For many retailers, yearly inventories are just around the corner…maybe even this week. In fact, you may not even be here right now or you may be too busy screaming “get those mark downs in” to have the time to read this. That’s fine, I’ll wait…. Okay maybe just bookmark it and come back later because what I’m going to share is important to your after-inventory plan.
Inventory numbers are an essential component of loss prevention planning. In LP, it’s our Super Bowl, our World Series, or which ever sports metaphor suits you. The average shrink number provides important insight as to how we did “overall,” but beneath that single average is the real story. And there can be plenty in that story to celebrate…or to raise eyebrows. Being in the prevention business, I won’t take up a lot of your time talking about all the “good” things it may demonstrate. If your numbers are good, excellent, analyze the things that got you there…stir…and repeat.
Analysis is important. Within even the good numbers can be results that should make you cynical. Some are obviously terrifying, but others can mask the truth of how we arrived at our results. When the mask makes our numbers look decent, we might be tempted to just accept that gift and move on. Unfortunately, I’ve never seen karma not show up in the next cycle and often it’s like a sledgehammer whose impact sounds something like, “How did our shrink deteriorate so much in a single year? What have you people been doing?”
You may not be able to change your numbers, but it is important to analyze them and call out suspicions or at least share your cynicism. Here are my Top 5:
Puppies and Kittens: If you’re in the pet store business your inventory may self-perpetuate. For everyone else, merchandise does not make new merchandise. An overage simply means bad systems. One store’s win is another store’s loss, so there isn’t any such thing as "extras"…again unless you’re in the puppy, kitten, or fish business.
The Long Tail Gift: When we lay all those shrink results out by store is there a nice long tail of overages helping our average? The Long Tail Gift is a more global example of puppies and kittens. Although the average is still the average, this occurrence means locating shrink points and applying an action plan is nearly impossible. You just don’t know which stores lost and which stores won, so the percentage of stores with overage becomes your minimum error rate for your best guess programs.
The Jackpot Average Price: When I conduct a shrink analysis one of the first steps is to divide the total dollars lost by the total units lost. The result gives me the “average unit price.” It’s not a true average of course but it tells me a lot about the inventory system integrity. If a company’s average price point is $20 and the average unit dollars lost is $40 that means either “all” the expensive stuff was stolen or there is a pricing/SKU issue in the system. The reverse is also true. The number need not be an exact match, but the law of averages says it should be close.
Department What?!?: Inventory nights can be stressful. Sometimes there isn’t time to figure out which department the never before seen, one-off item belongs. So from time to time we will have “Dump Numbers” in our results. In significant quantity they make me suspicious. In my experience they have been the result of everything from poor inventory prep to dishonest inventory padding. At best it is another example of “we don’t know how much of what is in our stores.” The larger the number in a store or the larger the percentage for the chain, the more reason to raise a flag and ask, “why?”
Nuclear Numbers: Sometimes a store just “blows” up. The entire job function of loss prevention is to figure out the 'why' and the 'how' in such meltdowns. The fingers usually point at the cause farthest from the person giving the explanation. The truth is it’s not always what it seems and some of the aforementioned occurrences could be the culprit. The explanation and the plan for correction, however, should be based in cause not purely speculation. If the store has never had a dishonest employee that’s not evidence that it’s “not” internal theft. If they never reported issues with shoplifting is seems a bit convenient to suddenly be blaming ORC. But if they took a number of transfers or another store on their delivery route enjoyed some overages, then we can’t discount a system error. So we have to investigate, draw together the evidence that we can, and make an educated and objective guess.
Inventories are not perfect, neither are systems or the people who operate them. Our shrink numbers are a guideline, a trend that shows if we did the same, better or worse with this year’s programs. Any time we are dealing with the number of moving parts found in the inventory process it is prudent to be a bit cynical. The worst thing that can happen is to be placed in a situation where we have a number, good or bad, with no clarity on the accuracy of the averages. After all, our programs are supposed to correct the course, which only happens if we know our actual starting point.
Authored by: Ray Esposito