Writing a Prescription for Controlling Shrink

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EDITORS NOTE: Ernie Deyle is the vice president of lossprevention at CVS/pharmacy. Since joining CVS in 2002, thecompany has undergone dynamic changes in the loss preventionarea, resulting in their posting one of the lowest shrink rates inall of retail. This during a period when they were adding 1,260Eckerd stores to bring their total locations to over 5,400 inthirty-seven states.Prior to joining CVS, Deyle worked in retail consulting withCap Gemini Ernst & Young where he was the global leader for thefirms profit recovery and shrink management practice. Beforethat he was with Arthur Andersen where he led the firms effortsin the retail loss prevention area. Deyles career began at the store level in the groceryindustry. He worked for the Kroger Co., Fleming Foods/Scrivner,and Homeland Stores in a variety of roles, including storeoperations, special projects, and loss prevention.

EDITOR: CVS is a different company today than it was just a fewshort years ago. Describe the Eckerd acquisition and how that hasimpacted your loss prevention organization.

DEYLE: Acquisitions are fundamentally difficult on a variety ofdifferent levels. First and foremost, it is a major event for thoseassociates being acquired. Many have questions: Am I going tohave a job? Whats going to happen to me? What will I wind updoing? How is this going to impact my family?With that in mind the first issue we addressed was theassociate integration issue. We spent countless hours visitingwith the acquired associates on multiple levels. Our seniorexecutive team, including the CEO, conducted meeting aftermeeting with store personnel in an attempt to address concernswhile providing a roadmap of our integration strategy. This groupdid this by being on the ground, talking to the Eckerd employees,making sure that they understood everyone had a role movingforward in the new CVS model.

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EDITOR: How did the Eckerd employees react?

DEYLE: Given the dynamic of this particular acquisition, meaningthe JCPenney folks were very public for over a year about wantingto purge the Eckerd business from their overall business model,the associates impacted were subject to an enormous amount ofuncertainty and stress for a very long time. As I just mentioned,when we spent time with these individuals in the field,overwhelmingly the feedback the vast majority conveyed was theneed for leadership, direction, and constancy

Therefore our strategy around the human aspect of thistransaction was developed with just that in mind. The primarydriver in our people strategy was to quickly assimilate andblend these new associates into teams with highly productiveand highly seasoned CVS counterparts. Once these teamswere aligned, we quickly trained and educated them on thecritical CVS processes, methodologies, policies, and guidelinesgoverning their new role with CVS.

EDITOR: How are those new stores performing?

DEYLE: In a nutshell, and of no surprise to the team and our shareholders, the results are very solid. Sales trends are good,customer traffic is up, customer conversion is up, and, near and dear to my heart, shrink results are on the road to recovery.Considering CVS past track record with successfulacquisitionsRevco, Peoples, and Arborthis should come as no surprise to those who know retail.

EDITOR: Speaking of shrink, oftentimes, when you acquire a company, you acquire stores that have inventory shrinkagechallenges.

DEYLE: That was certainly true in this case, as you may have read from several analyst reviews before and during the acquisition process.

EDITOR: How have you started the process of putting your programs in place there and how have they adapted to that?

DEYLE: Given the shape of the Eckerd LP infrastructure at thetime of acquisition, it was critical that we immediately implementour shrink reduction attack strategy. From an LP perspective,the tactics we began to deploy were overwhelmingly adoptedby the field. Clearly our approach was a dramatic improvementfrom what was the standard operating procedure over the lastfew years or so. If I had to pick one way to best describe theseimprovements, it can be framed around the specific area of spanof control. Eckerd had slashed the field LP team to the point thatwas completely incomprehensible. They were operating at a spanof one LP person for every 150 to 200 stores. At CVS we operateat a rate of one LP associate for every fifty-five locations. Usingthat one strategic difference to characterize our shrink attackstrategy versus the Eckerd/Penney program, clearly adapting toour methodologies was a very short conversation with the fieldwhen we attempted to obtain the fields buy in.

EDITOR: What were your first thoughts on attacking shrink?

DEYLE: First and foremost, we had to get the right personnel on ground. We were able to populate our field org chart by leveraging seasoned LP veterans from other areas of thecompany, in addition to absorbing several talented folks from the Eckerd LP team. We filled in the remaining positions withexternal hires. These new team members went through an extensive training program to bring them up to speed on our LPprograms, systems, and methodologies primarily through our wingman training program.

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EDITOR: Describe that training program.

DEYLE: Whenever we bring a new person on board, they gothrough a twelve-week training program. We tie them to aseasoned LP veteran…thus the wingman name…who in mostcases have been with CVS for a number of years. These folksare the cream of the crop. They all are beating budget from afinancial performance standpoint. They obviously understand thevast majority of the programs CVS utilizes on a day-to-day basisand, more importantly, they have a strong working knowledgeof our shrink-reduction attack strategy. Part of the program ishands on work in the veterans market to see firsthand how atop performer executes.

They then go through an extensive week of training with ourinvestigation skill sets development program. This is basically ahow-to course on effective interview techniques, investigationdevelopment, documentation requirements, et cetera.

Additionally, we spend a large portion of this training aroundour transaction monitoring application from Retail Expert. Wecall it VIPER, which stands for Visible Improvement and ProfitExecution Results.

The final two areas of training that we deploy focus on thefinancial drivers and the pharmacy operations aspects of the job.From an accounting view, we take them through a rather extensivecourse on the financial elements of LP. Spearheading this trainingmodule is a very important team of individuals who work closelyaround the financial elements of shrink management. Theseindividuals are call GMA or gross margin analysts.

Lastly, we have a rather extensive program around pharmacymanagement. Included in this module are certificationrequirements for our LP team to become certified techs.Additionally, our LP team must complete a nationally certifiedclass designed specifically for the pharmacist, as a pharmacyshrink-reduction training school.

EDITOR: Given the nature of your business and this training,what type of individual do you look for when you hire an LP professional?

DEYLE: We are rather meticulous, and have established a ratherhigh level of expectation in the type of individual we bring into ourorganization. They have to be nothing short of a high performerin their prior life before joining our organization. Weve raised thebar significantly on the in-bound talent level expectation in ourorganization.

EDITOR: Do you look for different qualities and experiences thanthe traditional retailer may look for?

DEYLE: Very much so. My background is slightly different froma traditional LP person. Thus, we look for a person who has avery strong operational background from a high performingretailer. We look for them to have a very strong businessacumen, which means that theyve got to have a strong baseof financial knowledge to go along with their exceptionaloperational background. They have to understand the P&L andhow to drive components within the profit-and-loss statement.Additionally, they must understanding the relationships andinteraction that each line item plays with one another.

So, to summarize we are looking for more of an analyticaltype. They must be ambitious, a self-starter, with very strongcommunication skills. We can teach them the basic tactics ofLP 101, such as how to conduct the baseline audit, how todo an interview, that kind of thing. What we cant teach is theanalytical, communicative aspects, and, more importantly, it ishard to teach leadership and drive.

EDITOR: Describe your field organization.

DEYLE: The people in the field are called regional lossprevention managers because they cover multiple regions.While they have specific district managers in the operation that they touch, they cross over regions, which means they dealwith three or four regional operations managers. Again, ourRLPMs have fifty-five stores they supervise and support.

EDITOR: What are your expectations and objections for aregional manager?

DEYLE: Quite simply coach, mentor, teach, train,support. Above all else, they are to be a support resource,a subject-matter expert, and a trainer for the operations team. They must be able to quickly analyze and process multiple actions at any given time. They must be able to isolate situations,evaluate trends, and develop solutions as they apply to scenarios presented. They must be able to work effectively with the field operations team…the district and regional management teams…to properly support the store and our programs.

EDITOR: Is the analysis you mentioned the same or different from what many other LP executives would call an audit?

DEYLE: Its similar in that theres an established format orchecklist that can be used as a guide. But it doesnt necessarilydeal with what they visibly see that day when theyre walkingthe store. Thats a part of it, but the analysis goes beyond that.What weve set up here at CVS is a way that we look at specifickey performance indicators or KPIs. From an LP perspective, ifwere looking at the right drivers, we should be able to effectivelyforecast what a stores risk model will be when we take the actualphysical inventory. In short, we have established a predictivemodeling methodology that allows our LP team to be moreproactive in our attack strategy rather than reactive. Our structureis designed to be 70 to 80 percent proactive and 20 to 30 percentreactive. Youll never be completely proactive as the nature of theLP beast includes putting out the daily house fire. However, if youwatch the correct key performance indicators, if you understandthe relationships between certain data sets, and you can properlyread their subtleties, you can stay ahead of the fire.

EDITOR: How often does a KPI report come out?

DEYLE: Our methodology allows for countless views. We look at those daily, weekly, monthly, and quarterly because the business unfolds in that timeline.

EDITOR: As the senior loss prevention executive in the corporation, what are a few of those key performance indicators that you look at and deem so critical?

DEYLE: As I mentioned earlier, our transaction monitoringapplication, VIPER, is at the epicenter of everything that we do.We have an analytical tool that resides over the point of sale,over our pharmacy system, over our DSD [direct store delivery]system, and over the front store inventory bucket. This givesus the ability to capture the entire lifeline of an inventory itemfrom the time its born in the CVS world, meaning its procuredfrom a buyer, to the time it leaves our environment, whetherthats from a point-of-sale purchase, product withdrawal, damagereclaim, a transfer, its stolen, or whatever.

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Theres a term thats not used very much in retail, but one Icreated in the mid-90s called SRA or sales reducing activities. Thebest way to describe an SRA is it is anything that decrements asale. These are the most critical data points to understand of allthe key performance indicators, thus they must have a specialnameSRA. Think about it in this manner, one of the mostcritical data elements captured by a retailer is sales. Therefore,logically speaking would you not want to capture all salesreducing activities associated with those sales?

Why are SRAs so critical? If you do nothing else in lossprevention but manage the SRA bucket effectively, youre goingto drive shrink results. The relationship between SRAs and shrinkis simplethe lower the SRA value of a store, historically thelower your shrink rate will be in that store.

EDITOR: The SRA concept is intriguing. What are some othercomponents you look at?

DEYLE: Wow, there are a hundreds of different KPIs that give usflags as to how things are trending in our organization from an LPpoint of view.

EDITOR: The type of merchandise you carry, drugs in particular,seems to have made your industry segment a primary target oforganized retail crime. Is that correct? If so, how do you combat it?

DEYLE: Organized retail theft [ORT] has certainly impacted theapparel, hard goods, and electronics retailers. Were not immuneto this growing concern of loss. Because of over-the-counterdrugs and other high-valued merchandise in our stores, ourindustry segment has gained the attention of organized crimegroups. Thus, were seeing more evidence that this is an issuewe must address both from a CVS specific standpoint and froma chain drug perspective. With that in mind there are severalactions we are doing internally to help mitigate our losses relatedto this element of risk.

We already have some of the best product-protection initiativesin place in the chain drug/supermarket sector with regard to howwe display items in our store and customer accessibility. We are acompany that tries to not lock high-risk items up behind a cageor put them behind a check stand. Lock-up tactics limit customeraccessibility, thus impacting sales negatively.

Our approach is very simple. We want the potential shoplifterto come into our store and spend more energy to get lessversus spending less energy to get more down the street. Withthat thought in mind, we use a variety of different tactics andfixtures to help us in our effort to mitigate loss in this area.Without giving away our strategy, the most common visiblecountermeasure involves the use of push-it fixtures and clickerracks to display merchandise.

EDITOR: What about EAS?

DEYLE: We have EAS in place and have just converted fromSensormatic to Checkpoint, which was a very importantstrategic change for us. We view EAS as an element of ourproduct-protection countermeasures. Its not the heart ofeverything we do, but its the backbone of our productprotection initiatives. We have to have a strong EAS platformin place in order to set everything else in motion. With that, ofcourse, means that source tagging is important to us and plays acritical role in our product-protection strategy.

EDITOR: A lot of people would view your store as beingtwo stores in onethe pharmacy section and the generalmerchandise. Do you approach LP differently in the pharmacy asopposed to the front of the store?

DEYLE: We definitely do. They are two different animals. Thereare two very different types of associate skill sets requiredto manage each area. Additionally, youre also dealing with avariety of government-related issues and state regulations in thepharmacy, like privacy issues, Board of Pharmacy guidelines, thatkind of thing. So, weve made great strides to have our LP folksgain a greater understanding of the pharmacy operation as awhole. As I stated earlier, when we bring a new person into ourLP team, they must complete and become certified on a ratherextensive pharmacy training module before the can receive apass and begin work as an RLPM. Again, we also require all ofour field LP team complete the pharmacy tech training program,thus they all come out certified pharmacy techs.

EDITOR: Whats the benefit of that?

DEYLE: It adds a level of understanding and provides themwith a working knowledge of the basic fundamentals governingthe pharmacy operation. This provides a foundation andcommon background to draw from as they interact with thepharmacy staff.

EDITOR: I suspect that the management and loss preventionphilosophy that you brought to CVS were fostered by yourprevious work experiences. Can you talk a little bit about that?

DEYLE: I was very fortunate to be at the right place at the righttime on several occasions throughout my career. I started withthe Kroger Co. in Dallas, Texas, as a cashier/bagger. I movedup to working in the cash office dealing with deposits andreconciling sales, then went into special projects doing installs oftime-and-attendance systems along with a variety of things.

I wound up in Pennsylvania where I took a job with theScrivner Company as director of front-end operations for a groupof grocery stores. There I dealt with the POS system functionality,cash office management, sales reconciliation, and systemprogramming of the POS system. We were having problemswith theft in those stores, and I was asked by Ron Huber, thenpresident of the group of stores, to go fix the problem. Thatwas my introduction to loss prevention…although I did have theoccasional run in with a shoplifter while in Texas with Kroger.

When Scrivner was acquired by Fleming Foods, the CFO,Larry Kordish, and EVP of operations, Jim Demme, went toanother company. I was lucky enough to go with them toHomeland Stores, which is in Oklahoma City.

While serving in that role I was approached by ArthurAnderson about coming to help lead their loss prevention effortsfor their retail consulting group in Chicago. Shortly before ArthurAndersen imploded, I decided to take on the role of the globalleader for the profit recovery and shrink management practicefor Cap Gemini Ernst and Young. I was with Cap Gemini workingon a job for CVS when I decided to take the position at CVS.

EDITOR: That experience must have allowed you to look atdifferent retailers from both your operations as well as lossprevention management perspectives.

DEYLE: The consulting experience exposed me to so manydifferent retailers and so many different operations. It was ahighly educational platform for me to absorb all the best andworst practices that retailers were using to drive sales, driveprofitability, manage people, implement programs, and, ofcourse, change management methodologies. That experiencegave me a wealth of knowledge on multiple fronts and helpedput me be in the position to be able to manage this role, becauseit was rather a daunting task to fix what we had to fix here atCVS. 4,200 stores. Thats a big ship to move in the water. And itseven bigger now with 5,400-plus locations and growing.

EDITOR: In those consulting projects where you were involved,were the relationships always positive between the consultingrole and the LP executive?

DEYLE: A lot of people view consultants as a pain, as do I to adegree. Consultants are basically somebody that comes into yourenvironment, looks at your watch, and tells you what time it is.But the organization I was fortunate to be part of was uniquefrom the standpoint that no one on the team had less thanfifteen years of operational retail experience before joining theconsulting team. That provided us with the foundation to speakfrom experience, you know from a retail viewpoint, not just anMBA who understands the book elements. So at first, yeah, youget that wall. But the minute that you start having conversations,the wall started to come down because we spoke from a retailoperational background. They knew you get it.

EDITOR: There is a perceived insecurity by some LP executiveswhen the CEO hires a consulting team to look at LP issues andthe LP programs. Your experience was different.

DEYLE: Thats right. And I can understand that. If our CEO,Tom Ryan, told me, Im going to have such and such come inand talk to you about loss prevention, Id think, Whoa, thatsmy role. And Id feel there might be a loss of confidence in theteam and my capabilities.

One of the things we did when we went into these engagements is align with the executive team and positionour team as an internal resource, subject-matter expert ontheir LP team. Once the trust factor had been established, we primarily focused on project management elements of initiative implementation and let the LP team do their thing. It createda great working relationship. To this day I still have greatfriendships that were fostered during those engagements.

EDITOR: Thank you very much for sharing some of yourexperiences with our readers.

DEYLE: Im glad to do it. Your magazine is a great opportunity to share and understand what other folks are doing. Im aproponent that believes loss prevention is loss prevention; wehave no company lines from which to separate us. Hey, were nottrading marketing strategies. Were solving problems together.

So, I really enjoy sharing information about LP tactics andtalking to others about loss prevention issues. Its something Iwill always be committed to and hope the industry continues todo so as well. Thanks so much for allowing me time to talk toyou about my team here at CVS.

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