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A Different Approach to Calculating Shrink and Loss

Posted on 1/28/14 12:30 PM

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Shrink and LossFor most retailers, the calculation of a shrink percentage is the standard measurement of how well a company or individual location is performing with regards to loss prevention. These percentages are calculated by dividing the inventory loss (in dollars) against sales dollars within a specific time frame. It is from these results that most loss prevention initiatives are determined, target stores defined, and resources deployed. But is this an accurate accounting of true loss?

I don’t think anyone would doubt that by controlling inventory loss in a retail environment, a retailer will be able to increase their profitability, either in a single store or entire company. However, in today’s retail environment, there are many other areas that can affect profitability outside of inventory loss. I ask;

 

Should retailers look beyond inventory loss alone and take into consideration other areas of profitability concern?

Should retailers look at a calculation of Gross Dollars Loss and adjust their shrink calculations to include non-inventory loss against a store’s or company’s total shrink percentage?


What is Gross Dollars Loss? It is simply adding the non-inventory dollar loss for each location to the inventory dollar loss.

Gross Dollar Loss = Inventory Dollar Loss + Non-Inventory Dollar Loss

Inventory Dollar Loss is a figure we are all familiar with as it pertains to inventory shrink. It is the difference in dollars (either cost or retail) from a location’s on-hand inventory against that location’s book inventory. It is the figure retailers use to determine their shrink today.

Non- Inventory Dollar Loss is the calculation of certain non-inventory related losses that occur at store level. These losses are those that are reviewed by loss prevention, acted upon to investigate theft and loss, and use programs and initiatives to reduce opportunities for these losses. These non-inventory related losses can include;

  • Net Cash Register Discrepancies
  • Net Deposit Loss and Discrepancies
  • Credit Card Charge backs
  • Bad Check Loss
  • Gift Card Loss due to theft

Where do you find these “buckets” to calculate your gross dollars loss? You can find them along with other categories of non-inventory loss on a store or company’s P&L (profit and loss) statement. Have you ever looked at your stores’ P&L statements or requested documentation to show losses for each location in the above areas?

 

Why is Gross Dollars Loss important?

Losses that affect your company’s profits can be found in more areas of non-inventory related areas today than ever before. Examples include credit card charge backs or gift card frauds. They are often reconciled post-transaction and affect your P&L but not your inventory. As a driver of loss prevention initiatives, wouldn’t you want to know those locations that have high losses in these areas? Could these losses be due to internal theft, compliance concerns or improper training?

I am aware of some loss prevention departments who make it a point to review P&L statements for their store locations. They use this review to see if there are concerns related to non-inventory loss, but what if their calculated shrink included these non-inventory losses into a new bucket; Gross Dollars Loss? A new shrink percentage formula to base your loss prevention success and initiatives on would be;

Gross Shrink Percentage = Gross Dollar Loss (Inventory + Non-Inventory Losses) / Sales Dollars

What are your thoughts on this concept of re-calculating shrink to include non-inventory dollar loss? Are you doing this or anything like this in your program? What other non-inventory losses should we include?

I would be interested in your feedback and anything you may add to this thought process.

 

Authored by:

David Johnston   David Johnston, Director of Business Development

   Ray Esposito Linkedin







The Shrink Analysis Formula


Topics: shrink awareness, policies and procedures, Loss Prevention program and development

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