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Significant Inventory Loss Requires Perspective

When inventory loss rises, are you looking in the right place to find a solution?

Inventory loss is a fact of life in retail. When maintained at acceptable levels, it’s the cost of doing business, much like payroll and other operating expenses.

However, when shortage begins to trend upward, whether on a store-by-store basis, or even across a chain, it becomes imperative to view the problem in a proper perspective in order to identify and correct the cause.

Even if not readily apparent, significant retail inventory loss arising in multiple locations may be synonymous with a single, larger problem that affects a population of stores. This can include systemic anomalies or actual, wide-scale theft. This may seem like stating the obvious.

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However, many companies and even seasoned loss prevention professionals “think too small” when attempting to explain and resolve a spike in retail shortage.

There is a tendency to react to the problem locations as individual entities that are exhibiting separate issues, with shoplifting and employee theft as the default suspects. Indeed, both can account for significant inventory loss. However, a widespread spike in shortage implies problems within a process, not individual events.

The single biggest inventory-related common denominator shared throughout a company is its supply chain: getting its product to its stores. When it comes to accounting for significant shortage spikes, this process must be added to the top of the list of suspects. Though it isn’t automatically the source of the problem, it should not be ignored.

Furthermore, analysis of the distribution of goods must include both the physical and systemic movement of product. This is a significant point to understand; the movement of product through a company simultaneously follows two paths and must be viewed separately as a physical process that can be compromised and a systemic process that may be corrupted, contain anomalies or produce erroneous data.

Throughout my career, I’ve investigated numerous significant increases in shortage on a multi-store level. In each case, the cause was traced to the distribution process. Some of the instances were caused by systemic/procedural issues, and others were caused by large-scale, third-party cargo crime or theft scenarios. Collectively, they accounted for over $12 million in shortage.

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Events such as these may be rare, but when they do happen, they can create a major problem quickly.

When investigating a widespread rise in retail inventory loss, an important first step is to find what, if any, common denominators the targeted stores share above and beyond their shortage concerns. Those common denominators will point you to the source of the problem. This analysis will require a global view of the business, not simply an assessment of the individual stores.

Few “experts” within a company truly understand the entire process of moving product throughout the organization and maintaining accurate inventory data. In today’s typical retail structure, that process collectively flows through a myriad of departments, each responsible for just its own segment. This includes logistics/transportation, retail inventory accounting/inventory control, third-party entities, and store operations.

In many cases, these departments use different operating platforms, which in itself can become an issue as data is shared or merged. Loss prevention professionals need to have a complete understanding of the physical distribution process. They also need to understand how inventory data is shared, merged, reported, and maintained among these entities.

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Inventory Loss: Identified

In 2003, I joined Eddie Bauer as a regional loss prevention manager and was responsible for stores in the Northeast and Mid-Atlantic states. The shortage in that region was approximately 35 percent higher than the rest of the company and had been steadily rising over a three-year period. By the time I joined the team, the shortage in that region had spiked over $3 million over that time frame.

The bulk of the inventory loss occurred in a small group of stores in and around New York City. At the time, the existing LP team insisted the root cause of the shortage was due to shoplifting and had invested a great deal of time and money attempting to enhance employee awareness, all to no avail.

However, data pertaining to shoplifting incidents, arrests and recoveries didn’t come close to justifying the shortage numbers. In fact, that data couldn’t even support 10 percent of the annual shortage loss in this small collection of stores. Mass employee interviews generated a handful of internal cases, but they failed to account for the rise in shortage.

I found it curious that all the affected stores were within a 40-mile radius of New York City. After a meeting with the logistics department, it was determined those stores were all serviced by the same freight carrier. (At the time, Eddie Bauer had contracts with approximately 36 different trucking companies nationally). That piece of information was used to develop the theory that shipments via this carrier were being compromised.

Several weeks of carrier surveillances, informal discussions with drivers, collection of physical evidence and 100 percent shipment auditing proved that freight cartons were being opened while in the carrier’s possession. Up to 100 items were stolen from each store shipment every week.

Unlike the shoplifting data, this data was completely consistent with the accrued losses in those stores. Finding that common denominator resolved–in a matter of weeks–an issue that had been escalating over three years without any resolution. By the following inventory cycle, the shortage in that region was at its lowest point in the 80-year history of Eddie Bauer.

This investigation illustrates the importance of thinking big and finding the common denominator when confronted with widespread inventory loss. It also highlights the significance of taking a global view of the problem to ensure you are looking for answers in the right place.

While many loss prevention investigations occur in the weeds, there are times when you need to start the process with a 30,000-foot view to see all the moving parts of the big picture.

Takeaways for resolving high shortage:

  • Aside from sharing high shortage, seek to identify other common denominators among stores. They will point you to the source of the problem.
  • Widespread high shortage implies problems within a process, not individual events.
  • Shortage spread out over a large geographical area and many store locations requires you to look at many moving parts and volumes of statistical data. Find a way to remove all the static and focus on the crux of the process.
  • Companies need to have at least one subject matter expert who thoroughly understands the entire physical and systemic process of the movement of product through the organization.
  • When a distribution issue is the suspected problem, both the physical and systemic paths of distribution must be analyzed. It is beneficial to follow both paths forward and backward.

This article was originally published in 2016 and was updated March 20, 2019. 

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