retail management

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Shrinkage in Retailing.Key characteristics and issues identification & reduction

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Shrinkage – What is shrinkage?

Shrinkage is the reduction in physical inventory caused mainly by process failure, errors, shoplifting and employee theft.

Example

Theoretical inventory 5 Physical inventory 4 Sales 20 Shrinkage (5-4)/20=5 %

Admin. Error

18%

Shoplifting

31%

Employee

Theft

45%

Vendor Fraud 6%

Source: (us) National Retail Security Survey, November 2002 based on 2001 retail sales and

inventory shrinkage

Definitions:

ECR Europe

Michael Levy and Barton A. Weitz in Retail Management

Deloitte

Variance between theoretical and actual inventories. Losses due to a combination of supplier fraud, process failures, internal theft and external theft.

Difference between the recorded value of Inventory (at retail price) based on merchandise bought and received and the value of the actual inventory (at retail prices) in stores and distributions centers, divided by retail sales during the period.

Inventory losses through theft, damage, mis-measurement and paperwork errors realized after a physical inventory that show a difference between the recorded accounting value of inventory from purchases and receipt of goods and the value of the physical inventory on hand as a percentage of sales for the period.

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Shrinkage – Where does Shrinkage Loss occur in the Supply Chain?

• Shrinkage Loss in delivery to the site• Shrinkage Loss from the site• Shrinkage Loss in delivery from the site

DeliverDeliver

Information Flow

Retailing ConsumingReturnsReturnsSourceSourcePlanPlan

stock handling chain

ReprocessReprocess

New LifeNew Life

Product Flow

€? €? €? €? €? €? €? €? €?

Shrinkage Loss

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Shrinkage – What is the impact of Shrinkage in Retail Business?

As a percentage of sales shrinkage may be relatively small but it’s impact on the bottom line of a low-margin industry is significant, especially at a time with increased competition in a slowing economy.

In 2000, European retailers’ stock loss accounted for €13.4 billion a year or €258 million per week. Across Europe, 58% of all profit is lost through Shrinkage

• UK has the highest shrinkage numbers in the EU:

Survey’s in the UK retail market show an average shrinkage of 1.7% and in the UK manufacturing Industry of 0,6 %. This totals to a shrinkage of 2,3 % on FMCG sales.

A shrinkage of 1,7 % results in an average loss of profits of 19%. The crimes suffered by retailers result to a 25% decrease in profits.

• Greece has the second highest shrinkage in the EU with 1,5 % on retail sales

Source: The Economist, National Survey of Retail Theft and Security, Retail Crime Costs Survey by the British Retail Consortium.

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Shrinkage – What retailers do to deter shoplifters & employee theft?

Among the newest security technologies being used by retailers to control losses due to theft are:

• Point-of-sale data mining software solutions that detect potential theft problems at the cash register and alert appropriate personnel in real-time. These data mining packages can be tied to digital video recorders to provide crisp, clear images of who sold what to whom with a click of a button and can delivered to any location around the world.

• Source tagging programs where tiny anti-theft labels about the size of a paper clip are placed inside an actual product or product package, effectively hiding it from view.

• Self-alarming anti-theft tags that broadcast an audible alarm throughout the store when a shoplifter attempts to improperly remove it from merchandise.

According to the Retail Theft Trends Report, discount, department, and supermarket retailers accounted for 41 percent of the retailers surveyed, but they represented 88percent of the shoplifting cases.

However, shoplifting is one aspect of the problem and perhaps the most straightforward to attack.

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Shrinkage – Identify and reduce shrinkage

In order to identify and reduce shrinkage we follow a holistic approach comprised of eight steps:

1. Recognize Stock Loss Shrink Sales & Profit

(Reports & Detail)

8. Follow Up (Re-visit)

2. Develop a Strategic Plan

(where is it occurring?)

7. Evaluate Implementation

3. Map Key Processes and Measure Problem

(Flowcharts & POS data mgmt.)

6. Implement Solutions

4. Analyze Risks, Identify Causes

(drill down into areas)

5. Develop solutions & prioritise actions

(work with mgmt.)

Source: In cooperation with ECR Europe

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Shrinkage – 1. Recognize the Problem / Benefits

Recognize the impact of shrinkage on your business: To cover for a € 10 value of shrinkage € 1,000 of additional sales are needed (assuming a 1% net margin)

However, shoplifting is one aspect of the problem and perhaps the most straightforward to attack.

Source: ECR Europe

Benefits of reducing shrinkage

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Shrinkage – 2. Develop Strategic Plan

Address shrinkage reduction with a holistic approach as an organisation wide issue:

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Shrinkage – 3. Map Key Processes and Measure Problem

Perform process review with detailed flow diagrams in areas of focus:

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Shrinkage – 4. Analyse Risk and Identify Causes

Perform process review with detailed flow diagrams in areas of focus:

Risk Tolerance Model

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Shrinkage – 4. Analyse Risk and Identify Causes

Identify Reasons for Shrinkage:

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Shrinkage – 5. Develop Solutions and Prioritise Action

Identify Reasons for Shrinkage:

• Identify opportunities:

• Some solutions come in the form of new processes which are re-designed to reduce shrinkage levels:

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Shrinkage – 5. Develop Solutions and Prioritise Action

Prioritise Solutions to focus and optimise shrinkage reduction efforts:

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Shrinkage – 6. Implement Solutions

Develop clear action plans, timing, roles & responsibilities . . .

while taking into account budgetary constraints in order to prepare for a successful Roll- Out:

Cost of shrinkage prevention

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Shrinkage – 7. Evaluate Implementation

Build a Business Case to calculate impact on profitability:


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Shrinkage – 7. Evaluate Implementation

Manage and Control Implementation Efforts:


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Shrinkage - Contacts

For further information please contact:

Chris Konstantinou

Managing Partner

[email protected]

Deloitte & Touche Consulting SA

250-254 Kifisias Ave.

152 31 Halandri

Athens, Greece

Tel: + 210 67 81 100

Fax: + 210 67 76 232

Chronis Kokkinos

Manage

ckokkinos@

Deloitte & Touche

1 Andr

551 33

Thessal

Tel: + 2310 406 550

Fax:+ 2310 406 570

r – Consumer Services

deloitte.gr

Consulting SA

ianoupoleos Ave.

Kalamaria

oniki, Greece

retail management

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