SHRINKAGE CONTROL - HOW AND HOW MUCH HAVE YOU LOST ?

We will be discussing the below topics in this blog :

- Understanding Shrinkage

- Causes of Shrinkage and Control Measures

UNDERSTANDING SHRINKAGE :

Shrinkage is the variance between the actual physical inventory at store and the perpetual book inventory in our system. This missing inventory is also known as obsolete inventory. The below illustration will help you understand it better.

ILLUSTRATION :
A retailer opened his home needs store at Chennai on 1-Mar-2014. He has an opening inventory of 

50 Units for an SKU (WhiteCrystal Toothpaste 100 gm) in his system based on the first purchase made. Post opening the store to public, there were other transactions done for the SKU. Based on the transactions he had a closing inventory of 73 Units at the end of the month on 31-May-14 

Opening Inventory                                   = 50 Units (first Purchase made) 

PO Goods Received Note (PO-GRN)    = 180 Units

Sales                                                       = 150 units

Return to Vendor (damaged Goods)        = 10 units

Customer Returns / Sales Return              = 3 unit

Closing Inventory in system / Book Stock = 73 Units

Stock ledger movement in Units will be as below :

Closing system Inventory = Opening Inventory + PO GRN - Sales - Return To Vendor + Customer Returns

= 50 + 180 - 150 - 10 + 3

= 73 Units

On 31st of May 2014 the retailer does a Physical Inventory count for the complete store and found that only 69 Units are physically available at the store. This has caused a difference of 4 Units from the book inventory

Perpetual Book Inventory    = 73 Units

Counted Physical Inventory  = 69 Units

Variance / Shrinkage            = 4 Units ( loss to the retailer)

Now that the customer has already paid for the inventory of 4 units while purchasing the same, he has lost the revenue on the product both on unit cost and retail. If we assume the unit cost of the product is 35 Rs. and selling unit retail of the product is 60 Rs.

Purchase Loss to the retailer at Unit Cost         = 4 X 35 = 140 Rs.

Sales Loss to the retailer at Unit Retail              = 4 X 60 = 240 Rs.

Now that we have understood the variance / shrinkage, we will understand the cause for the variance of 4 units in the chapter "Causes of Shrinkage" and how the retailer found out the actual cause for the inventory loss

CAUSES OF SHRINKAGE and CONTROL MEASURES : 

1. Employee or Internal Theft :

More than 60% of shrinkage is caused due to internal theft, that is people from the very organisation they work for. Though it is sad to hear this, this is the reality in retail industry. Employee theft takes place at multiple points within a store i.e. at Cash Tills, Back warehouse, Shop Floor. Below are a few instances or examples :

a. Cash Tills :
- While billing a product, cashiers can purposefully skip a product in the  bill and hand it over as part of the shopping baggage to the customer
- Credit Notes are issued to customers even without taking return of a physical product
- Credit Notes issued for higher value than the product returned
- Change not given to customer retained by the cashier
- Billing products on wrong barcodes

b. Back Warehouse :
- Products received not booked in GRN and claimed from supplier as In-transit loss, due to minimal uantity the supplier accepts it but when collated as a quarterly data, the loss booked will have a considerable value
- Wrong In-transit Loss booked for receiving done against transfer of inventory from warehouse
- Products sent out of the store as part of empty cartons and later removed by the employee from the garbage disposal area

c. Shop Floor :
- Tag removers used to remove security tags from products, to facilitate acquaintance take the product from trial rooms unnoticed
- Interchanging the garment tags between high value and low value SKUs
- Sneak away though gates with small products without being frisked by security guard
- Carry small products in lunch boxes, hand bags and back bags
- Bring in old or used product and take a new similar product out
- Take products out through duplicate gate passes

Control Measures :
- The retailer should develop good relations with its employees and keep high morale in team
- We need to keep a tight check on our employee movements within the store premises with proper security cameras and frisking at gates
- Movement of inventory from back warehouse to the shop floor and vice versa should be tracked properly through inventory movement registers
- All credit notes issued has to revalidated as part of Day end process by head cashier
- All products to be returned back to the shop floor should be tracked
- Credit Notes and cash back should be issued only at Customer Service Desk, only redemption to be  entertained at Point Of Sale/Cash Tills at Large Format stores
- Regular tracking and scrutinising of In-transit loss report and GRN-PO difference report by loss prevention team
- Weigh, check and send the empty cartons out of the store in the presence of a security officer
- Surprise perpetual inventory check has to be done by Department Manager for a single SKU and verify the same against book quantity
- Employee entrance and exit should be different from customer entry and exit
- Employee declaration register to be made available at employee entrance and exit
- Full frisking and bags need to be checked by security guards at entry and exit
- Gate pass register has to be maintained and gate pass status has to be validated at regular intervals
- Security Tag counts and security Tag removers should not be made available to floor and warehouse staffs

2. Shoplifting :

 Shoplifting, otherwise known as customer theft is the second biggest contributor to shrinkage at stores. It is also a very sensitive issue because even if you know that the customer has committed a theft, you need to have concrete evidence to prove and recover the product from the customer or bill the customer. Handling customer theft is also sensitive because it will tarnish our brand image if we are found wrong or we have misunderstood a loyal customer for a shop lifter.

Control Measures :
- Security tagging of products will help us to a larger extent in reducing shoplifting
- Garments handed over to customer for trial has to be tracked with a token system
- Trial Rooms should be checked by floor staffs on regular basis for loose tags and if found has to be reported immediately to the operations / store manager
- Loss Prevention Cell / Team has to be formed and the members have to be well trained on handling shop lifters
- Should not encourage customers consume edible products in the store without billing the same
- Surveillance cameras / CCTV should be placed at right places across store location and a security officer should be appointed to monitor the same

3. Damage and Expiry:

This is one area where regular check is required and it has to be done religiously by the floor staffs for their respective departments. Near expiry products should be cleared through clearance sale to reduce loss. Excess ordering should be avoided for short shelf life products
Damages can be customer or staff damages. Incase of a staff damage the product value can be recovered from the staff and in case of a customer damage, we have to bill the product based on its retail value to the customer. Usually customer damages for low value products are not billed to the customer if its a genuine mistake or if he is a loyal customer.

Control Measures :
- Do not entertain customers to carry pets into department stores
- Do not entertain customers to consume edibles or juices in garment stores
- Spillages on floor should be immediately attended to and cleaned
- Ensure shop floor is not slippery
- Educate staffs on handling various types of products
- FIFO method has to be followed in replenishing the products in shop floor
- Short shelf life products should not be excess ordered
- Non-selling products should be returned back to Vendor in case of Sale or Return products

4. Administrative and System Error

Administrative and paperwork errors such as mark up and mark down of the prices cause around 15 per cent of the retail shrinkage. This is coupled with ERP system errors wherein sales information, stock movement information are not updated in Book stock causing incorrect book inventory. This causes wrong shrinkage booking during inventory checks

Control Measures :
- Mark up and mark down of prices error can be validated through sales auditing, oracle ERP has a
  very robust sales audit module where in retailers can identify SKUs selling on wrong Selling retail
- Sales errors should be identified and rectified as part of sales audit process
- Price changes in system should be verified by merchandisers before approving the same
- IT Team plays a vital role in ensuring all stock movement are correctly updated in ERP without
  message loss, this is done though regular monitoring of messages in the interface between systems
- Maintenance of registers for all stock movement is a must at store level for reference
- Scan margin report will help to a large extent to ensure products are sold at correct price

5. Vendor Fraud :

Vendor frauds are easy to identify if proper tracking mechanism is in place. Two points were vendor comes in contact with stores is at the time of Receiving of goods and Return of Goods. Vendors tend to send less or more physical stock as compared to the ordered quantity. At times wrong product is shipped by vendor and delay is pick up of vendor returns causing inventory damage

 

Control Measures :

- Ensure products are scanned and checked while GRN (goods received note)

- RTV (return to vendor) should be shipped on time and vendors should not entertained for delays

- Invoice matching should be robust i.e. Purchase order , Vendor Invoice and GRN has to be matched and discrepancy if any has to be highlighted and resolved before payment. Oracle ERP's ReIM (retail Invoice Matching) is a very robust system which facilitates retailers identify and correct both staff and vendor frauds
 

With the above understood, the retailer analysed the stock movement of the toothpaste at his store and found that last GRN done against the PO was for 30 units but the actual physical inventory received was only for 26 units. This was identified while validating the supplier invoice in which supplier had mentioned that he had supplied only 26 units against the PO of 30 units but the staff has done the GRN as per the PO qty of 30 units without physical check, there by causing an obsolete inventory of 4 units in the system. Perpetual Inventory Check and Invoice Matching process helped the retailer identify the issue.
 

To control this issue, retailer introduced physical scanning of products in GRN process to avoid human error and appreciated the invoice matching team for identifying the error in GRN

                               ILLUSTRATIVE REPRESENTATION OF SHRINKAGE