Although the calculation of shrink is quite simple, the factors that determine your shrink calculation may not be. Damages, known thefts, defective merchandise, mismates, return to vendors and items ‘marked out of stock’ (MOS) could be creating some “black holes” in your shrink percentage.
The MOS concept is fairly straight forward and used by most retailers. An item that cannot be sold because it is damaged for example, is documented as such allowing the merchants to replenish that item onto the sales floor. This affords the retailer the opportunity to replace the non-saleable item as opposed to not having that item available until the next physical inventory cycle.
The “black hole” as it relates to the MOS concept is in the process itself. The tracking, authorization, verification and disposal of these items are where shrink can be hidden, theft can occur or inventory padding can take place.
Let’s take a look at some of the more common MOS “black holes” that can leave your company exposed to hidden loss.
Damages, Defectives & RTV (Return to Vendor)
Non-saleable merchandise due to damage or defect should be maintained and recorded to properly receive credit from the vendor (RTV) or destroyed. A retailer should not be responsible for poor manufacturing nor should a customer be stuck with a damaged item.
When it comes to the process of handling damages, is your process set up to reduce potential loss?
Who is authorized to damage product?
Who verifies that product is damaged or defective?
Who confirms the disposition of product?
Even if your process addresses and answers the above questions, additional questions to ask are:
When was the last time an audit was completed on your damage process?
Can you ensure that the process is actually being followed in your locations?
Could an employee steal through your damage process or a manager “pad” their inventory because they know a District Manager or Store Manager does not follow proper procedures?
Technically a known theft is not really known unless someone sees the person steal the item. However, we as retailers assume that a theft has occurred if certain indicators are present. Price tickets in a fitting room, an empty box, or an empty hanger are possible indicators that an item was taken and not sold.
Some companies document known thefts to track potential theft. Others document them for replenishment purposes. Some may even use documented known thefts to be adjusted in their inventories (we hope this is not the case).
Like damages, the process you have established with regards to known theft not only needs to be properly documented, but also properly monitored.
What are the criteria in your company for determining a known theft?
Who is authorized to write up a known theft?
Who verifies or validates these known thefts?
What do you do with these known theft reports?
To ensure that internal theft is not taking place via known theft reporting, put specific processes in writing and validation in place at the store level. Use your auditing programs (DM, LP or others) to validate known thefts. Make sure that all indicators are available or at least documented. Have you ever thought of analyzing your known theft data?
The two examples along with other categories of MOS’s have one commonality. If proper policies and procedures are not implemented and followed, these areas can hide shrink. Companies must have proper guidelines, documentation and audit practices in place to document, validate and dispose of non-saleable merchandise. Allowing store personnel to have free reign in handling merchandise out of stock or not ensuring field management is following proper procedure can leave your company exposed to shrink you may not have ever been aware of.
Written by Tim Casey, CPP, CFI, Director of Corporate Services