As retailers continue to search for ways to reduce costs in order to stay competitive, while at the same time raising wages in response to political and societal pressures, shrinkage is an area ripe for revenue recovery opportunities. Recent National Retail Security Surveys and 2014’s Global Retail Theft Barometer Study estimate the cost of shrinkage to US retailers in the range of $42-44 billion annually (depending on which survey’s numbers you go with). Theft by associates and customers account for 75-80% of those losses…well over $30 billion annually. The remaining 20-25% is caused by administrative errors, damage to inventory, vendor fraud and other miscellaneous issues.
Those numbers are substantial, and as a result, present a significant opportunity to recover lost revenue if shrinkage can be reduced. In a recent earnings call, Greg Foran, President and CEO of Walmart US, identified a significant focus on reducing shrinkage as a key strategy to turn around Walmart’s recent trend of declining gross profits. This approach certainly makes sense since even a very small reduction in losses can have a sizeable impact on Walmart’s $300 billion per year US operations.
Even for retailers without Walmart’s global scale, reducing shrinkage can have a measurable impact on profitability. Take a discount retailer with $1 billion in annual sales as a simple example. Discounters tend to have the highest shrinkage in the US at 2.78% of sales. Reducing that shrink by just 0.25% has a $2.5 million revenue impact – not insignificant.
Identifying and reducing shrinkage has typically been focused around effective security controls and inventory audits. For example –
- POS systems auditing all associate actions and making it relatively difficult to process unauthorized voids or refunds
- Security cameras, both to serve as a deterrent and to identify/record questionable activity
- Physical security measures – guards, security tags, etc.
- Reviewing business analytics to identify inventory flow, loss patterns or fraudulent activities
These tactics certainly play a critical role, but are skewed a bit more toward identifying loss and perpetrators versus preventing it in the first place, which is where we think a big opportunity exists.
A process-centered approach to loss prevention
One avenue to address shrink that doesn’t seem to receive enough attention involves effective preventative processes…and of course ensuring that associates are aware of and following those processes. Some examples -
- Onboarding procedures informing new associates of your policies, for example related to employee theft, and receiving auditable acknowledgement that associates have read/understand those policies.
- Managerial review and audit procedures (e.g. balancing register transactions, verifying inventory counts) – ensure managers identify suspicious activity and associates’ knowledge that these checks and balances exist provides a deterrent to theft.
- Building loss prevention into customer service procedures since roughly a third of shrinkage is the result of shoplifting. For instance, acknowledging customers when they enter the store or department puts them on notice that you’re aware of their presence. Checking in periodically to ask if they need help also tends to prevent them from feeling comfortable enough to shoplift.
- SOPs for completing administrative tasks and associated “paperwork” correctly when it comes to product ordering, receiving and inventory; since 15% of shrink is the result of administrative errors.
- POS/transaction processing procedures to minimize transaction errors which can lead to inventory discrepancies.
- Product stocking and handling guidelines to avoid preventable inventory damage.
These are just a few examples of processes, which if well-defined and adequately followed, can make a measurable impact. Procedures certainly can’t replace cameras and security guards, but can help to modify the organization’s cultural mindset around mitigating shrinkage, and clarify each associate’s responsibility in that process. Unfortunately, just pointing associates to a long list of policies and procedures during their onboarding process is not enough. They’ll forget most of it two weeks into the job. Ongoing reinforcement is absolutely necessary.
Associates must have ready access to critical processes, procedures and job aids where and when they’re working. You can’t expect an associate to leave the sales floor to access information from a workstation in the back room or halfway across the store. It just won’t happen. That content needs to be accessible on their POS terminal, Symbol/Telxon devices, tablets…anything that makes it easy to get to.
Simply having well documented processes and introducing associates to policies and procedures during onboarding isn’t enough. Constant reinforcement is critical to ingrain using these tools in associates’ daily routines, thus being able make a measurable impact on results. A common approach to keeping those procedures and best practices front and center is to tie them into a task management solution. Automated task management tools are becoming more prevalent in retail as a means to more efficiently assign work to associates and to keep track of who is doing what and when.
Including process and procedure information when assigning a task helps to ensure that associates not only know what they need to do, but also how to do it properly and efficiently. While the benefits of task management stretch far beyond addressing shrinkage–we’ll cover that in a future post–it’s an important approach for getting processes impacting loss prevention to associates in a way that’s actionable.
Interested in learning more about how innovative retailers leverage process discipline and task management to optimize workforce performance? Drop me an email and we’ll share what we’ve learned.