Shrinkage
Wikipedia has a great definition of shrinkage. The author refers to it as “the loss of products between point of manufacture or purchase from supplier and point of sale”. The posting further states that 48.5% of shrinkage is employee theft and 31.7% is due to shoplifting (according to the National Retail Security Survey conducted by the University of Florida). It lists the four major causes of shrinkage as:
- Employee theft
- Shoplifting
- Administrative errors
- Vendor fraud
The survey stated that shrinkage was 1.7% of revenue in 2001 and I find that surprising low. 1.0% is a good target and to find that the aggregate for retailing is close to that number is probably a bit optimistic. Many retailers don’t like to admit to this problem.
In my years of selling retail systems, it was an eye-opener to hear retailers defend their employees of being loyal and incapable of theft. It was also an eye-opener to find retailers who, with a new system, finally could create accountability and identify the cause(s) of high shrinkage. The highest number I ever ran into was a multi-store apparel retailer on the west coast that was experiencing 11% shrinkage on about $15M in sales. $1.65M (at retail) in losses!
This operation’s original system had no accountability among accounting, receiving and transferring. The controller was about to jump off a bridge until installing a system with that accountability. What was eventually determined was that there was a theft and fencing ring in one of the warehouses. This group of individuals had created a fictitious store for themselves and they were “transferring” goods to a fence for cash. The ringleader, “a trusted employee”, was arrested along with a few other individuals. Definitely grand theft.
Another interesting case involved a golf resort in the US. There was a remote driving range/golf lesson facility that was responsible for stocking golf clubs for sale. The director of golf was suspicious that something was going on, but they had no inventory management system and only a cash register at the driving range. He finally set a trap for the thieves and caught them. Each one was brought individually into a room with a deputy on one side of a table opposite the caught employee. They were presented with the evidence and given a choice of signing a confession with various stipulations or going downtown with the deputy.
An audit determined that these thieves were buying around 120 sets of irons each year and less than 10 were being sold on behalf of the resort. This was a case where the thieves were given the opportunity to make purchases on behalf of the resort, with no accountability for the purchases. They approved the packing slips and invoices which were then paid by accounting. Before you believe the director of golf was perhaps derelict in his duties, he was frustrated that the ownership would not give him control over any portion of the remote location. He finally got their agreement that a potential problem existed, took control and caught them very quickly.
Another interesting form of shrinkage is quite prevalent, but not captured as frequently. It has been called “sweetheart selling”, but is better described as unauthorized discounts. This is when an employee grants special pricing to friends without authorization. Sometimes the employee will selectively ring up some, but not all items, to help avoid suspicion. For example, someone may bring 5 items to point-of-sale, but their employee-friend only charges them for some of the items.
So, there are many forms of shrinkage and ways that employees can make life miserable for a retailer. Just for the mathematical exercise, let’s assume that a retailer has a net profit of 4% before taxes on the financial statement. That means for a $100 item, the store will gain $4 in net profits. If the item cost the retailer $50, then the retailer will have to sell 12.5 units to offset the loss of the $50. In other words, selling $1250 worth of this product will earn the store $50 in net profits to offset the theft!
Want to feel worse? Let’s assume you have 2% shrinkage on $500,000 in sales. That means that you have $10,000 in losses at cost (COGS = Cost of Goods Stolen!). At 4% net profits, that means that you sell $250,000 each year JUST TO COVER THE SHRINKAGE!!!
Now, anybody want to go back and rethink whether or not their employees are all trustworthy?
Alan Fisher is the leading expert on inventory management in the golf industry. He has conducted numerous seminars across the US and Europe for the golf industry and has authored numerous articles on maximizing retail inventory. If you would like to know more about how you can make your retail a profitable part of your business, please contact him at any of the following:
alan.fisher@mygolfretailguru.com
866.32 RB101 (866.327.2101) toll-free (US)
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