The evolution of the LP profession has required a change in the way that we approach the retail environment. First and foremost, we have come to recognize that inventory shrink is a more complicated problem than merely looking at the theft of merchandise. Shrink is a complex issue that must take into consideration a variety of issues. Shrink reduction is now seen as a vehicle of profit enhancement and an integral part of the retail model. We have new perspectives on how we can influence company profitability in other ways as well, which has allowed us to set our sights on the bigger retail picture. As a result, our retail shrink management strategies require a multifaceted and broad-based approach in both design and administration.
The three major causes that contribute to inventory shrink in any retail operation are internal theft, external theft, and operational compliance. An effective loss prevention program must focus on all three of these areas. If you only focus on one or two of them, the ones you dismiss could negate the success you gain with your programs in the other areas. In the area of operational compliance, an in-store audit must be one of the components of your inventory control strategy.
The fundamental purpose of auditing is to “inspect what you expect.” All companies develop strategies and programs to reduce and control loss. However, these strategies and programs don’t work unless they are in place and being adhered to. Audits enable you to “inspect” the compliance to these strategies and programs.
In-store audit findings enable you to identify and address issues prior to taking inventory and receiving shortage results. If used properly, audits can provide you with the actionable information you need to “course correct” and ultimately achieve desired results. However, it is the setup and execution that determines success.
Audits must give an accurate picture of what is actually happening in a store or facility. If they don’t, they have limited value. In order to correct issues, you must know what they are. Auditors must be able to objectively report their findings. While that may sound like common sense, it doesn’t always happen.
Consider this. If the person who conducts the in-store audits reports directly to the district or regional manager who is responsible for managing the stores, can they truly audit objectively? Will their “partnership” be jeopardized if the LP person fails them in an audit? Will the LP person’s performance evaluations be negatively impacted? In order to get full value from your auditing efforts, structure your LP auditors so that they report independently from the people who run the facilities they are auditing.
Joint audits are another methodology that can cloud objectivity. For example, having the district manager and LP auditor conduct an in-store audit together will generally result in more subjective audits. The district manager is ultimately responsible for the stores and will tend to be more lenient with the scoring. They will sometimes give the store the benefit of the doubt. Then, due to their higher management level, they can influence the LP auditor to be more lenient as well.
Objectivity is important because the goal is not to have passing audit scores, but to achieve the desired shortage results. If every store passes their audits and the shortage results do not meet expectations, then the program is not effective. However, if the audits have been conducted objectively and the stores are all passing, the poor shortage results are most likely due to one or both of the other two potential problem areas: internal and external theft. This enables you to focus on those areas during the next inventory cycle.
In most retail operations, stores are held accountable for inventory shrink in their performance metrics. Therefore, having the appropriate motivation to reduce shortage is already in place. However, to get optimum results from your audit program, there must be consequences for failing an audit. The consequences should be serious enough to get the attention of the person being audited. For example, if a store fails an audit, it should result in some type of disciplinary action.
If the consequences aren’t meaningful, store management will not focus the appropriate attention on achieving compliance and passing the audits. If you can create the objectivity and accountability, you are on your way to creating an effective audit program.
Senior Management Support
Without senior management support, it is almost impossible to have an effective in-store audit program. You might as well use your LP resources exclusively for investigations and physical security because auditing will be a waste of effort.
Senior management understands the value of an effective audit program. To get their support, first develop the audit program concept that best fits your business. Second, review it with your supervisor. Once the two of you have finalized the program concept together, present it to senior management for their approval. They will often have additional input that will enhance the program. It also enables them to take ownership of the program. This will help obtain their support because they feel that they have been part of the process and contributed to it.
A Credible In-Store Audit
If you don’t have an effective store audit program or don’t have one at all, what is the best way to revise your current audit program or get started with a new one? Start with the fourth key: a credible audit.
Create a task force that includes corporate, loss prevention, and store management. The selection of the task force members is important. By including store personnel in this process, there will be more of a sense of ownership, and the in-store audit will have more credibility. This helps positively address the “ivory tower” perception where store employees feel that “corporate” doesn’t know what really goes on in the stores.
Consider including the people who write your company policies and procedures to be members of the audit task force. Those people can fully explain the purpose and content of the policies and procedures. A side benefit is that they actually educate many members of the task force who may not fully understand existing policies and procedures. Consider including representatives from the internal audit department. These individuals can add tremendous value based on their in-depth auditing experience.
Finally, consider including representatives from human resources. Their input will be critical when you discuss the disciplinary action consequences for failing audits.
Challenge the task force to develop an in-store audit that addresses shortage control in all areas of store operations. This does not normally include creating new policies and procedures, but just selecting those that will make a difference in reducing inventory shrink.
This article was originally published in 2007 and was updated April 18, 2017. See Part 2 of the three-part series on auditing and operational compliance here.