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Attacking retail shrink where it counts.


THE CHANGING ROLE OF LOSS prevention departments in retail dictates that a keener business sense be exhibited by all loss prevention representatives. In the past, most departments were viewed as "shop cops." Responsibility was limited to investigating internal and external theft and physical security. The time has come for the loss prevention department to emerge as a legitimate business partner.

Organizational structure is important in achieving this business relationship. One company, Consolidated Stores International Corporation, pairs a loss prevention counterpart with each district and regional manager of operations. This pairing promotes interdepartmental communication and forms a partnership that works to reduce inventory loss, also referred to as shrinkage or shrink.

On an income statement, shrink is included in the cost of goods sold. The establishment of shrink reserve dictates the amount of the charge. If shrink can be reduced, the reserve can be lowered. As a result, the cost of goods sold decreases and the gross margin increases.

Paperwork is where reconcilable shrink exists. Apprehension records help identify the amount of loss due to theft, but that is all. Even though the source of shrink has been identified, it has not been removed from the income statement. Reconciling paperwork errors aid in reducing these losses. A company can reduce shrink in several ways.

A multiunit retail chain should begin by examining procedures at its distribution center. One of the most important items to check is the clean cutoff of goods prior to inventory.

Many companies charge stores when the distribution center processes an order. But if the order has not left the distribution center or is in transit when a store conducts a physical inventory, shrink will occur. Close monitoring and proper systems at the distribution center can prevent this situation.

Consolidated Stores International Corporation recently conducted a series of cyclical inventories. The company monitored distribution extensively and found just such an error.

By reconciling the error, annual shrink decreased by nearly 1 percent in the cycle stores. The effort was well worth the time spent. The 1 percent reduction in shrinkage in a company the size of Consolidated translated into approximately $3 million more on the bottom line.

Including a packing list with all shipments also reduces inventory shortage. By giving store managers tools to monitor the flow of merchandise - such as packing lists - errors can be identified quickly.

Markdown administration can be another major cause of shrink. When individual stores submit markdowns to the corporate inventory control department, proper documentation should be attached. Documentation should note the proper dollar amount of markdown taken and credited to each store. Company-wide markdowns should be logged as they are sent out and when they are returned from stores. This procedure prevents a store from inadvertently failing to return a markdown sheet.

To gauge the efficiency of markdown administration, spot checks should be done in the field. For example, loss prevention representatives should audit the quantity of a recently reduced item and compare the count to the amount of markdown dollars.

Consistent, large discrepancies indicate poor administration of markdowns by store management. Operations supervisors must be committed to enforcing correct markdown programs. An overstated markdown will increase the cost of goods sold and decrease the gross margin. The following accompanying chart illustrates what may happen as the result of an improper markdown. [Tabular data Omitted]

Many reactions could occur as a result of this apparent 1.5 percent decrease in gross margin. The buying staff may decide to increase retail prices to offset the decrease in gross margin. This increase, in turn, may diminish sales because competitors' prices are lower. The decrease in sales would be a direct result of this paperwork error.

Assuming there is no theft or other error, this 1.5 percent decrease would be returned at inventory as there would be the offsetting overage. On the other hand, if the markdown were understated, the reverse would occur. The gross margin would improve, and management would be happy - until a physical inventory was conducted. Shrink would then erode the gross margin in the form of the shrink reserve used to cover the shortage. Therefore, it is critical to administer markdown procedures properly.

Interstore transfers are another source of headaches for many retail companies. Inaccurately listed or extended transfers cause shrinkage and overages among the stores doing the transferring but do not incur shrinkage for the company as a whole. The incorrect transfer shrinkage and overage will net themselves out on the corporate profit and loss statement. Store managers should monitor such transfers because they may be receiving shrink-related bonuses.

An incorrect transfer can result in shrink. The transfer is usually due not to error but to deception. A store manager who wishes to pad shrink might inflate the transferred out figure submitted to corporate inventory control. Then he or she will put the correct retail on the document sent to the receiving store. If inventory control debits and credits without matching these two documents, it is probable that this manager will continue to take advantage of the weakness in the system.

Most chains rely on outside vendors to send shipments directly to their stores to supplement their distribution center freight. One safeguard against shrink from outside vendors is to physically check merchandise. Shortages should be noted on both the receiving document and the truck driver's bill of lading.

When inventory control gets the receiving document, the retail value of the shipment is recorded in the perpetual inventory. Normally this is a data keypunch function. The perpetual inventory figure and store records should be checked for keypunch mistakes. Posting a higher figure in error results in shrink.

Normally a fiscal year consists of 12 periods. It is essential that merchandise received in one period be posted in the same period. This is especially true when cyclical inventories are used.

CEOs should be aware of the effect shrink has on the gross margin and the far-reaching effects it can have on the company as a whole. Management should be committed to reducing shrink and make all areas of the corporate office accessible to loss prevention.

Two key departments that must work hand in hand with a company's loss prevention or internal audit department are operations and management information systems (MIS). Operations can provide the impetus to educate field operatives in controlling shrink, and MIS can help generate reports to monitor shrink.

Not only does implementing such programs bring prestige to the loss prevention department, but the business knowledge displayed will make the department's employees an intricate part of the corporate structure.

Shrink reduction will now be displayed in hard figures as the result of reconciliations and not from projected reductions the department hopes to achieve. Security managers will be better able to anticipate shrink instead of waiting for actual physical inventories. Most importantly, security becomes a part of the corporate team.

About the Author . . . Mark Thompson is regional loss prevention manager for Consolidated Stores International Corporation in Bowling Green, KY. He is a member of ASIS.
COPYRIGHT 1989 American Society for Industrial Security
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Thompson, Mark S.
Publication:Security Management
Date:Sep 1, 1989
Previous Article:A screen test for success.
Next Article:Retail security: doing it by the numbers.

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