The fight against shrinkage begins with knowledge. Ragtrader dissects the key findings of KPMG's 2009 Global Retail Loss Prevention Survey and how they apply to fashion retailers.
International approach
Financial audit, tax and advisory firm KPMG conducted its first Retail Loss Prevention Survey in 2005, when it interviewed 27 retailers across the Asia Pacific region. Its recently released 2009 edition involved 47 leading retailers across the Asia Pacific, Americas and Europe, Middle East and Africa (EMEA) regions.While the extent of shrinkage was broadly in line with earlier research - representing up to three per cent of total sales - KPMG global retail head Mark Larson was surprised by the results.
"[These rates] represent a very large loss of profit, yet our survey shows that over 90 per cent of companies remain satisfied with their management of stock shrinkage," he said. "The conclusion has to be made that many retailers are making losses that are needless."
Companies surveyed by KPMG believed that more than half of all shrinkage was caused by theft and one-third by process failure; that is, the management of physical inventory.
A silent threat
Shrinkage: Is it all in the slip of the hand? The 2008 'Global Retail Theft Barometer' estimated 77.7 per cent of all cases were caused by internal and customer theft. Conducted by UK-headquartered Centre for Retail Research, the report claimed only 16.5 per cent of loss was caused by internal errors and 5.8 per cent by external failures.
But KPMG Asia Pacific head of retail George Svinos has a different take. "Many retailers focus their efforts on internal and external theft, when the main issue is often process failure. But process failure is difficult to address because you have to look at the whole retail process and that is a very large and complex issue."
Process failure can occur at various stages of the supply chain, from warehousing and distribution facilities to procedural hiccups in retail stores. KPMG UK retail professional Nick Boyd believed even simple checks such a stock counting could be overlooked.
"Stock is typically counted by department, at the beginning of the day or most likely at the end of the day when people are tired and looking forward to getting home - one reason why so many errors are generated."
A case study conducted in the UK paints a clearer picture of where things can go wrong. KPMG was commissioned to diagnose the causes of stock loss for a medium-sized retailer (over 100 stores and 5,000 employees) which reported shrinkage rates of 2.5 per cent of turnover. By tracking the movements of stock, interviewing staff and comparing performances across 18 of its stores, KPMG discovered that losses were almost equally shared between process failure and "real losses".
Theft accounted for 0.68 per cent of the total 2.5 per cent loss, handling damage was at 0.63 percentage points while elements like stock management, logistics partner errors and stock count errors accounted for 0.64 per cent.
Svinos said this highlighted the importance of working with suppliers. "As well as reviewing delivery processes, there are clear opportunities to address shrinkage by collaborating with manufacturers on issues such as packaging," he explained, adding that sealed goods (or garments on hangers) were less likely to be stolen out of convenience.
Myer supply chain director Prakash Menon has attracted a flurry of attention for his efforts in this area. Speaking at the recent 2009 Smart Conference in Sydney, Menon detailed his approach to inventory management after the department store was acquired by private equity firm Texas Pacific Group in 2006.
This was a business which had over 1200 suppliers across twelve categories, including fashion and accessories, and 240, 000 active SKUs.
Menon and his team were able to reduce process errors by streamlining the number of Myer distribution centres across Australia, investing in advanced e-commerce solutions and bringing the entire system in house.
Simple measures such as the introduction of roll-cages to most Myer stores improved the transport of goods from store dock to floor, reducing offloading time from 45 minutes to seven and leaving little time for inventory bungles. Source tagging at the point of manufacture also enabled Menon and his team to keep better track of goods.
In its second year of practice, the overhaul saw a 60 per cent reduction in Advanced Shipping Note errors - electronic documents which contained detailed information over a forthcoming consignment of goods - and an increase in selling space as storage of inventory became more streamlined.
Last year, the department store upped the stakes by appointing a manager to tackle shrinkage issues across inventory. A new point-of-sale system and closed-circuit security was also announced this year.
Managing sticky fingers
Retailers were pretty satisfied with their response to shrinkage, according to KPGM's survey.
Some 96 per cent of respondents believed their performance on shrinkage control was average or better and 73 per cent thought it was satisfactory or best practice. Many companies believed these types of losses were an inevitable cost to doing business.
However KPMG UK head of retail Helen Dickinson said shrinkage levels of up to three per cent of sales should be of great concern.
"Most retailers understand that during a recession, their loss levels are likely to rise. But a recession also means there is pressure not to spend money and, given the significance of loss, for some retailers that could be a false economy."
While there was near consensus on the need for teams to monitor stock loss, there was no consensus on how they should be organised or whom they should report to. Almost half said staff reported to the chief financial officer, the supply chain director or commercial director; but up to 18 different officers were cited in the rest of cases.
Larson says a lack of definition and clear communication was a leading factor in stock loss.
"Procedures tend to be disseminated through various documents that may be addressed to shop floor managers, or financial controllers, or internal audit staff or technical security staff. This goes to the heart of the organisational challenge of stock loss: there is no one key actor."
While Retail Apparel Group (RAG) declined to comment on its shrinkage policy, chief executive Gary Novis believed it was ultimately a front line issue. RAG owned and operated menswear chains .yd, Tarocash and Connor.
"We run our brands independently of each other and only administration, finance and IT are shared resources. The brand managers are ultimately responsible for shrinkage but it is a key performance indicator of the retail sales team.
There are retail businesses that have loss prevention officers that are responsible for stock loss but I feel this takes away the responsibility from the people in the front line."
KPGM's survey found that among internal processes for loss control, cash protection was the priority followed by stock checking. IT-based initiatives, such as systems checks and analyses of electronic point of sales data, were used less intensively.
Looking forward
While most companies believed radio frequency identification was too expensive to implement, Svinos believes this could soon change as prices for technology dropped.
"It is true that RFID is cost, but we may also see a step change soon. You may see retailers following the example of [American discount department store] Wal-Mart which required their top 100 suppliers to use RFID. But the main potential at this stage may be at a box or crate level rather than on individual products."
A majority of companies believed quality staff and employee integrity would be the most important future action against shrinkage.