The European Road Map—Managing Stock Loss in the Retail Sector

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If shrinkage management could be viewed as a journey, then recent European experience would be one not only lacking a final destination, but one plagued by too many blind alleys, detours, and one-way streets—the proverbial “road to nowhere.”

However, thanks to a collaboration of leading retailers, manufacturers, and academics, a radical new approach to the problem of shrinkage has been developed that is enabling European retailers to realize huge savings.

Prior to the work of the ECR (Efficient Consumer Response) Shrinkage Group, most retail responses to shrinkage were crisis driven, often triggered by a poor end-of-year stock loss result. This would usually generate a knee-jerk reaction, blaming the losses on outsiders, namely shoplifters, and involving the use of further technology to try to “solve” the problem. No systematic collection and analysis of hard data to monitor performance was typically employed. So, when the next crisis loomed, the reactive cycle would begin again.

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This article will describe how European retailers have begun to think about the problem of stock loss in a new way, ultimately finding an alternative approach to solving the age-old problem of shrinkage. It will chart the work of the ECR Europe Shrinkage Group and the development of an innovative and successful road map designed to provide retailers and their suppliers with a methodology designed to combat the problem of stock loss.

Mapping out the Problem

The 2004 ECR Europe shrinkage survey found that the cost of shrinkage to food retailers was €18.4 billion (~ $24.5 billion USD) or 1.84 percent of retail turnover, equating to losses of €66 million a day (~ $88 million).

More strikingly, recent research by the Cranfield School of Management has shown that if stock loss could be eliminated, then profits of a typical European retailer would be 62 percent higher. In addition, the impact of shrinkage on the consumer is becoming more apparent, particularly in terms of the cost of defense merchandising and shelf out-of-stocks on customer satisfaction and sales.

However, responding to shrinkage has suffered from a number of interrelated problems that have combined to limit its effectiveness in dealing with an issue that is costing businesses billions of Euro a year both in terms of losses and expenditure on so-called solutions.

Unfortunately Necessary. Shrinkage management has suffered from an image problem within organizations. Too often it has not been seen as actively contributing to bottom-line profitability. It is seen as a regrettable consequence of doing business or a function that can be called upon when things have gone badly wrong, such as a break-in, when products have been contaminated, or a member of staff has been attacked. To this end, it has often been seen as a task that requires the skills of those formally employed in public policing—detaining offenders and employing guards.

Juggling Priorities. The roles and responsibilities of security or loss prevention departments are often many and varied, ranging from issues of health and safety, through monitoring contract guarding companies, to responding to kidnap attempts on senior members of the organization. This myriad of often competing duties, some of which may be a statutory requirement and could incur significant liability if non-compliance or negligence is proved, means that prioritizing stock loss and shrinkage can be difficult for those tasked with its management.

Solutions Searching for a Problem. Many of the methods and approaches adopted by shrinkage managers can be characterized by a prioritization of one particular problem—shoplifting—coupled with an almost obsessive belief that the answer can be found in a quick-fix technological panacea. Recent data from the ECR Europe shrinkage survey showed that retail shrinkage managers themselves suggest that only about one-third of loss is caused by external theft. And, yet, as one senior manager for one of United Kingdom’s largest food retailers put it, “Tackling shoplifting accounts for about 95 percent of our security budget.”

Living in a Data Desert. One of the most fundamental problems that has faced security managers is a lack of relevant, timely, and accurate data on stock loss. As the recent ECR Europe shrinkage survey found, European retailers cannot account for 51 percent of their losses, which equates to €9.5 billion a year (~ $12.6 billion).

Without doubt, this lack of data plays a pivotal part in producing poor product protection. Not knowing means not understanding, which means that any response will inevitably be piecemeal, partial, and poorly defined. What has been almost totally absent is the data required to make the first step possible. Good decisions and effective threat assessments rely upon having high-quality, reliable information.

In Splendid Isolation. If security managers can be defined as working in a data desert, then they can also be considered to be there very much alone. The ECR Europe shrinkage survey found very low levels of both inter- and intra-company cooperation on resolving the problem of stock loss. Very few organizations have recognized the value of cooperating across company functions to develop more integrated and strategic approaches. Functions such as buying, marketing, IT, and human resources were found to be rarely involved in security management issues, and yet they have much to offer both in terms of identifying future problems and helping to implement potential solutions.

Likewise, cooperation between companies throughout the supply chain was found to be largely absent. Shrinkage is a problem that transcends company boundaries. It is something that requires genuine partnership and cooperation if it is to be managed efficiently and effectively.

Myopic Management. The final factor that has seriously affected shrinkage practitioners is a tendency to see the problem as only occurring at the end of the supply chain, after the products eventually reach the store. This is in part a function of the prioritization of shoplifting as the primary cause of stock loss. The store is the point at which customers are allowed to interact with the products and where many of the current technology solutions are most easily applied. But as the ECR Europe shrinkage survey found, up to one-third of loss takes place before the goods have reached the retail outlet, highlighting the need to look at losses of goods in transit and while being stored in distribution centers. Certainly the stores are a very vulnerable part of the supply chain, but they are very much a part of the chain and stock loss practitioners need to look beyond the retail outlet and recognize that good loss prevention is about securing the entire supply chain.

Developing a New Approach

In 1999, ECR Europe, an organization set up to foster greater cooperation between retailers and their suppliers, established a shrinkage group (www.ecrnet.org). The purpose of this group was to take a fresh look at the problem of shrinkage. It brought together a unique collection of representatives from some of the biggest companies in Europe, including Ahold, Allied Domecq, Bacardi, Carrefour, Gillette, Metro Group, Proctor & Gamble, Sainsbury’s, and Tesco, and supported by academics in the U.K. from the University of Leicester and the Cranfield School of Management.

Co-chaired by senior representatives from Ahold and Gillette, in its first year it completed the first pan-European survey on the extent of stock loss, and recently carried out the survey again in 2004. More importantly, the organization developed a methodology for tackling the problem in a more systemic and systematic way—the ECR Europe road map.

In the subsequent six years, the group has extensively tested the road map by completing at least fifteen detailed case studies. It is now part of corporate security policy for Ahold, Gillette, Makro Belgium, and Tesco in the U.K. and is proving to be a versatile, simple-to-use, and yet powerful tool for reducing shrinkage not only in Europe, but increasingly in other parts of the world as well.

[The ECR Europe methodology is presented in a “blue book” titled “Shrinkage: A Collaborative Approach to Reducing Stock Loss in the Supply Chain,” and is available for purchase on the organization’s web site, www.ecrnet.org.]

The ECR Europe Approach to Stock Loss

While the ECR Europe shrinkage road map has been one of the most tangible and widely used outputs from the work of the shrinkage group, underlying its use are the following guiding principles that provide the foundation for its success.

  • Engage senior management and prioritize shrinkage
  • Identify accountability—measure, monitor, and motivate
  • Prioritize inter- and intracompany collaboration
  • Adopt a systemic and systematic approach
  • Unlock the value of the “hot” concept
  • Focus on process failures first
  • Encourage innovation and experimentation
  • Document learning and disseminate success

Engage Senior Management and Prioritize Shrinkage. For most stock loss practitioners, the first and probably most critical part of the process of developing a more effective approach to dealing with the problem of shrinkage is ensuring that not only do senior managers appreciate the value of doing this, but that they also give it their full support. Without this, new strategies and solutions will become bogged down by a lack of prioritization and are much more likely to be sidelined in favor of other organizational projects.

Surveys such as the recent ECR shrinkage survey provide key benchmark data with which organizations can compare their performance, and enable stock loss practitioners to raise shrinkage up the agenda.

Identify Accountability—Measure, Monitor, and Motivate. One of the key findings from the ECR Europe survey was the relative lack of responsibility and accountability certain parts of organizations expressed concerning shrinkage control. Departments such as buying, marketing, IT, planning and design, and logistics all considered themselves largely excused from becoming involved. Effective stock loss control requires that all parts of an organization reflect upon their potential role and contribute accordingly.

For instance, what is the likely impact of a store redesign upon security equipment? What are the security implications of changing the way in which goods are delivered to a store? How likely is it that a new product will be damaged or stolen as it moves through the supply chain?

In addition, organizations need to develop systems that enable them to collect data that informs the stock loss control process. Good stock loss control requires data that is highly accessible, timely, and contains a high degree of granularity, preferably measuring stock loss at item level.

Finally, staff needs to be properly motivated to take the problem of shrinkage seriously. The recent ECR survey found that those organizations that incentivized staff through bonuses for low stock loss results were far more likely to have lower levels of overall shrinkage. As one manager responding to a recent research study carried out by ECR Europe said, “Shrinkage is as important to me as sales.” Making sure that store management are properly rewarded for the stock loss efforts is a key part in developing an effective shrinkage strategy.

Prioritize Inter- and Intra-Company Collaboration. Critical to the success of the methodology has been an emphasis upon collaboration, both between departments within a retail organization and between retailers and their suppliers. This approach enables the root causes of shrinkage to be more easily identified and ensures that eventual solutions are more robust, longer lasting, and precisely tailored to the problem. For instance, a recent case study between a do-it-yourself chain in the U.K. and one of its suppliers identified key problems with damage to packaging and on-shelf theft. A solution was jointly developed based upon a redesign of the packaging and the way in which the products were merchandised on the shelf. This led to a 50 percent reduction in shrinkage losses as well as a 33 percent increase in sales—a positive outcome for both retailer and supplier.

Adopt a Systemic and Systematic Approach. The ECR Europe shrinkage road map (shown above) ensures that organizations adopt a much more systematic and systemic approach to responding to the problem of shrinkage. It requires organizations to carefully map out the extent of the problem and measure it more robustly prior to consideration of possible solutions. It encourages a detailed review of the entire supply chain, not just focusing on the store itself, but the route products take from manufacturer through to eventual sale at the check out. But it also ensures that organizations carry out a proper evaluation of the impact of the solution, and that best practice is then incorporated into company practices.

For example, a U.K. supermarket chain and one of its beers, wines, and spirits suppliers mapped out the supply chain for a particular type of vodka and gin that were suffering high levels of shrinkage. This entailed mapping out the process from the bottling plant, through each organization’s supply chains right up to the point when the products were placed on the shelves, analysing in detail each process step along the way. This enabled key root causes to be identified and secured a reduction in shrinkage on these products of 40 percent.

Unlock the Value of the Hot Concept. Most retail organizations are familiar with the concept of hot products—those items that are much more likely to suffer from shrinkage. However, the ECR Europe approach encourages retailers and their suppliers to broaden this concept further, looking at potentially hot processes, such as the receiving of goods at the back of the store; hot people, for instance, certain managers who have disproportionately higher levels of stock loss; and hot places, particular parts of a retail estate with above-average levels of shrinkage. Taken together, they are termed the “hot concept” and enable stock loss practitioners to focus on the key elements that are likely to generate the greatest return on investment—the vital few rather than the trivial many.

Focus on Process Failures First. The ECR Europe shrinkage road map encourages organizations to focus particularly on the processes used to manage and monitor the movement of goods throughout the supply chain. Poor processes, or lack of adherence to them, can not only generate shrinkage, but can also act as a mask or cover for other shrinkage-related behavior.

For instance, a lack of product checking and auditing can enable dishonest staff to steal product and cash more easily. In another example, a recent European case study found that a change of process that stopped the weight checking of meat products from a particular supplier encouraged them to begin to deliberately under deliver stock. Through the use of the road map, this situation was uncovered, resulting in the delisting of the supplier and a one-off return payment in excess of $1 million.

Encourage Innovation and Experimentation. One of the most remarkable findings from the recent ECR Europe shrinkage survey was that those organizations that had been involved in a high level of experimentation and innovation, including carrying out pilots for new solutions, using the ECR Europe road map, and collaborating with suppliers and other organizations, had on average 20 percent lower levels of shrinkage.

Problems such as internal and external theft and inter-company fraud all require organizations to continually reflect upon the effectiveness of existing approaches designed to reduce their impact. Thieves continually innovate and adapt their methods to counter loss prevention programs and technology. Therefore, organizations need to do the same; otherwise they will be left behind in the ongoing struggle to minimize losses and maximize the difficulty for offenders.

Document Learning and Disseminate Success. The final principle focuses on the need for organizations to share their learning and to ensure that best practice becomes part of company policy. Companies that have successfully used the ECR Europe shrinkage road map have ensured that not only are the results from any particular project carefully evaluated, but also that successful solutions are used throughout the company, turning successful pilot projects into integrated best practices.

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Case Studies in Success

The road map and the guiding ECR Europe principles are producing some remarkable results for those companies that have used them, not only in terms of significant reductions in shrinkage, but also increases in sales as well.

The ECR Europe Shrinkage Group is currently engaged in a process of disseminating its work throughout Europe by organizing in-country workshops to raise awareness of the methodology and encourage retailers to use it.

The group is also continuing to develop its work, including designing a “mini” road map for store managers, developing a series of tools to help reduce the problem of shrinkage in hot stores, and looking at ways of improving the training given to retail staff on shrinkage management.

To return to the analogy used at the beginning of this article, since the establishment of the ECR Europe Shrinkage Group, European retailers and their suppliers now have a road map to guide them on their journey. Instead of being on a road to nowhere, they are now on a road to lower shrinkage, greater on-shelf availability, and increased consumer satisfaction.

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