Time to Stop Shrink

According to the most recent National Retail Security Survey, shrink climbed to 1.58 percent of retail sales in 2010, up from 1.44 percent in 2009. The study showed the extent to which retail losses hammered away at profitability, costing retailers $37.1 billion in 2010, up from $33.5 billion in 2009. To LP professionals, shrink conjures visions of millions of dollars gushing out of the retail organization every year. Their efforts to identify the sources of loss and correct problems can sometimes feel like trying to keep water from leaking out of a bucket filled with holes. New technologies, regulations, and multiple players add to the complexity of the retail business, constantly introducing new risks. These factors also create a “moving target.”

According to the same survey, the majority of retail shrinkage in 2010 was due to employee theft, at $16.2 billion, accounting for 43.7 percent of total losses. Retailers reported that 18.7 percent of cases involved collaboration between internal and external players. Retailers lost $12.1 billion to shoplifting (32.6 percent). Other sources of loss included administrative error ($4.8 billion and 12.9 percent) and vendor fraud ($2 billion and 5.4 percent). Retailers said that the cause of the remaining shrinkage was unknown.

How can LP professionals begin to reverse this trend and make significant strides in combating shrink? One answer to this question may lie in the details: the minutia of retail operations. It will be useful to think outside of the box when looking for ways to “plug the holes” associated with administrative shrink. These are tiny errors in the way information is inputted, exceptions are handled, or data is tracked that are multiplied by millions of transactions, thousands of items and hundreds of stores. For example, an incorrect price for a single item entered in a POS system triggers shrink on thousands of items. Or perhaps damaged items are returned to the vendor and not properly credited to the retailer. These problems stem from a gap in some process, a failure to double-check work, or possibly lack of protocol to follow. This is where a major opportunity lies for LP professionals: in creating systems, training, and verification to ensure that processes are in place and consistently executed to prevent the most fundamental causes of shrink.

In many retail organizations, LP is primarily focused on what is happening on the sales floor. Meanwhile, the company’s weak spots and sources of loss may be in unexpected places, such as the buying process, invoicing, logistics and distribution. Before becoming overwhelmed with this scope of work and the gravity of their responsibility, savvy LP professionals will first attempt to determine the areas where their particular organization seems to be experiencing the greatest losses. Attempting to address all possible sources of shrink simultaneously will most likely result in an unsuccessful effort. By evaluating and then assigning resources and time to the most significant sources of loss, LP can focus on plugging the biggest holes and then move on to other sources. So it’s back to the basics for LP professionals. By taking a fundamental look at the end-to-end retail operation, they can get one step closer to stopping shrink in its tracks.

Andrew Wren serves as CEO of Wren Solutions, a loss-prevention technology provider helping leading retailers reduce loss and increase profits.