Deployment of retail anti-theft system

In October 2011, the Global Retail Theft Barometer - an annual survey conducted by the Centre for Retail Research in Nottingham, UK - reported that for the 5th year in a row Indian retailers reported the highest loss due to theft/shop-lifting. The shrinkage was reported to be 2.38% of sales. Spurred by this news, WSET - a Retail store - is currently evaluating the possibility of implementing an anti-theft system. The way the system works is as follows: One time (OT)/Multiple use (MU) tags are attached to each piece of Merchandise kept for sale it is difficult to remove the tags without special equipment. At the time of billing the clerk at the counter o o Removes the tag in the case MU De-activates the tag in the case of OT this action also makes it easy for the buyer to remove the tag at home.

If any merchandise with a MU tag or a non-deactivated OT tag passes through any of the 4 entrances to/from the store (where sensors are installed) there will be an alarm.

The sensors come in 3 types and each entrance will require 2 sensors of the same type: Sensor type OT only (OTO) MU only (MUO) OT and MU (OTMU) Description Can alert only if a non-deactivated OT tag passes through the door. Can alert only if a MU tag passes through the door. Can alert if either MU or non-deactivated OT tag passes through the door. Cost Rs. 55,000 Rs. 45,000 Rs. 85,000

Given below are some details about the tags: Tag type OT Additional information Tag cannot be reused once deactivated or removed from the merchandise. Approximately 3% of the tags get wasted due to incorrect installation and have to be replaced. Failure rate of installed tags (i.e. the alarm doesnt sound when a non-deactivated tag passes through the door) is 5%. Cost per tag Rs. 0.50

MU

Failure rate of deactivated tags (i.e. the alarm going off even though the tag was deactivated) is 0.0005%. In about 0.001% of the cases the billing clerk forgets to deactivate the tag before handing over the billed items to the consumer. This ofcourse results in the alarm going off. Additional time required at the time of billing is negligible. Tag can be used any number of time. Approximately 2.5% of the tags get lost due to misplacement by billing clerk every month. Failure rate of installed tags is negligible. Billing clerk requires about 2 seconds for removing the tag from each item. For about 0.035% of items the billing clerk fails to remove the tag, causing the alarm to sound even though the customer paid for the merchandise.

Rs. 1.00

An average shopper at WSET typically buys 15 items during a single visit and frequents the store once a week. The store has classified its merchandise into 3 types: Merchandi se type Description Avera ge price

Usually is about 60% (by count) of units a shopper Every day purchases. Typically there are a total of 300,000 units of low Rs.200 use (ED) cost items in the store. Typical margins on these goods are about 7.5%. Usually is about 30% (by count) of units a shopper Discretionar purchases. Typically there are a total of 150,000 units of Rs. y Purchase medium cost items in the store. Typical margins on these 400 (DP) goods are about 12%. Usually is about 10% (by count) of units a shopper Luxury purchases. Typically there are a total of 50,000 units of high Rs. goods (LG) cost items in the store. In general these goods are sold at a 700 margin of 25%. For the sake of convenience the WSET would like to keep a single tag type for all merchandise of a given type. The current CSAT level is about 80% and a drop of 1 percentage point reduces the number of store visits by 2% for the next 4 weeks. In general there are 5 people waiting in the queue for billing at anytime. For every additional minute spent on billing or waiting for the same, the CSAT is seen to drop by 0.25 percentage point. Every time a customer is stopped due to a false alarm the CSAT drops by 65 percentage points.

WSET has a regular customer base of about 10,000 and its cost of capital is about 12%. Do the required analysis and come out with a proposal for the best option for deployment. Make any assumption that is reasonable.