Doug Smith MSc
In today’s retail environment there is tremendous competition between retailers with a corresponding pressure on margins. The impacts of stock loss, which are sometimes in excess of 3% can have serious impacts on a business, ultimately resulting in a reduction of competitive advantage. All the indicators clearly show that losses are rising globally. According to ECR Europe losses in retail are approximately €13.4 Billion and similarly the University of Florida estimates that losses in the USA have risen to U$30 Billion. Similar results have been reported recently by PROVAR in Brazil and ANTAD in Mexico.

Given this deteriorating situation what can retailers actually do to improve this situation? Basically retailers need to recognize that retail losses are a serious risk to their businesses, develop a solid strategy to address this risk and use effective tactics to implement this strategy.


Recognition of the Risk

This fundamental step is extremely important. The view that losses are simply a ‘cost of doing business’ is outdated. The cost is reaching devastating levels and diminishing competitive capabilities. The consumers, after all, are not prepared to pay higher prices to compensate the retailer for their losses. As with any risk, in order for it to be addressed the senior management have to understand that if avoiding action is not taken it will personally affect them either through shareholder pressure for improved profits or loss of personal remuneration.

A suggested method to grab management’s attention is to demonstrate the potential benefits from reducing losses. Figure 1 below shows the typical benefits that can be attributed to a loss reduction program.



Fig. 1 © ICTS 2002 Loss Reduction Benefits

Having gained management’s commitment to resolving the problem it will then be necessary to measure the problem and correctly identify the source and causes of the losses. Figure 2 below shows that losses can arise from actual loss of merchandise, from operational inefficiencies and damage. The split between each element will depend on the nature of the business. Retailers involved with fresh food, for example, are likely to have significantly higher volumes of damage and wastage than a fashion retailer. It is essential to separate these issues in order to develop a focused strategy.



Fig. 2 © ICTS 2002 Loss Analysis

There is a presumption here that data is available to make this analysis. If not work will have to be undertaken to gather this data, probably using sampling techniques. Having correctly identified what are known losses (operational damage) and unknown losses, which are often referred to as ‘Shrink’ in the USA or ‘stock loss’ elsewhere, it is then essential to identify the causes of these risks. World benchmarks suggest that employee theft and errors are the main causes of losses. Figure 3 shows the ECR Europe view and the University of Florida’s view of losses in the USA.



Fig. 3 Europe and USA Loss Benchmarks


These views tend to simplify the issues, in reality, and from multiple project experience, staff are involved in the vast majority of losses. Whether through direct theft, collusion with others or simple errors staff account for the vast majority of losses. This has a significant impact when focusing resources. A more realistic view is shown in Figure 4 below.

Process failures, particularly system generated losses are significant and it could be argued that all system failures are ultimately attributable to staff. What is important here is that the correct causes have to be identified. This causal analysis will enable a proper cost benefit analysis to be prepared focusing on the correct risks.

Fig. 4 © ICTS 2002 Expanded view of loss causes


Developing a Strategy

Having established what needs to be focused on, the next key step is to decide on a strategy to combat the losses. In most companies there is pressure on capital available for major projects of any kind, so it is therefore necessary to prioritize actions to maximize benefits and accelerate cash flow. Figure 5 below illustrates the need to be risk focused when deciding to focus. It is a mistake to simply adopt a traditional blanket approach because this will lead to high risks not being eliminated or ameliorated or low risks receiving valuable resources.



Fig 5 © ICTS 2002 Risk Coverage

This approach therefore requires an organization to identify the risks and give priority to the highest risks and prioritize risks considering:

• Benefits
• Timescales
• Ease of implementation

With the highest priority being given to the actions that deliver the highest benefits in the shortest term and being the easiest to implement.

High risk is also a term that needs to be clarified. For loss reduction ‘high risk’ refers to the major contributors to losses. Typically 80% of all losses come from 20% of the risks and therefore by focusing on this 20% maximum benefits can be achieved. This will require management to focus on high risk processes, locations and products.


A Tactical Plan

Having established a strategy that is focused on a high risk approach, it is then necessary to develop an action plan to reduce losses. This plan should be holistic considering all elements of loss prevention. Figure 6 below shows how all the elements fit together. If one element is missing then the solution is likely to be ineffective.

The prioritized plan should contain many actions that can be implemented immediately, so called ‘quick wins’, short term actions, medium term actions and long term actions. Simply because a solution is long term does not mean that development can’t start immediately and in fact it may have to. The solutions themselves should focus more on deterrence than detection. Although in some cases the only deterrence is apprehension, this should be the exception rather than the rule. The costs of apprehension are significant. Staff may be injured and management’s time and other resources wasted on the administrative nightmare than can follow an arrest.

Fig 6 © ICTS 2002 Integrated Elements of Loss Prevention

Once the plan has been developed it will be essential to establish control mechanisms that will:

• Ensure deadlines are met
• Monitor program compliance
• Verify quality of implementation
• Track benefit achievement

There is always the option of a post implementation audit to establish the success or failure of the program. However, although a post implementation audit should always be carried out it is suggested that this is too late. Control mechanisms, introduced from the project’s inception, will head off problems immediately and ensure that the post implementation audit has a positive outcome

In addition to control mechanisms there also needs to be an excellent communication plan to support project implementation. The plan should consider using all available channels and have a feedback mechanism that will assist with implementation tracking. Essentially the communication plan should:

• Reinforce loss prevention as a core business issue
• Keep all staff informed of progress
• Advise all staff of what is coming in the future
• Keep people motivated

Communication or awareness also has to continue after all the project solutions have been implemented to ensure that loss prevention remains embedded in the culture of the company.


Conclusion

The problem of stock losses is serious and loss reduction represents a significant business opportunity to reduce costs and improve profitability. A loss reduction strategy, based on realistic analysis, has long term sustainability. However, almost as soon as the initial program has finished the risk analysis has to start again. By ensuring that loss prevention is embedded in the management strategy continual risk assessment will become second place. Fundamentally, the loss prevention mechanism has to sustain a proactive outlook.