I recently read over an article opining the phrase “sales cures shrink”. While the author touched on both sides of the coin, I found it interesting that in today’s retail climate, anyone would think that you can simply sell your way out of losses. Let’s cut to the chase here; we’re not bringing in 20% increases over last year, hell we’re lucky to come in flat to last year. Online giants like Amazon are eating up market share like never before and if brick and mortar don’t do something fast, sales will continue to slump.

Let’s break this down a bit further. Let’s say your shrink last year was 2% to your sales of $1,000,000. That’s a loss of $20,000 for the year, or about $57 a day. Taking that shrink number and dividing that into your loss per day gets you right at $2680. That means you have to sell an additional $2,680 on top of that $57 loss just to get to the break-even point. Understand this, you CANNOT stay in business if all you’re doing is breaking even. You just can’t. You need to turn a profit!

Being a realist here, there is no way that you’re ever going to sell your way out of shrink. EVER. It is a flawed philosophy and if you ever hear someone utter this crummy phrase, understand that whomever that person is, they have no idea what they are talking about. Unless you have some miracle business model and you’re bringing in money hand over fist, then “selling your way out of shrink” just isn’t an option. It’s a start…

Offsetting shrink takes a multi-faceted approach. Just as you can’t sell your way out of shrink, you can’t very well keep everything under lock and key, and it’s impractical to have the security devices on every single sku. If you’re trying to increase sales, you may be inclined to have more displays of merchandise. Copious amounts of data show that a customer is more likely to make a high dollar purchase if they have a chance to touch and feel the item. (Think sunglasses, hunting scopes, sports equipment, etc.) To sell it, they have to be able to touch it. For you not to lose it, you need to secure it in some manner. Once you find the balance of sales vs. LP procedure, you’ll find the winning formula for shrink reduction.

Proper security measures will only go so far to stop external losses. Internal theft accounts for an even bigger percentage of losses inside your store. Knowing who to hire, and whom you are hiring are both vital spokes in the retail wheel of shrink reduction. You need to go a step further and encourage a culture of honesty, integrity and ethics in your store. Employees should feel invested in your business, as that emotional attachment will likely deter an employee from stealing.

As with any problem, there are always a multitude of solutions to bring about positive change. Get away from a soloed approach to shrink and look at all the ways your losses may be tackled. Just as you would be foolish to believe that locking up all of your merchandise would stop theft, you’re of equal foolishness if you believe that sales are the cure all for shrink; and I personally, pity the fool.

What You Should Be Auditing

theft (11)When you work for yourself, you often spend a lot of time inventing the wheel. There is no corporate policy already in place for your stores to adapt. No one is there looking over your shoulder and telling you what records to keep and for how long. Sure, you probably have an accountant somewhere helping you with some record retention requirements. There are other IRS and tax records that you keep for a certain period of time. Overall, it is up to you to make these decisions and have a standard in place.

One area that can be difficult to make your own standard is having an internal audit. While it is a chore to come up with the questions and audit points, the payoff of having a better standardization and in store accountability will far exceed the trouble you put into to establish an audit.

One of the best places to start is by researching Sarbanes- Oxley. The Sarbanes- Oxley act of 2002 is a set of legal requirements that all organizations, regardless of size, must comply with. It basically regulates financial practices, after several companies were found guilty of falsifying their own financial records. The company’s biggest fallout was that they ended up devastating thousands of their own employees financially.

The ultimate point of the act is that companies are required to provide accurate and truthful information as to the company’s financial status. Over inflating sales, inventory, amongst other practices, to give a deceitful impression of a company’s success is now illegal. Companies must retain records of their financial status to ensure accuracy at all levels.

The easiest way to do this is to perform self-audits in key areas. These audits should be done daily, weekly, monthly and yearly, depending upon the task. Hiring a consultant can provide you with the legal specifics to keep your company on the up and up. Understanding the basics ahead of time can help you decrease those consultation costs, as you will already have some practices in place.

The first place to start is with your inventory. Understanding a cradle to grave approach to your product will not only help you with accuracy in your auditing, but keeping a closer eye on your product will help you decrease your shrink over the long term. Your starting point is with your receipt of goods.

Each shipment of inventory you receive should be documented and a bill of lading retained and filed by month. On each BOL should be the signature of who received the items, the date and time received, and a check mark or tally of what was received- either by piece, box or pallet.

Next, you should maintain listings and reports of items that are taken out of your inventory for a specific reason. If they are damaged and thrown out, sent back to a vendor for credit, used in the store, stolen, etc. There needs to be a paper trail attached to where these items have gone and why. A signature, or employee ID or who reallocated the products disposition should be included with these document (also retained and filed by month).

If you are still using paper sales receipts, including paper journal tapes, those records need to be filed by date, and then month. This is your listing of what merchandise has left your stores and is your proof that these sales actually happened and were not fraudulently contrived. If you have an electronic sales tracking system, you still need to have paper documentation of these sales retained somewhere in case of a computer glitch, etc.

Finally, all returns must be retained and spot-checked for accuracy. Since returns are another way for inventory to come back into the store, it is an important process to verify that these returns are accurate. Look for multiple transactions of the same item, or significantly larger dollar transactions. These are the returns that are most likely to have been done in error (over inflating your actual inventory) or can point to an employee’s dishonest activities.

Omni Channel Retailing

theft (11)Omni Channel Retailing is the current long-term direction that retailers are going forth with. It basically is the process of integrating all aspects of a retailer into one accessible unit for customers to shop. This is the current way to combine a brick and mortar location with online sales, social media, distribution, and mobile phone apps. By cohesively allowing customers to shop any location, by any means available, sales are maximized exponentially.

Simply put, a customer can purchase merchandise online, or from their phone by searching your company website. The products available come from your distribution channels, and in stock inventory within any of your stores. A customer has the ability to see what your on hand inventory is, make the appropriate purchase, and then decide how they will get the product. The options are usually pick up in store, deliver to home, or deliver (from the distribution center) to a store of their choice.

Omni Channel Retailing is a viable option, not just for the larger companies with hundreds of selling locations. It is actually a great way for smaller businesses to compete with these big box stores as customers have better access to a wider range of your merchandise, when and where the customer needs it.

Having worked with larger companies just beginning these selling processes, I was able to experience their growing pains first hand. The hardest obstacle to overcome was ensuring the proper on hand inventory, so when a customer placed the order we could quickly fulfill it.

I saw too many unhappy customers place an in store pick up order, show up thirty minutes later, only to find out we didn’t actually have their product in stock. Not only were they put out by the inconvenience of needlessly driving to the store, but also they still had to figure out how to get the merchandise they wanted to buy.

As we progressed with the process, we started taking a better approach to our on hand accuracies. As a result, our sales increased, as did our customer satisfaction. Through Omni Channel Retailing, we were able to reach a whole new customer base and increase our sales in ways we never dreamed we could.