Relying on Sales Won’t Eliminate Causes of Shrinkage

Inventory control experts must avoid focusing strictly on sales and consider the causes of shrinkage.

causes of shrinkage

Chances are, you’re heard someone say “sales cure shrink” or they plan to “outsell their retail shrink.” When this statement is used, the person uttering the words often has no idea what they are saying. Because of this, it’s easy to dismiss this statement. After a while, it may even label the person saying it as foolish.

However, is there any basis in fact to this statement? What if we remove the person from the statement and examine it solely on the basis of fact? Can ignoring the causes of shrinkage and refocusing strictly on sales solve our inventory issues?

As an experiment, let’s start with $1 million in sales and 2% inventory shrink as a percent to sales. Keeping the shrink dollars static, we can determine the sales dollars and corresponding shrink percent at every 1% increase or decrease in sales. If you look at each percent up to a 20% sales increase and a 20% sales decrease, the answer to the sales/shrink argument is very clear. The 20% sales lift versus 20% decrease is the difference between 1.7% and 2.5% shrink assuming our original 2.0% shrink dollars.

The answer is that sales can “cure” shrink, and alternatively, create a shrink monster if we’re experiencing a sales decrease. Shrink dollars remained the same, but the difference between 1.7% and 2.5% shrink could be a promotion and a termination. The exercise takes place in a vacuum, but it’s interesting to see the concept in action. The person who argues that “sales cure shrink” probably doesn’t have a grasp of this concept. Frequently, this phrase is used to push forward an agenda.

So How Should We Approach The Causes of Shrinkage?

Am I suggesting that we should stop our loss prevention efforts and become sales associates? Absolutely not. I believe performing the “sales affecting retail shrink” exercise is useful, so we can fully understand the data when having these types of conversations. Blindly dismissing the concept could make us as guilty as the person blindly using sales to justify not proactively addressing the real causes of shrinkage. Paradoxically, understanding that sales can technically “cure” shrink is a powerful weapon during this discussion.

I believe the powerful piece of this statement is what percent of a sales increase we plan to achieve out of a proposed idea. One may approach this in a positive manner and say “Great! How much of a sales increase are you projecting?” We know from the exercise above that it takes a significant sales increase to “cure” shrink.

In our example, it took a 9% sales increase to break a .1% reduction in shrink. For most retailers, 9% is an aggressive sales increase, and it only reduced retail shrink by .1%. Our 2.0% is now 1.9%, assuming that the selling activity did not add any additional shrink dollars. However, the “sales cure shrink” conversation normally assumes that there will be increased losses, but the sales increase will make up for any losses. Unfortunately, shrink losses can quickly consume any profits from a modest sales increase.

Like many solutions, the best answer may lie in the center of the two ideas. If we are creative and work together, we can increase sales and reduce shrinkage. I realize that I’m not breaking new ground with that idea. Increasing sales and reducing shrink is the foundation of most loss prevention methods. However, I found it valuable to demonstrate how these two financials affect each other.

It’s easy to learn an idea from someone else and put it into practice, but actually testing it and observing the results instills confidence in the idea that you cannot obtain any other way.

This article was originally published in 2014 and was updated September 27, 2017.

Comments
  • No. Nonsense to even think it can. It may disguise the loss but not cure the problem that continues to exist. It’s not nor has ever been about sales, the name of the game is margin. Anyone else who says differently has no clue whatvtheyvare talking about in this number crunching industry.

    Reply
  • Hi Adam,

    Your preaching to the converted here. I have been telling retailers for years that a shrink reduction and sales lift can alter the statistics especially for a new start company.

    Unless your sales increase by a significant margin year after year say 20% and more,(not likely or plausible)as that company matures its statistical data will be its demise because the shrink level will undoubtedly increase if an active Loss Prevention Program is not initiated.

    You make a good argument as well on the issue of a 10 to 20 percent increase in sales. This also means what the retailer is selling is something what people really want.

    When people want something bad enough either temptation or greed or just plain growing pain errors becomes a part of the equation hence, a higher shrink will naturally occur.

    A good LP plan can prevent this.

    Thank you for the article.

    Reply
  • Adam

    Thanks for your comments. The missing piece of course is margin. If the margin is high then the associated shrink number can also be high and vice versa. We reported on a study in Europe where shrink went from 0.1% to 2% when batteries went from closed to open display, but the overall net profit increased by 83%. Sometimes the sell more lose more scenario is viable but you need to understand the margin and of course ignore the associated moral conundrum of in effect ‘allowing’ more crime to happen to generate profit!

    Keep up the good work.

    Best wishes

    Professor Adrian Beck

    Reply
  • Adam, as you conclude, that person was not a complete fool. Take a recent example shared by Ahold and P&G in Europe, they reported that when batteries were sold from behind the customer service counter, shrink was 0.2%. When they then moved them to open sales at the checkout, shrink went up to 2.0%. However, sales increased by 87% meaning net profit was up by 83%!

    In Europe, it seems an increasing number of retailers are adopting a more holistic approach to managing losses moving away from the traditional mindset of tackling only unknown loss, to a capability that has in scope, known loss, waste, damage, markdowns, etc and for some even out of stocks. These new teams also come along with new names, for example, the total loss team.

    Importantly, what these new teams focus on is delivering the right shrink number per category or even products like perfumes, that strike the right balance between starving the store of sales by locking up, etc, and a scenario where sales come at any cost, premium vodka placed on a display pallet outside the store. So, going back to your fool, a more accurate statement would be have been that “sales can cure shrink”

    The work of LP I think is to partner with the business to find the right balance between availability and shrink.

    Regards, Colin

    Reply
  • Dear Adam, inventory control experts a contrary to the LP “experts”, they do consider inventory shrinkage causes (all causes, including virtuals). There is loss prevention cost beakeven line, ROI negative. More sale = more inventory movement (record distortion risk) = more clients movement (shoplifting risk) = more sale transactions (sweethearting risk), etc. Balancing LP’s structure cost vs shrinkage reduction benefits is the key. It is a business not rabbit chasing game.
    Darek Sakowski

    Reply

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