Retail shrink is expected to reach a rec­ord $115 billion in 2009. Of that number, $40 billion will be point-of-sale shrink. While some of this shrink can be attributed to employee theft and fraud, the majority of it is actually caused by common and costly operational issues.

According to the 2008 Food Marketing Institute Loss Prevention and Security Report, point-of-sale shrink in supermarkets has grown from 1.54% of sales to 2.3%, an incredibly high number considering that average gross profit in supermarkets is 1.84%. However, as staggering as these numbers are, they are an underestimate of the true loss that is occurring. Loss prevention (LP) professionals and grocers believe that they are catching most losses at the point-of-sale, especially when benchmarking against accepted industry standards or their competition. The problem is that today’s tools are unable to detect certain patterns of operational shrink.

New studies suggest that operational shrink is much more significant than grocers and LP professionals previously thought. This data shows that operational shrink may account for as much as 40% of all shrink, costing retailers $16 billion annually. These figures, though, may actually be much higher. LP analysts employing new technologies are now able to identify losses beyond theft, including shrink caused by systemic issues (UPC incorrectly entered, manufacturing issues), operator errors (void with no charge, open rings) and poor promotion execution (unclear promotions, promotions not dropped to the POS).

Shrink occurs in every department, from the supply chain to advertising and to retail. Yet, most of it is unrealized until it reaches the point-of-sale system, where the inefficiencies and the errors of the other departments surface. For example, a BOGO promotion in the latest weekly circular will cause significant shrink unless the promotion is properly established in the POS. Without the link to the POS, the BOGO will not register when scanned, leading cashiers to bypass the system. The retailer who pays for the product upfront and then bills the vendor back for the promotion is now missing a critical piece of the data required to do this.

Because of the inefficiency and limited impact of current solutions, LP professionals are only seeing the “tip of the iceberg.” Grocers need to see and be aware of everything, including small operational errors, because these mistakes quickly add up.

Several sources of shrink go unnoticed because most tools today do not allow analysts to view many transactions, leading them to simply look for abnormal exceptions occurring at the macro level. For instance, retailers use exception reports that only look for cashiers who process an inordinate amount of voids, which helps detect employee theft. This is limiting, however, because every individual void is potentially a symptom of an operational issue that is causing significant shrink.

The reality is that there is a substantial amount of operational shrink that grocers are unaware exists—an alarming truth considering that it is much more common and costly than are fraud and theft. In fact, for every fraud case there are 21 operational incidents occurring at the point-of-sale and in the supply chain. Whereas fraud is isolated to a single person or a group of people, operational shrink is epidemic. For example, if one cashier is making a particular mistake, then it is very likely that many cashiers are making the same mistake.

Indeed, hundreds of cashiers from numerous stores within different grocery chains have been found incorrectly scanning cases of water. Supermarkets often train their cashiers to complete an order as fast as possible. In turn, cashiers quickly scan an item, listen for the beep, and move on with the next scan. So when a cashier scans a case of water, he does not notice that he is scanning the UPC on the individual bottle, which is exposed through the case’s clear plastic over-wrap, rather than the correct UPC on the bottom of the case. The result is that a case of water bottles costing $5.49 is bought for $0.69, a $4.80 loss that can go unnoticed in a medium to large transaction. Because this is a widespread error, these numbers rapidly increase: one SKU’s estimated annual loss exceeded $80,000.

Mistakes will always happen. The problem is that many operational incidents are often overlooked by LP professionals. Tools that identify not only theft and fraud, but also hidden operational shrink enable grocers to successfully address all losses that directly affect their profitability. 
 

Pedro Ramos is vice president of operations at Agilence Inc., a video analysis company that identifies and reduces losses caused by systemic issues, associate fraud, operator errors and promotional errors. He can be contacted via email at pramos@agilenceinc.com.