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Combating Risks in the Retail Industry

Background Study

Retail Industry with a global market of USD 22.64 Trillion in 2017 is expected to reach USD 27.7 trillion by 2020 and is undergoing a massive change in its marketing structure. This envisages changes resulting in

These changes are brought about mainly due to changes in technology, human behavior towards shopping, new entrants in the retail sector, new products, new marketing strategies, global economic changes, political strategies, climatic changes etc. These changes also bring about changes in the various dimensions of risk which are presently in vogue for the retail industry. An adaptive approach to risk assessments, synergic management, and development of new controls, processes, and organizational structure is required to meet the challenges put forward to the retail industry by these changes.

Global Retail Statistics

In 2017 Retail sector achieved a global sale of USD 22.64 Trillion of which USD 2.3 Trillion was through E Commerce. Out of the E-Commerce channel USD 1.35 Trillion was contributed through M Commerce.

Global Retail market is expected to reach USD 27.7 Trillion by the year 2021 with a CAGR of 4.9%. E Commerce share in Retail sale is expected to grow to USD 4.5 Trillion by the year 2021.

Dangers facing the Industry

Risk appetite of retail industry has been deemed at a higher level than most of the other industries, due to the complexities arising from marketing technicalities, and management structuring on a cost effective manner. The necessary due diligence on risk management strategies from the very onset of a project needs to be revamped in the industry.

Lack of capability for establishing appropriate risk management strategies, building the necessary infrastructure for the same, and lack of management responsiveness to the risk escalations have drawn the industry into deeper turmoil than the appetite prevalent.

If you place a broad perspective on risk assessments, the dangers may be identified as

The impact of the above dangers leads to heavy damages in the industry and results in

Research data on Retail losses
Sensormatic Global Shrink Index from Tyco Retail Solutions and Planet Retail RNG
The mix of dangers / risks differ from industry area and sector. The global impact of store shrink alone has been assessed at USD 100 Billion which is 1.82% of global sales by the Sensormatic Global Shrink Index from Tyco Retail Solutions and Planet Retail RNG. This index has been the most dependable measurement point to assess the impact of store shrink since the exercise considered the following:

The above sample covered segments having 1.56 Trillion USD which contributed to 7% of the global retail sale.

Retail Losses Leader

The online fraud value is estimated at 1.58% of the global Ecommerce transactions, which is USD 36 Billion. This is bound to increase due to lack of proper authentication procedures, new marketing schemes like in-store pickup of online orders, etc.

Association of Certified Frauds Examiners

Institute of Certified Fraud Examiners, the premier agency involved in global fraud research and audit process, has released its Report to the Nations, 2018. This report informs on the following aspects relating to risk of fraud and existing level of fraud in the Retail Industry, based on detailed investigations and analysis of over 104 Retail organizations globally and in specific regions across the globe. This report lays out the specific frauds and details presently prevalent in the retail sector. Specific areas of excerpts from the report is given here under.

Fraud Schemes % of occurrence (in 104 cases)
i
Billing
20%
ii
Cash larceny
10%
iii
Teeming & lading
19%
iv
Check and payment tampering
9%
v
Corruption
28%
vi
Expenses re-imbursements
8%
vii
Financial statement frauds
12%
viii
Non-cash
34%
ix
Payroll
5%
x
Register disbursements
13%
xi
Skimming, etc
13%

All fraud schemes were seen prevalent with medium and high occurrence conditions. The median loss for these sector was USD 50,000 for each occurrence. Further, the scope for cost escalations are prevalent in areas like inventory holding cost, promotion, overtime, vehicle operations cost, etc. The above facts, certifies the grave need to commit a risk review, in organizations similar to your esteemed organization.

Vital Role for Risk Consultants

Risk Consultants play a vital role in establishing the infrastructure for the Retail Industry. They have made remarkable achievements in cost cutting, detecting of revenue identification failures, fraud detection, prevention, and providing for corrective measures in such areas. The approach required to meet with the infrastructural applications has been duly explored by a few of them to provide value adding services to the organizations in this industry. The prudent use of such Risk consultants could go a long way in supporting the organizations war to combat the risk prevalent in their industry.

Risk Consulting for Retail Industry

Being aware of the various fraud schemes, shop shrink factors, control requirements to close risks, policy and procedural requirements to be complied in the industry for the specific sector of your client, is required to be borne by a professional risk consultant. This requires exposure and research into various dangers in each of the domains under each sector of each area of the retail industry. The risk consultant’s awareness in the areas of control requirements for each potential threats is necessary to add value in their association with the client.

A true professional Risk Consultant shall always build up the Risk register for the client prior to planning out the audit strategy. Scoping of the audit structure or domains is very much a critical aspect in the Internal Audit functions development in your client’s organization.

Our Strategy for Risk Containment

Synergic strategies for prevention, detection, and correction for expenditure overload, revenue loss, Low productivity and fraudulent practices needs to be implanted into the core structure of the organization. The following structured methodology may be considered for meeting the required norms for establishing the same.

Determined to add value to retail clients, Affility has developed multi layered strategies to combat the threats in this sector. The focus of the threat combat strategy is to ensure;

Ensure that the check list of threats be generated and covered in the review process to ensure effective coverage of risks as a fraud and shop shrink prevention strategy. Multiple schemes of shopper’s theft with or without collusion from other sources have been identified by our risk consultants and preventive procedures identified to stop such practices in retail outlets. We also focus on adaptive strategies to keep the shop lifters who continue to generate novel fraud schemes and making it more resilient and un-identifiable, to succeed.

Outsourcing Model with Affility

Outsourcing of Internal Audit function through Affility can be done by an organization under 2 different structures.

There are various models under which a Risk consulting could be outsourced while client has an Internal Audit Head to ensure the governance aspect of the function.

Written by

Director- Risk Consulting