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Shrinkage in Retailing.
Key characteristics and issuesidentification & reduction
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Shrinkage What is shrinkage?
Shrinkage is the reduction in physical inventory caused mainly by process
failure, errors, shoplifting and employee theft.
Example
Theoretical inventory 5
Physical inventory 4
Sales 20
Shrinkage (5-4)/20=5 %
Admin.
Error
18%
Shoplifting
31%
Employee
Theft
45%
Vendor
Fraud
6%
Source: (us) National Retail Security Survey,
November 2002 based on 2001 retail sales and
inventory shrinkage
Definitions:
ECR Europe
Michael Levy and
Barton A. Weitz
in Retail
Management
Deloitte
Variance between theoretical and actual inventories. Losses due to a combination of supplier fraud,
process failures, internal theft and external theft.
Difference between the recorded value of Inventory (at retail price) based on merchandise bought and
received and the value of the actual inventory (at retail prices) in stores and distributions centers,
divided by retail sales during the period.
Inventory losses through theft, damage, mis-measurement and paperwork errors realized after a
physical inventory that show a difference between the recorded accounting value of inventory from
purchases and receipt of goods and the value of the physical inventory on hand as a percentage of sales
for the period.
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Shrinkage Where does Shrinkage Loss occur in the Supply Chain?
Shrinkage Loss in delivery to the site
Shrinkage Loss from the site
Shrinkage Loss in delivery from the site
Deliver
Deliver
I nformation Flow
Retailing Consuming
Returns
Returns
Source
Source
Plan
Plan
stock handling chain
Reprocess
Reprocess
New Life
New Life
Product Flow
? ? ? ? ? ? ? ? ?
Shrinkage Loss
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Shrinkage What is the impact of Shrinkage in Retail Business?
As a percentage of sales shrinkage may be relatively small but its impact
on the bottom line of a low-margin industry is significant, especially at a
time with increased competition in a slowing economy.
In 2000, European retailers stock loss accounted for 13.4 billion a year
or 258 million per week. Across Europe, 58% of all profit is lost through
Shrinkage
UK has the highest shrinkage numbers in the EU:
Surveys in the UK retail market show an average shrinkage of 1.7% and in the UK manufacturing Industry of
0,6 %. This totals to a shrinkage of 2,3 % on FMCG sales.
A shrinkage of 1,7 % results in an average loss of profits of 19%. The crimes suffered by retailers
result to a 25% decrease in profits.
Greece has the second highest shrinkage in the EU with 1,5 % on retail sales
Source: The Economist, National Survey of
Retail Theft and Security, Retail Crime Costs
Survey by the British Retail Consortium.
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Shrinkage What retailers do to deter shoplifters & employee theft?
Among the newest security technologies being used by retailers to
control losses due to theft are:
Point-of-sale data mining software solutions that detect potential theft problems at
the cash register and alert appropriate personnel in real-time. These data mining
packages can be tied to digital video recorders to provide crisp, clear images of who sold
what to whom with a click of a button and can delivered to any location around the world.
Source tagging programs where tiny anti-theft labels about the size of a paper clip are
placed inside an actual product or product package, effectively hiding it from view.
Self-alarming anti-theft tags that broadcast an audible alarm throughout the store
when a shoplifter attempts to improperly remove it from merchandise.
According to the Retail Theft Trends Report, discount, department, and supermarket
retailers accounted for 41 percent of the retailers surveyed, but they represented 88
percent of the shoplifting cases.
However, shoplifting is one aspect of the problem
and perhaps the most straightforward to attack.
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Shrinkage Identify and reduce shrinkage
In order to identify and reduce shrinkage we follow a holistic approach
comprised of eight steps:
1. Recognize Stock Loss
Shrink Sales & Profit
(Reports & Detail)
8. Follow Up
(Re-visit)
2. Develop a
Strategic Plan
(where is it occurring?)
7. Evaluate
Implementation
3. Map Key Processes
and Measure Problem
(Flowcharts & POS
data mgmt.)
6. Implement Solutions
4. Analyze Risks,
Identify Causes
(drill down into areas)
5. Develop solutions &
prioritise actions
(work with mgmt.)
Source: In cooperation with ECR Europe
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Shrinkage 1. Recognize the Problem / Benefits
Recognize the impact of shrinkage on your business: To cover for a 10
value of shrinkage 1,000 of additional sales are needed (assuming a
1% net margin)
However, shoplifting is one aspect of the problem
and perhaps the most straightforward to attack.
Source: ECR Europe
Benefits of reducing shrinkage
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Shrinkage 2. Develop Strategic Plan
Address shrinkage reduction with a holistic approach as an organisation
wide issue:
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Shrinkage 3. Map Key Processes and Measure Problem
Perform process review with detailed flow diagrams in areas of focus:
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Shrinkage 4. Analyse Risk and Identify Causes
Perform process review with detailed flow diagrams in areas of focus:
Risk Tolerance Model
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Shrinkage 4. Analyse Risk and Identify Causes
Identify Reasons for Shrinkage:
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Shrinkage 5. Develop Solutions and Prioritise Action
Identify Reasons for Shrinkage:
Identify opportunities:
Some solutions come in
the form of new processes
which are re-designed to
reduce shrinkage levels:
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Shrinkage 5. Develop Solutions and Prioritise Action
Prioritise Solutions to focus and optimise shrinkage reduction efforts:
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Shrinkage 6. Implement Solutions
Develop clear action plans, timing, roles & responsibilities . . .
while taking into
account budgetary
constraints in order to
prepare for a
successful Roll- Out:
Cost of shrinkage prevention
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Shrinkage 7. Evaluate Implementation
Build a Business Case to calculate impact on profitability:
Cost of shrinkage prevention
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Shrinkage 7. Evaluate Implementation
Manage and Control Implementation Efforts:
Cost of shrinkage prevention
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Shrinkage - Contacts
For further information please contact:
Chris Konstantinou
Managing Partner
ckonstantinou@deloitte.gr
Deloitte & Touche Consulting SA
250-254 Kifisias Ave.
152 31 Halandri
Athens, Greece
Tel: + 210 67 81 100
Fax: + 210 67 76 232
Chronis Kokkinos
Manage
ckokkinos@
Deloitte & Touche
1 Andr
551 33
Thessal
Tel: + 2310 406 550
Fax:+ 2310 406 570
r Consumer Services
deloitte.gr
Consulting SA
ianoupoleos Ave.
Kalamaria
oniki, Greece
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