Deeper Analysis May Reveal Necessary Shifts in Target Programs
As the end of most retailers' fiscal year approaches, physical inventories will soon be scheduled, and year-end (or half year) inventory results calculated. Once completed, retailers will look to evaluate their results to determine how profitable both individual retail locations and their company as a whole were against inventory losses.
The de facto standard that most often determines a store's profitability against loss is the calculated percentage of dollars lost against sales dollars, or the shrink percentage. Most commonly, the shrink percentage is the singular measurement of performance of a location, as well as the only criterion used when judging whether a store should be part of a target store program.
However, when truly gauging your inventory loss and overall store profitability, additional measurements involving loss, including a historical analysis of sales and shrinkage and a review of units lost, may in fact reveal that some of your high shrink percentage locations may not be the most suitable for target programs.
For example, consider two locations for the same retailer:
- A single retail location has a shrink percentage of 2.5% to sales. This location lost $10,000.00 in shrink based on its physical inventory counts. The sales for this inventory period were $500,000.00. This location holds the 3rd highest shrink in the company which has a target store program to review all locations above 2% of sales.
- Another location by the same retailer boasts a shrink percentage of .95% to sales. Being a high-volume location, this store had sales of $1,200,000.00 for this inventory period; therefore, this location lost $14,250.00 in shrink dollars. With a shrink percentage slightly below 1% of sales, this location is in the top tier of lowest shrink percentages in the company.
As you can see, considering only the shrink percentage when analyzing your stores may not always provide a full picture. Here are some additional areas to research when analyzing your inventory results to determine which locations may be costing you more, and should therefore be considered target store opportunities:
- Measure the shrink percentage against shrink dollars lost. As seen in the previous example, sometimes a larger volume location can hide increased losses. Take a look at the total shrink dollars lost by location to see if there may be a lower shrink location that is actually losing more inventory dollars. Targeting these higher shrink dollar locations may actually increase your profitability and better reduce your overall losses as a company.
- Break the analysis down to the most common denominator - units. Analyzing where you are losing your inventory will help to determine focus and begin the search for the root causes of loss. Too many losses in a single department may indicate a possible inventory error, and several losses in high dollar merchandise may be a good indicator of possible theft. If you maintain any known theft reporting, you can also research those against unit loss by department to help validate the known theft.
- Compare similar store "types" to each other. When conducting larger-scale analysis, choosing those locations with similar sales volumes, location types or other location-based factors create a better peer comparison. Another measurement can be looking at those with similar security countermeasures, as a positive result in one location may indicate proper use of these countermeasures.
- Compare the last two or three inventory results of each location. Looking at the history of the shrink percent, sales and shrink dollars can help to determine if the store is a continuous problem. Sometimes the shrink dollars lost or units lost can be the same or less inventory to inventory but due to a sales decrease, the shrink percentage was high.
Once target stores are determined, take a historical look at losses by department or category. Again, looking at unit loss against shrink dollars for that department or category can indicate the type of loss (high dollar versus high quantity). Department comparisons can also indicate a global issue with the location or an isolated issue with a single department which can assist you in building your target store approach.
At your next inventory period, take a more detailed approach while analyzing your inventory results. Adding deeper levels of analysis may result in finding some inventory problems that can be easier solved and bring more profitability to your company by the next time inventory comes around.