Strategies that can eliminate some, if not all, causes of product loss can have a huge impact on retailers’ bottom line. While contributors to shrink are multi-fold, one strategy that retailers have leveraged to successfully combat shrink losses is scan-based trading (SBT). SBT is a type of consignment-based sales model where suppliers retain ownership of products until they are sold at the retailers’ point of sale (POS). The model provides a data-driven approach to inventory management by offering detailed insights into POS data and inventory movement down to the UPC level. By transferring inventory ownership to suppliers until POS, SBT minimizes retailers’ inventory holding costs and can be leveraged to reduce, if not eliminate, shrinkage risks.
Retail shrink encompasses many types of loss, primarily driven by theft, but nearly 20% of retailers’ shrink is attributed to operational errors. Ultimately, SBT has the biggest impact on mitigating errors in reporting and processing that contribute to this type of shrink. Product losses due to operational missteps can fall into several categories: administrative errors, vendor fraud or delivery errors, as well as unattributed losses. In many instances, errors in manual processes contribute heavily to shrink rate. Inventory receiving and counting, for example, is a particular challenge for direct store delivery (DSD) suppliers. With an SBT model, these errors can be quickly identified and eliminated, which can have a big impact on overall shrink losses.
SBT can successfully mitigate product losses stemming from operational mishaps by providing real-time data and accurate inventory tracking. This provides insight for suppliers and retailers into product movement from delivery to the POS, providing opportunities to identify operational errors that impact shrink. For example, a national drug chain had an apparel program that was shipped to stores via Federal Express. While sales were consistent in the program there were certain items that were frequently not showing sales. The supplier saw this as a signal to ship to the stores thinking the products were not in stock. In reality, it was found that these items were stuck in the back room un-merchandized, leading to false reporting of shrink and out of stocks. By focusing on delivery data and comparing that to daily sales, SBT reporting can identify exceptions to uncover improper handling by store staff such as this un-merchandised product stuck in the back room that can lead to high levels of operational shrink.
The data available through SBT programs can also be used to successfully reduce product theft. Inventory reporting enables retailers to work with their suppliers to optimize on-shelf quantities, limiting the potential for losses from theft. Real-time store, day, and SKU data allow for timely re-orders, helping to keep products in stock at the optimal level. This data also provides a detailed evaluation of product-specific shrinkage, empowering retailers and suppliers to target store-level interventions to deter theft and identify effective solutions.
The best leveraged SBT programs identify concerns in theft, process, or product use and monitor for spikes in shrink to address potential concerns at the source. One major benefit is sharing daily POS data with suppliers, which can be analyzed to identify inconsistencies that lead to loss. Based on our experience working with hundreds of retailers, anywhere from 3-5% of daily sales data has issues that can lead to shrinkage. This includes incorrect pricing, duplicate data, missing data, and incorrect UPC usage. By managing and looking for discrepancies daily, both retailers and suppliers can eliminate this leading cause of product and revenue loss.
In one example, a retailer with shrink exceeding 25% implemented a scan-based trading program to identify and remedy major contributors to product loss. They utilized data generated from SBT to analyze shrink across their DSD suppliers and their supply chain. Once problems were identified, suppliers were asked to convert their programs to SBT. The retailer worked with them to develop protocols around deliveries and item maintenance to reduce shrink. Dramatic results were seen by placing the onus on the suppliers to help solve shrink. The suppliers took greater care in what they delivered and placed the right products and quantities on the shelf to drive sales. This approach ultimately reduced shrink to just 10% within six quarters, while driving sales increase of over 6% year-over-year, providing benefits to both their suppliers and their stores in both relationship and financial scope.
Ultimately, retailers benefit from data-driven insights to combat shrink rates. Programs that can provide inventory tracking and transfer shrink risk to suppliers, such as SBT, can have a big impact on loss prevention initiatives.
Mark Landgren is SVP at Fintech, which works with over 250,000 retail and hospitality businesses.