Monday, September 10, 2007

Implementing a Shrink Reduction Program - Manager Bonuses

Regarding bonuses based on shrinkage – this is commonly one of the bonus criteria for store managers.

The best way to implement is to set a target shrink factor based on industry average and your own historical store inventory shrink rates. If a store has a very high shrink rate it may be more motivational to base a bonus on a percentage reduction of the shrink rate for the first year or two until it gets to an acceptable level. It is also important to communicate the store shrink rate and targets to all staff. They should know what the last year's shrink rate was as well as the target. All staff should be made aware of the programs designed to reduce shrink and how they can help reach the target shrink goal.

It is amazing how just being aware of the shrink issue and how to prevent it makes the problem go away.

Sources of Retail Inventory Shrink

Before jumping too quickly to try to implement a shrink reduction program it is important to understand what is the source of the inventory shrink.

Although there is some variation depending on the type of retail store, most retailers' inventory shrink rate should be in the neighborhood of 1.5%-2%. Anything over this usually indicates a problem.

The following is the industry average for the source of inventory shrink in the retail industry:
  1. Internal Theft 45%

  2. Shoplifting 35%

  3. Admin/Paperwork Errors 15%

  4. Vendor Fraud 5%

Internal Theft
Based on the above breakdown, much of the shrink reduction program should emphasize internal controls & processes related to damages and write-offs. Also, cross-store and employee comparison of refunds and unauthorized discounts should be done to ensure that some of the shrink is not happening at the till. Parcel/Bag checks is a bit more extreme but some retailers do implement this.

Customer Service is the best way to thwart customer theft. Acknowledging and servicing customers can avert many planned thefts. Also, signage indicating shoplifters will be prosecuted and arranging product so that low value items are near the doorway and expensive items are near the cash desk or under lock and key helps reduce easy shoplifting opportunities

Admin/Paperwork Errors
This is the inventory shrink category that you have the most control over. Review current procedures for receiving, transfers, pricing and write-offs to ensure they are being followed and to identify areas for improvement.

Vendor Fraud
This is most common when vendors are used to re-stock items directly in a store – usually this occurs only in larger department stores where vendor managed programs are in place.

Physical Inventory - How Often is Enough?

A number of my clients often ask if they should do a physical inventory more than once a year in order to cut down there shrink. As a general rule, there is usually no payback in doing inventory more than once a year unless need to for financing purposes or for a potential buyer of the business.

The cost of doing inventory usually outweighs the amount of inventory shrink that can be saved. However, it is recommended that monthly cycle counts be done on high volume items. This means selecting a handful of items (3-5) and having the stores do a count on those items only. This information is then used to verify against your perpetual computer inventory. Usually different items are selected each month so that 40-50 items are counted by the end of each year. However, if you have a problem item then you may choose to have that same one counted each and every month.