15 Best Practices for Inventory Loss Prevention

The ECR Europe Shrink and On-shelf Availability Group lists 15 best practices for inventory loss prevention.

inventory loss prevention

In April 2014, the ECR Europe Shrink and On-shelf Availability Group received a special award from ECR Europe to celebrate 15 years of the group and the delivery of an estimated €1.5 billion (~ $1.6 billion) in savings for the industry.

As Sir Terry Leahy, former CEO of Tesco, once said of this group, “In the hands of consultants, this body of knowledge would be worth billions. But thanks to this ECR team, it is free to the industry.”

To help illustrate the achievements of this group, I have listed below my view of the top 15 inventory loss prevention best practices that have emerged from 15 years of work.

 

1. Define and Manage Inventory Losses Holistically

A single loss prevention function should be held responsible for the overall management of both known and unknown losses across the whole supply chain, not just the stores. With the loss prevention team focused on improving the supply chain and loss problem as a whole, the risk of any part of the supply chain trying to avoid scrutiny by simply moving losses from one form of loss to another is not possible, as overall loss is the key form of measurement used to hold all parts of the supply chain accountable.

2. Improve the Visibility of the Inventory Loss Problem

Behind every inventory loss prevention or reduction success story identified by the Group lies good loss data. Timely, accurate, and actionable data available to all the right stakeholders, broken down by item and by store, leads to improved collaboration, more of the right actions, and enables the ongoing tracking of results and performance trends. Today, the only way to get this data is through regular cycle counting in-store. Tomorrow, the hope is that smart-shelf technology, including radio-frequency identification (RFID) will provide this visibility faster, at a much lower cost, and with a greater degree of accuracy.

3. Look to Fix What You Can Control First

Industry insights suggest that perhaps two-thirds of all losses are due to either process failures, wrong counting, wrong scans, damages, waste, markdowns, etc, or internal theft. Compared with external theft, both of these causes of loss are much more susceptible to retailer control and influence, which often means loss prevention teams focusing on these issues can deliver returns more quickly. In addition, it has been found that by focusing particularly on process failures, many of the opportunities for theft can also be reduced.

4. Put the Shopper First

By focusing too much on the aim of reducing the value of losses to as close to zero as possible may be counterproductive when considered in relation to overall business profitability. For example, when high-value items, such as fragrance, are moved from self-selection and sold from locked glass cabinets, there can be a very negative impact on sales. At the same time, an increase in the cost of labor to open and close the cabinets to serve the shopper, plus the extra cost of buying and installing the cabinets leads to a potentially reduced profit number and margin. While selling more and losing less is always considered to be the preferred strategy, there may be occasions where selling more and losing more can deliver increased overall profitability and margin on certain types of products.

5. Engage Senior Managers

Senior management support for the resources and budget required to manage losses is critical. But it is also important that they ensure every function and individual in the organization understands that they have a role to play in managing loss. The key to achieving senior manager support is the ability to show how an improvement in loss can contribute towards current business priorities.

6. Align Incentives

All functions can and should be part of the solution. For example, logistics can pick more accurately, buyers can manage range and promotions differently to lower the risk of loss, and marketing could design stores and customer-loyalty programs to lower the opportunity for theft and fraud. Including shrinkage loss as a visible component of the company incentive plan helps ensure that all functions are aware of, and are working towards, an aligned loss target, while reducing the risks that each organizational silo in pursuit of their own functional goals can create.

7. Appoint a Charismatic, Credible, and Strong Capability Leader

The critical role of the leader in inventory loss management cannot be underestimated, and the list of required attributes is long. They need to know the organization as a whole, with the ability to successfully engage all different functions in a way that is relevant to that function’s goals. Further, they need to recruit and lead a multifunctional loss management team to include data analysts, process improvement experts, technology wizards, and investigators. The role requires confident individuals with a passion to promote a topic that is viewed by many in the organization as not particularly sexy or exciting.

8. Invest Significantly in Data Collection and Analysis

The robust analysis of all possible available data, including POS transactions, till voids, returns rates, zero sales data, employee engagement, store adjustments data, and many more, is the key enabler to the engagement of others in the organization and developing the right approaches to tackling the problem effectively. The primary focus of the analysis should be the identification of the greatest opportunities for sales and margin growth that can also reduce inventory losses. More detailed data analysis can begin to challenge preconceived ideas of loss and potentially discover previously unknown problems.

9. Do Not Underestimate the Extent of Losses That Happen Before Items Arrive at the Store

Spot cycle counts undertaken by some ECR members and studies by academics looking at inventory accuracy prior to a new store opening have revealed that up to 29 percent of all store inventory records are incorrect before even a single item has been sold. Good master data and product management by the central buying team and manufacturers is essential to removing the confusion and losses created by products set up incorrectly on inventory systems.

10. Manage Category Loss Variation

The risk of loss across the various aisles in a store is not evenly spread, with some categories having higher levels of loss than others. Cosmetics, spirits, underwear, power drills, ready-to-go meals, and flowers are all categories where the risk of loss has been found to be high. At the same time, categories such as canned food or paint are both relatively low risk. Retailers and manufacturers need to reflect in their overall category strategies an appropriate level of loss per category and include the costs of the required loss solutions. This more holistic approach to category strategy requires strong partnerships between stores, loss prevention, and the central retailer and manufacturer merchandising and category management teams.

11. Remove Opportunity for Malicious Loss

Individuals typically consider four questions before embarking on an act of theft. First, what is the risk of being caught? Second, how easy will it be to carry out the act? Third, is the likely reward worthwhile? Four, if I do get caught, what is the likely punishment? To tackle the problem of malicious loss, retailers, third-party providers, and manufacturers must recognise this criminal rational decision-making mindset and work together to increase the chances of thieves perceiving that the risk of being caught is high and that the ease of offending is low. They can do this by removing some of the opportunities created by the strategic and operational choices they make. For example, the default for many supply chains is to seek ways to simplify and speed up the flow of goods from the warehouse to the stores. However, this can potentially increase the opportunities for theft to occur in transit and the back room. An alternative would be to add more security checks and controls in the movement of high-value goods to restrict these opportunities for theft.

12. Use the ECR Road Map to Remove Opportunity; Focusing on Hot Products and Stores

The ECR Road Map is similar to most problem-solving approaches with the big difference being that it is has been adapted to manage the specific problem of loss using ultra-simple templates, methods, and techniques that encourage broad participation and collaboration. The Road Map first identifies the size of prize and then, through process mapping, the potential failures that create opportunities for loss. Analysis tools then prioritize the possible solutions that address the underlying root causes of loss. Finally, the prioritized solutions are then tested and deployed to stores. This approach has now been proven to work on almost every imaginable category from apparel to fresh meat, sausages, and eggs to mobile phones, razor blades, and electrical accessories. Identifying the right project leaders, involving the key participants from the very beginning, getting to see how the hot products actually flow through the supply chain, in both high- and low-shrink stores, and, finally, making available suitable work space for the co-creation of solutions have proven to be key success factors of an ECR Road Map project.

13. Technology as an Enabler

Technology has an important role to play in loss management, but it has to be part of, and an enabler to, a sustainable strategy for loss reduction. For example, technology is now available to send stores, in near real-time, video-based alerts on possible non-scans at the point of sale. However, store management needs these alerts presented to them in an easy way, and they need to be trained on how they should appropriately act. Most importantly, store management will need to find extra time in their current working day to handle, on a timely basis, these new alerts. Without the right plans for people and procedures in place, technologies will remain under-utilised.

14. Help All Store Employees to Be the Very Best

Engaged, motivated, and passionate associates and managers in stores are one of the best possible solutions for effectively managing loss. Highly engaged employees are better at delivering store standards, minimizing errors, reducing waste, and fixing out-of-stocks. They are also less likely to be motivated or tempted to steal from their employer and be more likely to support a culture of integrity. From the thief’s point of view, alert and engaged associates are seen as the most unpredictable and effective of all the various solutions retailers have at their disposal to deter them from stealing. This very intuitive point has recently been further validated by ECR research on employee engagement, where stores with the most engaged employees have been proven to have up to three times lower levels of loss than stores with the least engaged employees.

15. Design Experiments Well and Document Results

Learning how new solutions and procedures work in the real world where confounding factors abound, such as store employee turnover, pricing, and weather, make it hard to know what is working and what is not. To reduce these risks, the ECR Group has promoted the benefits of robust methodologies based on the use of matching control and test stores to isolate the impact of the interventions being tested. Further, by documenting properly conducted experiments, organizations create a knowledge bank of what does and does not work, avoiding expensive mistakes in the future.

This article was originally published in LP Magazine Europe in 2014. This excerpt was updated July 20, 2017. 

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