Expert systems technology helps
to beat in-store fraud at M+W

"Although many find the subject embarrassing or fear that it might upset staff, we feel that it is important to protect honest staff and safeguard the viability of each store. Ultimately, that protects everyones jobs." That is how Les Mitchell Hynd, Information Systems Director at convenience store group M+W, describes the importance of measures to reduce fraud amongst staff. M+W has adopted a progressive approach to dealing with the problem and, amongst other measures, has recently implemented expert systems technology. It is a problem area that many retail and service companies are shy about acknowledging publicly. But, with in-store theft typically accounting for 1% of turnover and staff theft accounting for three quarters of this loss, it is a problem that begs for an effective solution.

M+Ws reported turnover for 1995 was over UK £100m and the Company has seen rapid expansion over recent years. Although Frederick Misselbrook ("M") and Arthur W Weston ("W") opened their first shop in 1870, it was not until 1976 that the firm opened its first experimental convenience store in Southampton, England. Last year saw M+W open its 150th store and there are now 170 spread between Bristol and the Wash, with a concentration in the South and London. The stores, which range from corner shops to small supermarkets, offer a wide range of merchandise and services and are open seven days a week from early until late. As a result, there are temptations for dishonest employees - particularly since quieter periods of trade may involve little in-store supervision of staff.

Les Mitchell-Hynd comments: "Thankfully, most of our staff are very honest, but there is a significant percentage who could be subject to temptation. We ensure that, when staff are employed, they are made aware that we use sophisticated security methods to monitor their activity. Even if this discourages most from dishonest behaviour, a single thief may take £1000 of goods in a single week." He also points out that, to some extent, in-store theft has almost become institutionalised: "It can be difficult to draw a clear line between the member of staff who takes a can of Coke on a hot day or a few sweets from the "Pick and Mix" and the one who carries out a series of thefts involving £3-4000 worth of goods."

M+W has acquired a reputation for advanced thinking in the convenience store sector of the retail trade. The company began implementing EPoS (Electronic Point of Sale) technology in 1989 across all stores - a process that was completed by 1992. Stores are now equipped with bar-code scanning equipment and PC tills that download data overnight to the Southampton head office. The value of M+Ws EPoS experience is reflected in the fact that the firm is actively marketing its seven years worth of EPoS data to suppliers and other operators in the sector. Les Mitchell Hynd believes that anti-fraud systems can have more immediate impact than EPoS sales data: "The gradual roll-out of EPoS systems means that early sales statistics are not 100% reliable. It takes time before the information has a real commercial value. By contrast, security measures have an immediate impact on the bottom line - even if only a fraction of the fraud cases are being detected at the outset."

M+W took the decision to introduce a so-called "Son-of-EPoS" system which captured certain exceptional transactions from the till data at each store (low value goods, voids, cancellations, refunds, and other transactions). Area managers, who were equipped with laptop PCs, were then able to capture this information and ask pertinent questions about the previous days till activity. "As well as keeping staff on their toes, a steady stream of general assistants and store management left the company's employment - often in the back of a police car," recalls Les Mitchell Hynd. However, this approach required area managers (typically with responsibility for 10-12 stores) to trawl through the data looking for suspect transactions. "Although they were generally very diligent in carrying out this task, the additional pressures caused by the company's rapid expansion and increasingly high staff turnover meant that the system was not being used to its full effect".

Les Mitchell Hynd had previous experience of working with expert systems and was able to research the potential of this technology as part of his studies for an MSc qualification. By gathering knowledge from an expert - "Knowledge Elicitation" - a series of rules can be determined for analysing till transactions, which help to highlight suspicious transactions. Knowledge elicitation involved a series of interviews with one of M+Ws security officers who was also an ex-police officer and had a background in crime pattern analysis. He was asked to comment on a series of transaction details from the existing database and then on the database of rules that was determined by the system. The software chosen for the task was XpertRule - a PC and windows-based software development tool capable of capturing domain knowledge and expressing this graphically as a series of structured decision tasks. "The system was easy to use, required very little programming and allowed us to be up and running within a few weeks" says Les Mitchell Hynd.

The security officer who provided the initial knowledge for the system has since left the company to take up a more senior position elsewhere. M+Ws Operations Director considered that the XpertRule system was sufficiently effective for the departing expert to be replaced by two part-time staff (both past store managers) who now run the system on a PC located in an office above one of M+Ws Southampton outlets. Two week batches of data from each store are fed into the system in the form of an ASCII file and XpertRule runs the analysis in a matter of minutes. "Because the software is easy to use and graphical, it means we can make the most of staff knowledge about convenience store management and reduce the need for IT expertise," says Les Mitchell Hynd. Reports provided by the XpertRule system are followed up by M+Ws one remaining security officer and the fifteen area managers.

The XpertRule system identifies transactions that are potentially suspicious: Low value transactions of one or two pence; refunds, voids and cancellations equal to the selling price of popular brands of cigarettes; and high value, self-authorised refunds, for example. Les Mitchell-Hynd comments: "Because of the nature of the business, it is impossible to look at any single transaction and declare that it is definitely fraudulent without corroborative evidence. This might take the form of video tape recordings, an interview with the till operator concerned or further manual checks carried out by a member of the management team."

Although the expert system may not be a final arbiter of guilt or innocence, it does focus M+Ws investment of management time. Since the system was introduced in late 1995, around 150 cases of staff fraud have been identified. This compares with 25 more serious cases for a similar previous period. Les Mitchell Hynd comments: "We find that one thing can lead to another and that a simple mistake might encourage later dishonesty. By homing in on problems quickly, it allows us to give warnings early on and to prevent more serious problems."

Given the early results and the estimated scale of the problem (currently £750,000 per annum) the XpertRule system has been remarkably cost-effective. Les Mitchell Hynd recognises that further work is required to refine the rules used by the system: "Just as a human expert continues to learn and improve with experience, it will be necessary to continue monitoring the expert system and use the results of evaluation exercises to feed back into improvements in the rule base." He also believes that expert systems technology has potential to support other parts of the business, including evaluation of new sites: "Developing a new site is a high risk decision that involves major investment. It also requires evaluation of socio-economic data about the local community, details of competing and supporting stores in the area and comparisons with other existing sites. Capturing knowledge about the results of this blend of factors could help to reduce the risk of future development work."

M+W is committed to a policy of expansion through new development, redevelopment of M+Ws present sites and acquisition of other stores. In parallel with this desire to grow the number of retail outlets is a desire to avoid growing head office overheads. Home working and the use of field-based office space is encouraged but efficient computer systems are seen as an essential part of achieving this objective: "Central command and control is vital," concludes Les Mitchell Hynd. "Systems provide the tools to control the business at a time of rapid growth, but they also allow us to provide information for area managers and other field-based staff to make effective business decisions."