Supply-Chain Shortage Control

Today’s retail environment is as competitively challenging as ever. The retail sector of our economy is in constant change, moving with evolving technology, adjusting to consumer demands, and anticipating trends. The bedrock upon which healthy retailers are built is the supply chain that provides the goods to be sold. A retailer’s competitiveness, or lack thereof, is in measurable part a reflection of the extent to which these avenues of supply are cost effective and efficient.

The responsibility of a supply-chain loss prevention professional, broadly speaking, is to execute priorities that preserve assets, at least those within the loss prevention purview. Fulfilling this directive, and thus promoting effective and efficient supply chains, often requires the loss prevention professional to analyze different business units or types to ensure the sufficiency of shortage control measures. Though the business types within a supply-chain unit or units may be varied, such as third-party logistics entities, picking and packing operations, consolidation units, and so forth, the approach needed to analyze each for shortage control sufficiency is the same.

The purpose of this article is to demonstrate a three-component approach to assessing the shortage control sufficiency of any supply-chain unit or business type within the unit and then remedying the insufficiencies as appropriate. The methods discussed here are specifically designed to address shrinkage related to internal theft and waste. Methods related to external and administrative-related shrink are beyond the scope of this article.

Shortage Control Analysis

Beginning a shortage control sufficiency review includes first establishing an understanding upon which all shortage control efforts will be built. That understanding is this: the goal for the loss prevention professional is first to identify exposure to shrink within the business type. Exposure simply means an area, process, practice, or condition in which or because of which loss is either occurring or likely to occur. Once exposure to loss is identified, shortage control measures can be directed at the exposure to either reduce or eliminate it.

There are three categories or areas of exposure analyzed in this approach—operational exposure, administrative exposure, and physical exposure. The nature of these relatively broad categories is a symbiotic one; affecting one category may produce either a favorable or unfavorable effect on one or more of the others.

Further, specifically not discussed within the scope of this article, although it should be considered from a holistic shortage control perspective, are tools such as data mining, trending, and reporting capabilities. These tools, when used properly, can have a complimentary and profound impact on the overall effectiveness of the shortage control measures implemented as a result of this analysis.

Operational Exposure. Review the business’s physical operation in its entirety. Start at the beginning of the process and analyze each subsequent step until the entire operational process has been reviewed. For example, in a typical setting, one might start with a receiving process, work into the merchandise storage functions, and then move on to merchandise processing and handling, merchandise replenishment, quality control if applicable, and finally shipping.

As each independent function or handling process is reviewed for exposure, develop answers to questions similar to these to guide your analysis:

• Are there operational methods employed that although effective operationally nevertheless circumvent or undermine current shortage control measures?
• Do the methods or practices employed in the operation generate unnecessary exposure to loss?
• Can operational practices be changed such that the business of the operation continues on, without unnecessary impediment, but does so in a way that reduces exposure to shrink?

Consider the following example to illustrate an operational exposure review. A high-volume, high-value business unit secured by fencing around its perimeter generates empty corrugate as a byproduct of the inventory replenishment function. To remove this material, the operation employs the use of powered industrial trucks to drive the empty corrugate through a gate in the perimeter fence and on to a recycling location outside the area. Because of the volume of corrugate, a thorough inspection of the material at the exit gate by loss prevention personnel is impossible. This process is repeated several times daily, and from purely an operational perspective, it is effective.

A review from the perspective of operational exposure would reveal that this corrugate removal process, while effective functionally, circumvents shortage control hardware in place, namely the perimeter fence. Further, because of the volume of material and occurrences, a meaningful inspection at the exit gate is not possible. The potential for internal shrink during this process is likely high.

In this example, exposure to shrink has been identified through the corrugate removal process. The goal here is to reduce or eliminate this operational exposure by modifying how the corrugate is processed. Consider the following:

• Could the corrugate recycling process be brought within the confines of the perimeter fencing? If so, the operational elements creating exposure to shrink will be largely removed or eliminated altogether.
• Could the business change the way in which it removes corrugate from the area that would reduce the risk of loss? For example, could the corrugate be flattened, then palletized, and then removed from within? If so, a large portion of the risk of loss has also been removed.

The goal here is a challenging one. After all, you are going to be asking the operation to change the way it does business. Compromises will likely be an element of any long-term solution. However, intelligent changes made here will impact positively the health of the unit, and that is a result all the business partners can agree on.

Administrative Exposure. Reviewing exposure to shrinkage from an administrative perspective involves analyzing current employee policy for the business unit within the context of both operational and physical shortage control measures. As matters of employee policy largely define how employees are permitted to interact with the environment in which they work, these policies should be consistent with measures to control shrinkage or at least not compete against them. Where administrative policy does not share alignment with operational and physical shortage control measures, exposure to shrink likely exists.

By way of illustration, an administrative issue that could have a direct impact on shrinkage is the employee dress code in certain business units. Employees working in a high-value area with easy access to individual merchandise units should reasonably have a dress code policy that deters against shrink, for example no pockets, no hats, and so forth. In this example, even if robust operational and physical shortage control measures have been established, if the dress code is weak or non-existent, administrative policy is actually undermining the entire shortage control effort.

When conducting this type of review, consider the following non-exhaustive administrative policy areas that could impact shortage control measures:

• Employee parking policy
• Break and meal times and locations of each
• Employee ID badge policy
• Background check policy
• Drug screening policy
• Cell phone and electronic device policy
• Discount policy
• Smoking area policy
• Purses and bag inspection policy
• Time clock policy

Physical Exposure. The goal in this phase of review is simply to determine what pieces of physical hardware, such as access control, CCTV, fencing, lighting, security personnel, alarm systems, and so forth, need to be present to best protect the business from shrink. The nature of the hardware desired will largely depend upon operational and administrative realities. Adjusting some component within the latter two areas will likely adjust the need for physical hardware as well. In any event, anywhere it is identified that a piece of hardware is lacking or does not complement the operational or administrative need of the unit, there is physical exposure and it should be remedied.

As with the operational review, a study of the business area must be performed. How does the movement of the business operation interact with current shortage control hardware? Consider the following:

• Are there sufficient physical controls in place to prevent or deter shrink in all desired areas?
• Are the current controls intelligently dispersed into the operation?
• Are the controls and measures used consistent with the value of the area and inventory to be protected?
• Are controls consistent with the manner of inventory processing; in other words, is the operation largely automated or manual in nature?
• If modifications to the operation were made, what additional physical controls would be required; which could be re-purposed?
• Does the shortage control hardware complement the other measures within the unit?

Advocating the Intelligent

Sizable funds can and have been spent on shortage control measures in businesses of all types. Conversely, the opposite is also true—not enough resources are deployed to protect against shrink, resulting in unnecessary loss.

An alignment between the business nature and type with the amount and expense of shortage control measures must be achieved. The closer this alignment, the healthier the business unit and supply chain. Being the advocate for the most intelligent ratio of shortage control measures to inventory value and risk of exposure is the desired position for the loss prevention professional. Assessing a business unit for shortage control sufficiency using the three-component approach described here will provide a pathway to effective shortage control.