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Using Decision Science To Predict Fair Shrink Targets And Define Action Plans To Fix

RI Team | 10th April 2018

I was recently carrying out some research on the highly emotive subject of retail shrink, the loss of inventory that can be attributed to factors such as internal and external theft, administrative error, vendor fraud, damage in transit or in store, and cashier errors that benefit the customer and picked up on some really interesting comments.

I look after Toys, one of the top five shrink departments in a very large store so I attend the shrink meeting every week. Our store sits within a very poor area so theft is commonplace. I do my shrink audits on a range of categories so I think I know what’s being stolen, but audits are mostly used to reset my on-hands, but as I look across my department I feel that I am facing into issues head-on and trying hard to fix.

We use locks to secure the bikes to the bike rack. This probably sounds crazy to some people, but when we don’t lock up the bikes, we get hit hard. They literally roll right out the door. Bike accessories are another big problem, especially bike lights. I’ve put some of them on locking pegs when it’s practical and I changed up the shelf fixtures so that high theft items were closer to the centre aisle for better visibility.

LEGO is another problem. I spider wrap expensive sets and only show minimum presentation, but I think people are sticking UPC’s from less expensive sets on the box and then going through self checkouts. Apparently loss prevention sees a lot of ticket-switching at my store.

Blind packs are also a big problem. For those who don’t know, blind packs are usually tiny, pocket-sized toys that come in little bags. You don’t know which one you get until you get it home, unless you open 20 of them right there in the store looking for that specific figure. I have tried to set these to inactive, but even when they’re inactive, I am sent the stuff anyway.

I don’t think I’m causing shrink through price changes. I’m not perfect, but I try to make sure my counts are accurate and I don’t take markdowns on stuff I don’t have.

I focus inventory all year round. If I find something out of the package, I always find a UPC for it and get it processed by claims. Even if it’s just a tiny low-value toy, it adds up over time.

I’ve even tried to think outside the box – installing dummy cameras or printing freeform labels that say things like “SMILE, YOU’RE ON CAMERA!” as a deterrent.

Despite doing all of this, I am still unable to hit the shrink target set for me by the business and I now question how this target was set.

When someone is taking this much time and effort to reduce shrink within their department then it’s hard to criticise. Yet too often we set unrealistic targets without context for that store’s environment, specific conditions or even its changing labour profile – targets typically being set to improve versus last year or to fall in line with its cohort group, which is sometimes not as similar as it needs to be. So is that really fair?

At Retail Insight, we believe that targets should be set fairly to reflect the context and reality of the store and department. We do this through the application of our Decision Engine to understand the potential drivers and levers of shrink:

  • We audit available data, tools and environments to source, cleanse and transform a complex set of data inputs;
  • We classify inputs into three groups: those controllable by the store, those controllable by head office and those which cannot be directly controlled, but do have an impact.
  • We tune our Decision Engine to mathematically model monthly store shrink and its drivers and their relative impact and importance;
  • We use our Decision Engine to isolate the impact of drivers and levers, allowing us to create fair performance targets that can be achieved by every store. Aggressive where they can be and realistic where they need to be.

The modelling is complex, but the output is simple and actionable: many of the controllable levers have significant relationships to the shrink target and yield realistic opportunities to design meaningful action plans to improve.

By taking the product of attribute importance and each individual store’s attribute values, expected shrink performance by store and department can be calculated and these fair targets used to identify the real opportunities to enable the retailer to lose less.