"What is the most important measure of the success or failure of your company's loss prevention efforts?"
If you asked retail executives that question, you'd likely hear the answer: “Our shrink results.” This wouldn't be surprising given shrink impacts profitability, shareholder returns, resource allocation decisions and more.
Therefore, it makes sense to examine how companies measure this important metric, how often they measure it, and whether this number can be predicted and tracked. This post summarizes the results of a benchmark survey that focused on the frequency and type ofinventory controlmethods.
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The purpose of this survey was tophysical inventory managementProcesses related to the frequency of inventory counting and whether the counts are performed by in-house staff or through the use of an external agency. Although the survey was conducted in 2007, retailers still find the results useful today.
Fifteen US-based organizations, composed of eight hard-line stockists and seven soft-line stockists, participated in the survey. The companies' stores ranged from 350 to more than 4,000 locations and accounted for more than $132 billion in combined annual sales. There were no mass retailers, department stores, or grocery chains in the sample group.
The survey was conducted by interviewing senior loss prevention executives in each organization. This enabled discussions and elaborations that provided details and insights into several of the issues.
Following are the questions each organization was asked, the answers they gave, any justification they gave for their approach, and some comments on the results from an outside perspective. The results in the tables were broken down by hardline and softline merchants to examine whether different operating formats result in different inventory counting processes.
Q1: During your fiscal year, how often do you conduct a physical inventory at each location?
This question only attempts to answer how often an inventory is generally taken at each location during the year. It is notable that hardline retailers overwhelmingly rely on one count per year, while softline retailers take physical inventory twice a year on average. However, this discrepancy can be somewhat offset by the different approaches each segment takes to the interim inventory (see Q4).
Q2: Are certain groups of subset stores counted more often?
While the first question looked for the general rule for a specific location, this question sought to determine if processes are in place to count specific stores more frequently. Overwhelmingly, both hard and soft line traders used duplicate counts as a means of tracking initial inventory results. The most common reason given by respondents was to conduct follow-up inventory at their “target” or high shrinkage locations.
"If a store's inventory differs by a predetermined percentage, it will be recounted," was a comment reflected by most respondents. Regarding the actual selection of stores to be counted, one of the largest retailers surveyed explained that selecting the subset of stores is a collaborative effort between existing inventory control methods, store operations and loss prevention.
Q3: Do you do "wave" or "snapshot" inventory counts?
Originally, this question asked whether respondents used cycle inventories or snapshot inventories. The term "snapshot" referred to the common practice of taking inventory in all stores at about the same time. This often happens towards the end of the financial year, e.g. B. in January or June.
The term cycle inventory was intended to reflect the practice of taking the store's physical inventory count all at once, but splitting up the total deals so that a certain percentage of the deals were completed in each "cycle". Some retailers use this method and run multiple counting cycles throughout the year. However, the terminology has been changed to refer to this method as wave inventories to allow the practice of true cycle counts.
True cycle counts involve the practice of counting inventory in a store throughout the year by periodically counting specific sections. In theory, this could completely eliminate the need for an inventory control procedure that counts the entire store at once. The survey found no one currently doing this as their primary means of inventory reconciliation, but it's not an uncommon practice in distribution and warehouse environments.
According to the above terms, nearly 90 percent of respondents conduct their inventory using a snapshot method as their primary approach. The few retailers that use a wave method determine their waves by proportionally distributing the number of stores counted monthly, which essentially means they count one-twelfth of their stores each month. A retailer performs wave inventories throughout the year and then performs a snapshot at the end of the year.
Benefits of snapshot inventories
- Ability to synchronize attrition results across the chain for purposes of performance reviews, bonus payouts, target deal selection and other operational programs
- Clear apples-to-apples year-to-year comparisons with no timing issues
- Allows the entire organization to treat inventory counts as an "event" where more attention is paid to store preparation, training, and management attention
- Easy inventory segregation for receiving, shipping, discounts and promotional events, allowing for cleaner inventory management
Benefits of wave inventories
- Ongoing measurement of shrinkage performance to allow adjustments to financial accruals throughout the year, meaning there is no 'surprise' at year-end
- Regular reporting of results draws management's attention to the problem of shrinkage rather than a once-a-year problem
- adaptabilityInventarprogrammSchedule to achieve various goals. For example, stocks with higher shrinkage can be taken earlier in the year to get a worst case scenario
- Greater management coverage and inventory monitoring as one district manager can oversee inventory at each location, which is impossible when all stores are counted at approximately the same time; and /li>
- Lower average inventory service costs as rates are higher during peak periods such as January or June
Q4: Have you set up a preliminary counting process?
More than half of all respondents do not carry out any interim inventories. However, there are big differences when looking at the results by segment. Hardlines traders are more likely to have a preliminary counting process in place. This may partially explain why soft goods retailers are more likely to take multiple inventories at each location (see Q1).
The other factor that might be at play here is the "fashion" orientation of many Soft Lines retailers. While hardline retailers generally have many items that are out of stock on a replenishment schedule, many softline and apparel retailers are "flow-through" operations, where an entire seasonal clothing line can ship to stores and when it's gone , there is no replenishment; Retailers have moved to a different fashion look or season.
Therefore, from a merchandise replenishment or buyer perspective, there is not much demand to get updated stock figures for these merchandise. However, a stubborn retailer may find this information critical, not only from a shrink perspective, but equally important to the ability to have accurate ongoing inventory counts for replenishment and promotional purposes. This may be one of the operational reasons for the segment variance seen in these answers.
Q5: Do your interim adjustments correlate with your attrition?
Respondents who reported taking interim inventories asked them whether their interim inventory adjustments correlated with shrinkage. Overwhelmingly, the group indicated that they correlated with attrition, although no effort was made to find out how this relationship was defined in their organization.
Q6: Do you use an outside agency to do your inventory counts?
Respondents were asked whether they hire an outside agency to conduct their inventories. Almost 90 percent of respondents outsource their physical inventory process. The majority of retailers who outsource the physical inventory process employ a national agency. Four companies that outsource their physical inventory management also have an internal system in use. For example, a company carries out internal inventories in branches with poor inventory results. The stores with good stock levels in the previous census outsource the process. Another large retailer outsourced the inventory process for a few years; However, they are piloting an internal inventory process.
Only two companies relied solely on internal inventory. They rent scanning equipment from vendors.
Q7: Have you changed your physical inventory control methods in the last two years?
As a primary operational function, physical inventory control methods are critical to retailer performance. The survey collected information from respondents about changes in inventory processes at their organization over the past two years.
Almost 60 percent of the companies surveyed have changed their inventory process in the past two years. Respondents who indicated that their inventory control methods had changed were then asked three follow-up questions about the changes. The results are shown in Table 1.
Most respondents said the changes are working, with the exception of the two retailers who changed their inventory cycle counts. These two retailers indicated that changing cycle counts makes the inventory process more difficult.
Commentary and Conclusions
The goals of the original survey were to identify common inventory control methodologies and practices as a benchmark that participants could use when evaluating their own programs. The key takeaway from looking at the results is what they say about the current state of metrics and data in the world of retail loss prevention. It is clear that most companies still only have one or two shrink measurements per year.
The implications of this finding are important. It is difficult in any organization to manage performance and results without frequent, reliable measurements of results. It would be almost impossible to imagine a retail company measuring sales performance, cash flow metrics, staff turnover, or any other key business driver just a few times a year.
As a result, it is striking that most retailers have settled for infrequent shrinkage measures, even with access to information systems and distributed databases. The reasons for this state of affairs are most likely due to challenges in developing more frequent interventions, as opposed to managerial resistance. Identifying these challenges was not within the scope of this survey project, but would be a worthwhile topic to explore in future research.
This post was originally written in 2008 and updated on October 23, 2017.