features of the retail environment such as internal control system, employee dissatisfaction and the ability to recruit honest employees have no direct parallels in the economics of crime literature, and are being touched upon for the first time.