9 Necessary Practices for Successful Shrinkage Control

Researchers analyze the shared characteristics of five US retailers that exhibit shrinkage control best practices.

Shrinkage Control, in-store audit

In the generally unyielding area of retail loss prevention, few US corporations have been highly successful in staunching the pervasive problem of inventory shrinkage—the problem that refuses to go away. This post highlights nine key shrinkage control approaches that could potentially save US retailing billions each year.

For retail loss prevention practitioners across the globe, trying to find the best solution to tackle the perennial problem of shrinkage has been a long and frustrating journey. In part, LP practitioners have been victims of retail organizational cultures that have seen them as an inevitable, yet regrettable, part of doing business. This perception has caused LP to be seen as peripheral to the core activities of the organization and primarily responsible for arresting thieves and installing alarms. But they have also been partly seduced by technology providers who offer quick-fix technological panaceas to the problem of stock loss.

Until recently, LP practitioners have largely operated in a data desert, making decisions based on instinct and guesswork rather than solid data and informed analysis. In the absence of reliable data, the industry has tended to focus almost exclusively on the most overt form of shrinkage—external theft—to the detriment of other key problems, such as internal theft and process failures.

In turn, this led the loss prevention world to traditionally look to the military and police for recruitment, leading to generations of managers who can be viewed as more adept at adopting a reactive rather than proactive approach to the problem, and who feel more comfortable trying to catch thieves than analyzing whether retail processes are fit for purpose and designed to maximize sales and minimize losses.

Despite all of this, some companies have bucked the trend and become successful at keeping their losses well below what the industry identifies as the norm. These success stories can be found in retail sectors around the world, and their representatives can often be heard making presentations at conferences and seminars highlighting how they have managed to achieve loss rates well below the national average. In many respects, they have adopted a way of working that is systematic, grounded in evidence, and focused on developing the right solutions for specific problems.

Following is a study completed by ECR Europe, which, as part of a broader survey looking at the scale and extent of the problem of shrink control, identified a number of common organizational themes associated with lower levels of shrinkage. This included the existence of a written corporate policy, a willingness to be innovative and experimental, a commitment to link bonus payments to shrinkage performance, and a willingness to actively collaborate with other organizational functions. This led members of the ECR Europe Shrinkage Group to think about whether there were a series of common characteristics among those retailers who consistently have low levels of shrinkage, and hence set the scene for the 2007 study reported here.

Shrinkage Control Study Method and Aims

The aim was to identify the key characteristics of retail companies in the United States that were perceived to have a track record for being innovative and progressive in the way they managed shrinkage control. These characteristics have been pinpointed based upon interviews with the head of loss prevention, a selection of their staff, analysis of company documentation, and store visits.

[Note: The five companies that took part in the 2007 study included the Target Corporation, Limited Brands, Best Buy, CVS/pharmacy, and The Gap—together having annual revenue of over $160 billion at that time. The method used to select the companies was the “reputational” approach, whereby a group of experts, key practitioners, and academics made recommendations based upon personal and experiential evidence. The 25 experts were requested to choose their top five low-shrink US retailers and from this, a rank order of companies was established. When you look at the average rate of loss for these companies as a whole as of 2007 (0.9 percent), compared with the industry average (1.59 percent), it is easy to see why they were selected by the panel.]

This research identified nine key areas that were found to be present in most, if not all, of the case-study companies. These key areas can be associated with their above-average performance on shrinkage control. It is further possible to group them into three factors—strategic, cultural, and operational. The first factor is focused on loss prevention within a broader organizational context; the second on the way in which loss prevention departments can develop ways of understanding and dealing with shrink control; and the third on looking at the role of store staff in delivering effective loss prevention.

Strategic Level Factors

Establishing Senior Management Commitment. The bedrock for the success found in these companies was their ability to create, sustain, and embed an organizational awareness of, and commitment to, dealing with inventory loss prevention. This started at the top of the company with senior management being fully committed to loss prevention as an important priority for all parts of the organization.

How this commitment was achieved varied among case studies, although the impact of a tipping point or moment of crisis concerning shrinkage control was clearly important for some of them in gaining the attention of their board of directors.

Without this level of commitment, the rest of the business will not be persuaded that shrinkage matters, nor will the loss prevention department receive the mandate or resources necessary to implement new approaches to tackle the problem. What was clear from all the case-study companies was the extent to which the senior echelons of management had been persuaded of the contribution effective shrink control can make to the overall profitability of the company.

Ensuring Organizational Ownership. The second strategic factor was the way in which the case-study companies had developed mechanisms to ensure that all parts of their organizations were persuaded to take ownership of the problem. To paraphrase one of the respondents in this research: “I can’t think of any part of the business that shouldn’t be thinking about shrinkage.” This is an important point, as many organizations have traditionally viewed their loss prevention departments as the sole arbiter on all issues relating to security and shrinkage.

What was interesting about the case-study companies was that they often viewed themselves more as advisors on shrinkage to other parts of the business (particularly the stores), which would then take responsibility for operationalizing that advice. This seems a far more realistic and sustainable approach given the limited resources available within most loss prevention departments. But it is also based upon the reality that without sustained commitment to address the problem of shrink control from across a company, then so-called solutions will remain piecemeal and largely unproductive.

Embedding Loss Prevention. The third strategic factor was ensuring that this organizational commitment was embedded within the business practices, policies, procedures, and strategic thinking. Each of the case-study companies had examples of how they had formalized a commitment to tackling shrinkage from all parts of the business. For some this took the form of creating standard operating procedures (SOPs) for departments to follow; for others it was about getting shrinkage as a standing item on agendas across the board.

Either way, the case-study respondents stressed the importance of this embedding process; otherwise the potentially short-term nature of organizational commitment would quickly become apparent. Getting people to not only think about shrink control, but to take responsibility for it, was a recurring theme in all of the companies taking part in this research.

Without these three strategic-level factors, any loss prevention approach will flounder on the rocks of diffidence, marginalization, and under-prioritization. Getting a broader organizational framework that is conducive to taking loss prevention seriously is imperative. The key to this is ensuring that senior management is attuned to the benefits of putting shrinkage high up on the agenda, and making sure that the rest of the business realizes it is something that must be addressed as part of their overall responsibilities.

Cultural Level Factors

The second group of identifiable themes related to the way in which the loss prevention department influenced the functioning of the business.

Providing Strong Leadership and Developing a Team. What was striking about all five of the heads of loss prevention that agreed to take part in this study was a sense of their ability to offer direction and leadership to their respective teams and more broadly across the organization. What was apparent was their genuine passion for the subject, and their desire to be pathfinders in the world of security management.

They were also very good at creating effective loss prevention teams. Creating a multifunctional team was apparent in all five loss prevention departments. Undoubtedly, they saw a role for the traditional former police or military personnel, but this was seen as a small part of a more cosmopolitan team that incorporated staff with experience in operating stores, working in the supply chain, auditing, and other varied areas.

For a majority of the companies taking part in this research, this multifaceted approach to team-building was necessary in order to address the complexities of shrinkage within modern retail companies, and recognition of the range of vulnerabilities that exist across supply chains. Loss prevention was not just about catching thieves; it was also about ensuring that stock arrived on time, at the right place, and at the right price.

Prioritizing people could also be seen in the way in which the loss prevention team influenced the selection and training of company staff more generally, but particularly in the stores. Once again, a range of strategies were adopted, including pre-employment screening, use of external databases to identify previously dishonest retail staff, and innovative training methods. A common strategy used by most of the case-study companies was to incentivize staff to take the problem of stock loss seriously.

For one company, this meant all store staff shared a portion of any savings they made on shrinkage in their store. For the majority of companies taking part in this study, incentivization was on the agenda for loss prevention staff and store management. A key message from these companies was getting the right people and ensuring that they were motivated and trained to deal with shrink control.

Using Barometer Management. Another key factor was the generation and analysis of data. The need to be led by numbers and not by intuition was a clear message. How this was achieved varied between the companies, but all had invested heavily in ensuring that they could not only monitor the rate and extent of shrinkage at a highly granular level (almost always SKU level), but also that they could analyze data to seek out trends and deviant behavior, usually through some form of data-mining technology or software.

What was particularly interesting was the way in which the loss prevention teams relied extensively upon inventory data to monitor performance in the stores; tracking the movement of goods was seen as an important part of their work.

Finally, they had all invested in employing data analysts to get the most out of the available data and to ask difficult questions and perform deep dives on the data. Again, this was important in enabling the loss prevention teams to move away from decision making based upon guesswork and intuition and move towards an evidence-based approach.

Nine Keys

Innovating and Experimenting. The prioritization of a culture of innovation and experimentation was also apparent. These organizations are not afraid to try new approaches and technologies if they think they will help to tackle the problem of stock loss. Indeed, most of them wanted to be seen as trailblazers and thought leaders in this field.

All were using a range of technologies, including CCTV, EAS, remote monitoring, data-mining packages, and other tools, although most recognized that they were not the fabled loss prevention panacea, but merely tools to be used in the battle against shrinkage.

All were clear that any new intervention needed to be carefully piloted and measured before any subsequent decision on companywide roll-out was made. The ethos of innovation and experimentation was not only focused on technologies; the case-study companies were also willing to look at new processes, procedures, and practices both within the stores and more broadly within the supply chain if they thought they might improve the way in which the company operated.

There was a strong realization that retailing in general, and loss prevention in particular, is not a static environment; it requires a company to be constantly evolving to meet, and hopefully stay ahead of, new challenges as they arise.

Talking Shrink Control. All five companies had developed a range of methods by which the company as a whole was kept informed of the way in which shrinkage was not only affecting the business, but also the opportunities for different parts of the organization to be part of the shrink control solution. The overarching need to raise and maintain awareness was striking.

The loss prevention teams were also good at using communication to influence different parts of the business, particularly through the provision of statistical data on a regular basis. This significantly helped a range of functions, including stores, merchandising, and logistics, to adjust their approach to particular processes, procedures, or products, and was also a key part of the institutional embedding of shrinkage.

Keeping shrink control on the agenda can be a challenge, especially when other priorities emerge and interest begins to wane. All the companies taking part in this study recognized the need to keep innovating to ensure the shrinkage message continued to be heard across the organization.

Prioritizing Procedural Control. Often, issues of process and procedural compliance can be seen as a non-loss prevention issue, or something to be dealt with by logistics or store operations. However, the impact of process failure on a business can be profound and costly, and the loss prevention teams taking part in this study all recognized the need to keep it high on their agenda. this was achieved by ensuring that the loss prevention department was made up of a multifaceted team, some of whom had detailed experience of how stores and the supply chain operated. But it was also done by keeping a close watch on the inventory data and looking for signs of deviance or lack of compliance.

This was partly achieved by ensuring that the loss prevention department was made up of a multifaceted team, some of whom had detailed experience of how stores and the supply chain operated. But it was also done by keeping a close watch on the inventory data and looking for signs of deviance or lack of compliance.

Operational Level Factors

Empowering Store Staff. The final theme that emerged from this work was the importance of empowering store staff to take responsibility for dealing with the problem of shrinkage. Traditionally, store personnel have  been seen as both the start and end point for controlling shrink; after all, they are the ones who deal almost exclusively with the goods and cash transactions with customers.

The scale of most retail concerns is breathtaking—tens of thousands of SKUs being distributed on a daily basis by a similar amount of people to thousands of retail outlets. Keeping control of this is impossible unless clear processes and procedures are in place and responsibility for ensuring adherence to them is delegated to supply-chain and store staff. But, unless the strategic and cultural level factors highlighted above are not first put in place, then they will not have the necessary operating environment as well as access to appropriate solutions to ensure shrink control.

The companies taking part in this study recognized how critical it was to make sure that store staff, in particular, were given the data, training, and support to be able to deliver the strategic plan on shrinkage control developed by the loss prevention team. Partly this was achieved through incentivization (staff bonuses being predicated on shrinkage performance), but also through a process of ensuring staff were made accountable for loss and enforced with potential sanctions, such as managers losing their job or being demoted.

Through the development of a credible organizational framework, the case-study companies had created an environment in which operational managers–particularly store managers–were expected to take responsibility for the day-to-day monitoring and control of shrinkage. The integrity of the overarching shrinkage approach made it much more difficult for store managers to “pass the buck” on loss prevention and claim it was not their responsibility.

Conclusion

This research set out to identify what it is about certain retailers that enable them to be consistently regarded as best in class when it comes to controlling shrinkage. It identified three interlinked groups of factors that characterize their approach:

  • The absolute necessity of having a strong organizational commitment to recognizing and responding to the problem,
  • A range of cultural factors that create the environment for delivering low shrinkage, and
  • The operationalization of a shrinkage plan across the company.

The first enables the second, which then creates the third.

While it was never the intention of this research to create an operational plan for reducing shrinkage in US retailing, it is hoped that it will at least stimulate debate and perhaps offer a framework that will enable others to learn from those who appeared to get it right.

This article was originally published in 2007 and was updated May 30, 2017. 

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