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Why don’t my audit scores predict shrink?

Posted on 11/2/10 1:30 PM

Take a look at your audit program. Do the results of your store audits (or DC or other location) correlate to the inventory shrinkage results of that location?

One would expect (and most do) that a high audit score, resulting in a good audit, should result in a lower shrink percentage (less loss). Theoretically, if the location is operational sound and abiding by the concerns of your audit, it should also be sound with regards to loss prevention and have low shrink.

shrink predictionUnfortunately, when working with many retailers for the first time, we have seen the opposite. We have found that locations with loss prevention issues or high shrink percentages have had high or passing audit scores. How might this be? Shouldn’t there be a correlation between audit scores and shrink results?

The lack of correlation between store audit scores and shrink results is a common dilemma for many retailers. Looking as to why this may be happening it is safe to say, that the lack of correlation is not an issue of audit value.

Correctly composed, audits provide several benefits:

  • They measure the level of compliance to company policy and procedures

  • They provide a learning opportunity forum for employees (follow-up and training must be part of any audit process)

  • They can identify the need for training, performance improvement and loss investigation

What we have learned is that audit scores that do not correlate to shrink are most often due to the audit content or the absence of an objective measurement.

Audit Content

The purpose of the audit, especially if the objective is shrink management, should be to review and measure those areas of control with regards to inventory loss. Unfortunately, many retailers utilize a single audit for multiple business practices. The combination of these evaluations skews the direct measurement of solely shrink related predictors and we find that loss prevention review takes a backseat to other business practices or measurements.

When it comes time to reduce the time spent conducting an audit, what is more important to your management team conducting the audit - Cash Refund review (cash refund fraud is the leading method of theft by employees and affects inventory as well as cash loss) or proper Plan-o-gram set-up for next week’s sale? Both are important, but which one takes precedence in depends on the purpose and goal of your audit.

Objective Measurement

Most retailers without a loss prevention function (or one that is stretched beyond capacity) rely on district, area of even store management to conduct audits. Although the need to use additional resources can be a necessity when it comes to auditing locations, we have found that often times the objective measurement of audits diminishes if those conducting the audit have personal interest in those they are auditing.

Having a non-bias party conduct audits brings a level of objective measurement into the process. Sometimes when audits are conducted by a person with personal interest, it can create a “benefit of the doubt” scenario rather than a score of “intent” with an audit question. One example would be a district manager giving a store manager a passing score because they knew they should be doing it and will do it before the next audit. An objective auditor would look at the scenario that day and provide a failing score because it was not complete. The auditor would also expect the store manager to correct it by the next audit and when the time comes, score that audit in the same fashion. Third-party audits can be used to conduct all or some of the audits throughout a program calendar.

How can you improve the correlation between your audit scores and your inventory shrink results? The solution is simple. When developing your loss prevention audits;

  1. Identify the evaluations that correlate to shrink: Find out what areas of your business controls can cost you losses due to theft or error. Develop your loss prevention audit around the compliance of these controls. 

  2. Maintain these specific questions as a sub score of the total audit: Not all of your audit questions will correlate to inventory shrink (Cash loss or deposit controls for example). Categorize these specific shrink related questions as a sub score of the total audit so you can accurately measure for correlation. 

  3. Determine if you require a specific loss prevention audit: Based on your identification and development of your audit, you may determine that it is best to have a separate audit. If so, think about the time and resources it will take to accomplish an additional audit. Sometimes it is best to run a separate program rather than expect it to be completed as part of another audit process. 

  4. Ensure the use of objective auditor: Think about utilizing an objective auditor for some of your audits. There are resources available with the experience and depth to support an existing audit program or to develop and execute a new store audit program.

Learn more about store-based auditing or improving compliance on our website or contact us to discuss your existing or planned audit program.

Topics: Loss Prevention program and development, Audits and Investigations

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