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Viewpoint: skimping on shrinkage is a false economy

I'm sure if I carried out a straw poll of retailers asking whether they would like to hear about a way of increasing their sales, there wouldn't be many negative responses. In the current tough trading environment no one can afford not to seize opportunities. By Helen Dickinson, Head of Retail at KPMG


Viewpoint: skimping on shrinkage is a false economy

However, due to stock loss or “shrinkage”, it seems that retailers could be losing millions every year that may well be preventable, according to a survey from KPMG International.

The findings revealed that many of the world's leading retailers estimate the value of shrinkage - due to theft, damage and errors - to be equal to up to three percent of sales, although in some cases the value may be even higher. And that represents a very large slice of a retailer's potential profits.

Our survey - in which 47 large retailers worldwide participated - found that causes of loss include theft by customers and employees, damage in transit or storage, and error such as stock which is 'lost' due to counting or other information errors.

Many retailers make the mistake of treating these losses as irreducible and treat shrinkage as an inevitable cost of doing business. But when you have something as significant and controllable as shrinkage, why not do whatever you can to address it?

Previous surveys on this issue have suggested that retailers' own errors contribute little to their rates of stock loss, whereas the KPMG survey suggests that internal error rates may be much higher than that, at 33 percent or more.

So while many retailers focus their efforts on internal and external theft, the main issue is often process failure. But this problem is difficult to address, because it means looking at the whole retail process and that is a very large and complex issue.

Such large internal error rates mean that improvements in the design and implementation of internal processes could save retailers a lot of money. Diagnosis of the causes of shrinkage is a challenge for many companies, so analysis of what's happening is clearly the missing link.

One reason stock loss may not be addressed as well as it could be is that it can often be unclear who in a company is responsible for the issue. While almost all companies surveyed have a dedicated team to review and monitor loss, reporting lines of responsibility were found to be extremely diverse, with 21 different responsible officers cited.

Almost half (46 percent) of respondent companies have teams reporting to the CFO, the supply chain director or the commercial director, but in the rest of cases reporting lines to 18 different officers were cited, such as the CEO, the head of audit, the logistics director, as well as the sales manager and head of warehouse.

There is also a strong reluctance among retailers to share detailed data on stock loss with supply chain partners who could help reduce the losses. Although the majority of companies (68 percent) said they collaborate with suppliers to reduce shrinkage, when asked whether detailed data on the total amounts and likely causes of shrinkage are shared with suppliers, just over a third of companies overall (38 percent) said they do this.

And despite the potential of RFID (Radio Frequency Identification) technology to control loss caused by internal errors, most companies (57 percent) still believe implementing RFID is too expensive. At the same time half of all participants in the survey do not use third party providers in an advisory or other service function to tackle shrinkage.

Most retailers understand that during a recession their loss levels are likely to rise. But a recession also means that there is pressure not to spend money and, given the significance of loss, for some retailers that could be a false economy.

The Retail Bulletins Loss Prevention Summit 2009 takes place on 9th September. Free for retailers to attend.Click here for more details.

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