The traditional definition of “shrinkage” falls short of capturing the complexity of this challenge. Retailers must broaden their definition even further, going beyond crime and their stores to encompass total retail loss.
In recent years, loss prevention leaders have focused on curbing organized crime in retail.
Headlines about the rising violence and financial impact of these coordinated attacks have made ORC the primary adversary of retail, making “loss” virtually synonymous with “ORC” for many companies.
The problem, however, is that losses are not so easily remedied, and preventing them requires looking far beyond theft and fraud.
The traditional definition of “shrinkage”—which focuses on inventory losses due to external (e.g., shoplifting, ORC) or internal (e.g., employee theft) factors, as well as administrative or process-related errors—does not adequately capture the complexity of the challenge at hand. To succeed in an increasingly competitive marketplace, retailers must broaden their definitions even further, going beyond crime and their stores to encompass total retail loss.
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Losses in retail are as varied and complex as in any other business. Technology companies don’t view inventory theft or stolen licenses as the only sources of loss, do they? Every efficiency gap or underperforming project is analyzed, quantified, and integrated into a holistic assessment of the company’s overall financial health.
The same should be true for retail. However, the intense focus on combating crime, reducing theft, and minimizing shrinkage has diverted resources from other important causes of lost sales. Lost time, lost inventory, labor downtime, and equipment failure are all part of the “total retail loss” puzzle. Unknown causes also play an important role.
To fully understand shrinkage in their operations, retailers must expand their understanding of loss to include missing inventory or opportunities:
On the sales floor. Theft isn’t the only reason items are unavailable to customers. Although often considered a “cost of doing business,” spoiled, damaged, overstocked, or misplaced merchandise is also “lost.”
At the checkout line. Fraudsters are the focus of attention at self-checkout lanes, but employee-operated lanes also cause losses in their own way. Human errors—for example, bagged but unscanned items or improperly processed returns—can have the same consequences as maliciously stolen products.
In the backroom. A retailer’s operational procedures can also lead to losses of inventory and less tangible resources like labor. Poor warehouse organization, a lack of visibility into planning or persistent no-shows, manual inventory counts, inaccurate labeling, and countless other practices lead to variances between performance and forecasts.
In the supply chain/transportation. Delivery delays, errors, material shortages, production defects, and more can negatively impact a retailer’s bottom line. Furthermore, product recalls can damage a retailer’s reputation—even if the issue has nothing to do with the salesperson—because shoppers may associate their bad experience with the store rather than the brand that manufactured the item.
Whether in the boardroom or at headquarters, executives may not like to hear it, but their decisions can lead to losses across the business. A commitment from leaders to efficiently invest in technology, people, and processes is critical for teams across the organization to achieve the goals that underlie business decisions.
In the court of public opinion, commercial liabilities can contribute to losses both in the form of unexpected expenses and—as mentioned above—through reputational damage. In fact, this is one of the most overlooked drivers of loss, as it is a side effect of customers disillusioned with your core brand values. Shrinkage—such as out-of-stock items that delay online order pickups—can diminish the customer experience and lead to lost sales or customer loyalty.
All these and more factors are part of the “total loss” puzzle for retailers, just as they are for companies in other industries. However, with so many potential sources of loss to consider, getting started can feel complex.
And it’s true: Developing a more holistic approach to LP requires rethinking the way you do business and balancing sometimes competing priorities. The good news is that all retail total loss initiatives start from the same place, regardless of where they end. To tackle total loss, LP specialists need to think more like other companies and take a multifaceted, data-driven approach that incorporates insights from all areas of the business.
The Big Picture
The first step is to work with different departments across the organization to centralize, standardize, and reconcile data. This will provide a comprehensive understanding of the impact of their practices on the bottom line. Teams should then review this database to identify gaps—areas of the store or organization that haven’t yet been included in the data collection program.
For many retailers, the biggest visibility gaps lie in the supply chain, warehouse, and other areas of the store that are less likely to be victims of theft. Fortunately, the technologies retailers already use to analyze losses can also be used to uncover the less obvious causes of loss that have the greatest impact on their profits.
Many retailers already use RFID technology to track where, when, and how theft occurs. But RFID can also uncover other types of losses. By attaching RFID tags and sensors to goods at the source, rather than at delivery, off-floor (or in previously unmonitored areas), they can capture data along the entire journey of goods. Tagging at the source also saves time, allowing employees to focus on other tasks, ensuring items are properly labeled and compliant.
Video surveillance and analytics, another component of existing retail technology suites, help retailers maintain a constant overview of their operations. This allows them to closely analyze customer behavior and footfall to optimize promotions, programs, and implementations. They can also highlight potential risks caused by poor store layout or inadequate customer service. When used in warehouse and production facilities, advanced video tools can identify loss-making factors behind the scenes, allowing them to make informed decisions to optimize stores and improve the shopping experience.
Once all areas from source to store are considered, retailers can leverage prescriptive and predictive analytics systems and services to identify all the different points in their operations that negatively impact profits—and how best to address them.
Are employees forgetting to scan items? Invest in training that highlights how their actions contribute to or detract from overall mitigation efforts.
Are delivery delays preventing customers from picking up online orders? Inventory and delivery data might show that a particular supplier is experiencing repeated delivery delays. This could allow management to reevaluate the partnership.
Are customers abandoning their shopping carts? Examine staffing practices and traffic data to optimize staff allocation, reduce wait times, and improve service.
This approach fosters a culture of continuous improvement over the long term. Each adjustment changes the company’s loss profile and represents the next step. If successfully implemented, each subsequent change brings retailers one step closer to understanding and minimizing losses, regardless of their origin, while improving operations from end to end. This proactive approach enables retailers to implement strategies that not only address inventory loss but also improve the entire customer journey, thus increasing value for the company and its customers.
Stop Losses, Initiate Growth
In a world where every dollar lost can impact not only a retailer’s profit but also their position in the marketplace, it’s critical for retail leaders to think holistically.
Considering all the factors that contribute to total retail losses—from the manufacturing of a product to its journey to the shopper—ensures retailers can thrive in an increasingly competitive environment. This comprehensive approach allows retailers to redefine loss, thus not only combating theft but also fostering sustainable growth and long-term success.