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Cutting Costs Through Shrink Reduction

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Achieving significant and lasting cost savings by changing the way retailers approach the persistent problems of shrink and concealed losses.

For an industry where company margins typically hover between 1% and 2%, shrink remains a critical opportunity to enhance company performance and improve the bottom line. While most retailers have tried a variety of tactics to reduce shrink’s monthly toll on profitability, for many it remains a frustrating game of trial and error: some efforts reduce shrink at the cost of losing margin while other techniques compromise sales. After failing to tackle the problem, many managers conclude – wrongly – that high shrink and concealed losses are simply a cost of doing business.
 

Many shrink reduction efforts fail because they fall victim to four common errors:

  • Lack of a fact-based, data-driven approach
  • Not identifying the real problem
  • Taking an undisciplined approach to solving the issue
  • Creating an unsustainable approach that fails to maintain a culture of shrink reduction

At SSA & Company, our work with the retail industry has taught us that by avoiding these mistakes, shrink can be significantly reduced without lowering sales. We have developed an approach to shrink reduction that leverages an analytical toolkit and deep retail expertise. This approach has been proven from our experiences on hundreds of shrink reduction projects.

Solving the Shrink Problem

1. GET THE FACTS

Most retailers say that shrink is one of the biggest problems in their business. However, when asked how big the problem is, it becomes clear that many organizations have neither the data nor the measurement systems to assess the scope of the problem.

Typically, retail shrink is measured by calculating the difference between the amount of goods a company should have on hand and its actual inventory (commonly determined through cycle counting). Oftentimes, however, the data companies collect for this purpose does not provide the detail retailers need to tackle shrink and concealed losses from sales, margin and expense lines. A good example of this deficiency is when a company accepts shipments of product from vendors, but lacks the capability to validate the exact quantity of each of the SKUs received. As a result, retailers could have inaccurate inventory data, which can lead to out of stocks, incorrect pricing and margin erosion. Additionally, it can disrupt their ability to accurately measure shrink, as well as expense, sales and margin losses through error or fraud.

Thus, it is critical for retailers to make the investment in systems and processes to capture the true value of shrink, expense leakage and sales/margin reducing activities. SSA has found that fragmented data and measurement tools can throw your business off-track:

  1. Disjointed processes and measurement systems
  2. Shrink programs not integrated with business results
  3. Outsourced LP services not aligned with your company’s processes, systems and metrics
  4. Disparate applications of technology and hardware

 

2. IDENTIFY THE “REAL” PROBLEM

 
Over the past two years, we completed a major shrink reduction campaign with one of the largest US grocery retailers, conducting more than 200 shrink projects. From headquarters to individual stores we heard much accepted wisdom about the alleged root causes of shrink: poor forecasting, undisciplined distribution systems and theft, among others. However, over 40% of the time, we found that what managers thought was the main driver of a shrink issue was shown to be the wrong culprit. True, the managers’ theories often pointed to a contributing factor to the shrink problem, but not the primary cause. In comparison, by completing a rigorous analytical assessment of the issue, we were able to work with store managers and merchandisers to solve the primary causes of shrink. Since our approach addressed the core issues, the solutions were successful, measurable and sustainable for the long term. It is vitally important to leverage intuition, but rely on facts.
 
It is important that retailers not underestimate the complexity of determining solutions once a root cause is identified. For example, one major US office product retailer used data and analysis to identify a significant theft issue with inkjet cartridges. The company knew shrink would continue if the issue was not addressed, but also had data that proved that inkjet cartridge sales would suffer considerably if the items were locked up behind a service counter. After significant analysis and testing, the company found the right answer – it redesigned its inkjet product display and location to better monitor theft, but not deter sales in the process. This example demonstrates that while identifying the correct root cause is key to solving shrink, it is only the first step in the process.
 
Root causes can be classified into specific areas of opportunity that share common processes or vulnerabilities. These root cause-based opportunity areas are typically based upon errors, poor disciplines, weak processes and controls, gaming the system or plain old fraud. In order of ROI unlocked, SSA typically initiates investigation into the following areas:

  1. Policy Abuse & Payroll Leakage
  2. Margin-Reducing Activities
  3. Sales-Reducing Activities
  4. Lax Merchant & Supply Chain Disciplines
  5. Theft & Physical Security
  6. Measurement and Reporting

 

Case Study – Finding the Root Cause: Dairy Shrink

A major US grocery retailer recently conducted a project to address fluid dairy shrink in 300 stores. At almost 5%, fluid dairy shrink was more than twice the industry average. The business initially assumed that the issue was related to a high number of low-volume dairy SKUs or poor product rotation. Analysis showed that the issue was actually related to a quality problem with the caps on one-gallon milk – their highest volume SKU. By fixing the issue, dairy shrink was reduced by 55% and the company saved over $1 million per year.

3. TAKE A DISCIPLINED APPROACH

A common mistake retailers make is attacking shrink as a single large problem. SSA’s disciplined Lean Six Sigma approach enables us to help you successfully combat shrink and concealed losses in a methodical manner, with a focus on continuous improvement. We not only partner with you to generate significant ROI, but also give you the foundation and tools to generate lasting results. First, retailers need to break down the problem into manageable levels by doing the following:

  • Identify the biggest opportunities

A truly thorough assessment of shrink begins by assessing the actual dollar value of reducing shrink, rather than just a percentage improvement. This assessment should include looking at shrink metrics in a variety of ways, such as by item, category, department, district, area and region. This allows you to look at the problem more analytically and determine your biggest areas of opportunity, helping you avoid expending effort in “pain-point” projects that may be highly visible to some people, but deliver little ultimate gain.

  • Dedicate resources

To attack a problem as stubborn as shrink, retailers need to assign a focused team to solve the problem and then hold the team members accountable for savings. Reducing shrink cannot be accomplished with a general directive to employees. Instead, it requires a concerted focus of professionals and team leaders who can build experience in solving shrink problems over time.

  • Track progress

Once you know where to focus and who will do the work, progress must be tracked and managed. Managers should know the status and expected completion date for every project in your shrink initiative. In the best managed companies today, shrink is a clear management Key Performance Indicator and projects that improve shrink are tracked regularly.

Case Study – 30% Perishable Shrink Reduction

For several years, a large retailer had attempted to substantially reduce its perishable shrink. SSA & Company worked with the business to apply the Shrink Reduction Toolkit to determine the root causes of shrink and identify a solution. Analysis showed that store associates were consistently over-ordering perishable inventory due to a lack of detailed historical sales data. To resolve the issue, the company developed order guides for all perishable departments, and required their use in all stores. These changes resulted in a 30% reduction in perishable shrink with an annual benefit of approximately $7 million.

Case Study – 40% Gross Margin Improvement

Portion control can be an untapped opportunity in retail, and one that contributes significantly to shrink. In one example, a grocery retailer found its in-store baked cakes exceeded their tag weight by anywhere from 1 to 37 ounces more than 95% of the time! After gathering and analyzing the data, it was determined that these weight fluctuations were caused by excessive icing on the cakes. Because this grocer produces nearly 2 million cakes each year, improper portioning of ingredients like icing results in excessive costs and reduced profitability. In this case, over-icing caused a 40% margin loss on each cake sold. With the help of SSA & Company, the retailer installed scales in all its bakery departments and implemented step-by-step instructions for building cakes. As a result, stores reduced their icing expense by $600,000 annually, and improved cake profitability by 20%.

4. MAKE THE SUCCESS LAST

Once a company finds the root causes of shrink and applies the right solutions, the remaining challenge is making the improvements “stick” over time. In the rush to deliver results and claim victory over shrink, companies oftentimes fail to ingrain the new shrink reduction practices into their daily work procedures. This results in a situation where retailers may have to solve the same problem again next year. To avoid this, managers should establish clear responsibility and accountability for improvements and conduct periodic reviews to ensure new processes remain intact. In addition, they must react quickly if processes do not perform as expected. Finally, shrink reduction objectives should be included in performance goals whenever possible to hold associates and managers accountable for sustaining the improvements.
 
Shrink is one of the most nagging challenges for retailers today. The good news is shrink can be solved, if you attack it in the right way. When done correctly, you can achieve breakthrough levels of improvement and experience lasting change that will provide tangible economic benefits for years to come.
 
With a wide-ranging knowledge of shrink reduction and continuous improvement programs, SSA will deliver quick and lasting ROI to your bottom-line.
 
Put our experience to work for you by contacting this practice directly:

john
John Rodgers
Senior Managing Director
Retail & Financial Services
jrodgers@ssaandco.com
(m) 815-735-3223

madigan
Joe Madigan
Senior Director
Retail Practice Lead
jmadigan@ssaandco.com
(m) 847-274-2518

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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