LOSE LESS AND SELL MORE : Using the ECR Europe Approach to Manage Shrinkage Adrian Beck Reader in Criminology University of Leicester, UK

Structure Defining Shrinkage The Scale of the Problem Key Principles of Effective Shrinkage Management A Case Study in Success

Defining Shrinkage

Process failures Inter- company fraud Internal theft External theft Shrinkage Original ECR Europe Definition Shrinkage

What Does Shrinkage Mean? Inter-Company Fraud Process Failures Internal Theft External Theft  Deliberate Under/Over Delivery  Invoice Errors  Quality and Weight of Items  Inventory Errors  Promotion Errors  Pricing Errors  Stock Going Out of Date  Damage to Stock  Product Delivery/Scanning Errors  Theft of Stock and Cash  ‘Grazing’  Collusion  Shoplifting  Till Snatches  Returning Stolen Goods  Burglary  ‘Grazing’

New Shrinkage Typology TOTAL LOSS Shrinkage Process Variance In Auditing At Checkout Product Movement Data Errors Product Loss Damage Spoilage Internal Theft External Theft Value Variance Reductions Pricing Missed Claims Unknown Loss Cash Loss Internal Theft External Theft Error Unknown Cash Loss

Scale of the Problem

International Comparisons YearSourceSize 2002National S’market Res. Group (US) ECR Europe Retail Council of Canada Food Marketing Institute (US) NRSS (US) ECR Australia Otago University (New Zealand) European Theft Barometer Eurohandelinstituts (Germany)1.23

Shrinkage Retail Iceberg 51% 49% Lack of visibility Lack of awareness –When did it happen? –Where did it happen? –How did it happen? –Who was responsible? Lack of accountability Prioritisation of the most visible/acceptable

Causes of Retail Stock Loss Study ExternalInternalProcessVendor Otago Univ (New Zealand) European Theft Barometer ECR Europe Retail Council of Canada Food Marketing Institute (US) ECR Australia NRSS (US) National S’market (US)2057??

Location of the Problem 24% Manufacturer Distribution 5% Retail Distribution 71% Retail Stores

Retailer’s Missed Profit Opportunity 0% 1 % 2 % 3 % 4 % 5 % CurrentPotential Average Retailer Margin Average Retailer Profit Margin 2.99% 62% Margin Growth 1.84% Average Retailer Shrink Margin 4.83% 1.84%

Shareholder Value Net IncomeShareholder Value €1 Incremental Sales € 0.15 € 3.00 €1 Inventory Reduction € 0.20 € 4.00 €1 Shrinkage Reduction € 0.70€ Calculated by the Cranfield School of Management based upon the following assumptions Sales Margin = 15%; Inventory Holding Costs = 20%; Net Overhead Cost = 30%; Share Price is a Multiple of 20 on Net Income.

Principles of Effective Shrinkage Management

Guiding Principles Engage senior management Convince them of the opportunity Show the impact on the consumer Persuade them that a multi functional approach is required Secure resource

Guiding Principles Measure the problem Data accessibility, timeliness and granularity Mining the data warehouse Monitor and generate transparency

Data mining... 10p report 14,836,947 products £12,000,000 shrinkage 1.48 billion kr Cashier error?

Guiding Principles Promote inter and intra company collaboration Who needed to be involved? –Manufacturer Design team Production Supply Chain Marketing Sales –Retailer Buyer/Merchandising Loss Prevention Supply Chain Store Operations –Environmental agency

BeforeAfter End to End Solutions

Guiding Principles Adopt a systemic and systematic approach –The ECR Europe Road Map

ECR Shrinkage Road Map CORPORATE POLICY Map & Measure Develop Solutions Implement Evaluate Plan Analyse Wake Up Call!

Crisis-Driven Shrinkage Management CORPORATE POLICY Map & Measure Develop Solutions Implement Evaluate Plan Analyse Wake Up Call!

Example Tool: 5 Whys There is no product on the shelf Problem 2. Why? Replenishment team cannot find it 3. Why? All packs seem to look the same 1. Why? Because it is in the back room 4. Why? No differentiation except by barcode 5. Why? Pack designed to suit DC operation

ECR Road Map Principles Collaborate and engage all stakeholders Focus effort on the processes: Products/Information/Money Identify greatest oppportunities then target root causes Remove the opportunity for loss or error Encourage evaluation & learning

ECR Road Map Benefits Ensures the right resources and people engaged Better and more sustainable results Less daunting More cost efficient Higher probability of success Quicker to implement Lessons can be reapplied to other problems

Guiding Principles Unlock the value of the 'hot' concept –Products –Places –People –Processes People Places ProductsProcesses

Hot Products Example

Benefits of the ‘Hot’ Concept Avoids spreading valuable resources too thinly Focus on the vital few amongst the trivial many Rapid impact Greatest return Possible diffusion of benefits

Guiding Principles Focus on process failures first –Removes opportunity Receipt process Returns –Masks malicious activity –Delivers Quick wins Cost effective wins Sustainable solutions

Process Compliance & Shrinkage Source: Ahold Hypermarkets: Czech: 2004

Guiding Principles Encourage innovation and experimentation –Keep ahead of the game –Initiate……. Pilot Studies on new ideas Road Map projects with suppliers Benchmarking against industry surveys –Experiment….. New solutions New store layouts –ECR survey showed that retailers who innovated and experimented most had 20% lower shrinkage

Guiding Principles Document learning and disseminate success

Measure Collaborate Focus on Hot Concept Innovate Experiment Adopt Systemic a Systematic Approach Motivate Staff Start with Non Malicious Shrink Disseminate Document Learning Use the Road ECR Road Map Adherence to Procedures Engage Senior Management Guiding Principles

The ECR Road Map in Action: Tesco and P&G Case Study

The Problem Products Locked UpShelf “out of stocks” Failing to serve the customer and failing to support their businesses

Tesco UK Shrinkage Unknown losses at RetailAs % of Sales Health and Beauty3.0% Wines and Spirits1.0% Clothing3.0% Home Entertainment3.5% Total Company1.01%

Tesco - Call to Action “Got the call” from the very top “Licence” to work across functions to reduce shrinkage Permission granted to take drastic action if needed

Plan Hot Products Hot Stores Look for Internal Process Failures

Hot Products... Health & Beauty

Hot Stores...

Tesco UK Shrinkage Unknown losses at RetailAs % of Sales Health and Beauty 3.0% Wines and Spirits 1.0% Clothing 3.0% Home Entertainment 3.5% Total Company1.01%

P&G Hot Products Unknown losses at RetailAs % of Sales MACH39% OralB Braun15% Duracell20%

Map & Measure Picking Shelf

Analyse What could go wrong? Scored each risk – Severity – Occurrence – Detection Assessed root causes for key risks

Solutions Developed Secure Supply Chain for top 500 hot products

Solutions Developed Secure storage in top 200 stores This has become “design” standard and is rolled out in all stores

Solutions Developed Modified Packaging to enable product protection in all stores

Solutions Developed Introduced regular counting of hot products to measure results

P&G Hot Products Unknown losses at Retail MACH39%3% OralB Braun15%9% Duracell20%2.5% Sales Growth 2003 Vs % +13% +47%

Tesco UK Shrinkage Unknown losses at Retail Health and Beauty3.0% Wines and Spirits1.0% Clothing3.0% Home Entertainment3.5% Total Company1.01%

Tesco UK Shrinkage Unknown losses at Retail Health and Beauty3.0%1.75% Wines and Spirits1.0%0.95% Clothing3.0%1.75% Home Entertainment3.5%1.5% Total Company1.01%0.69%

Hall of Fame OrganisationsLocationResults TescoUK€143 million annual savings Tesco & P&GHungary- 74% losses + 288% sales B&Q & PlasplugsUK- 50% losses + 33% sales Feira Nova & DanonePortugal- 45% total shrink Ahold & sausage suppliers Poland- 42% losses Sainsbury’s spirits category UK- 40% losses + 10% sales Sonae & Colgate Palmolive Portugal- 29% losses Sainsbury’s & MenziesUK- 25% losses + 10% sales Wickes & GETUK- 7% losses

Organisations whose corporate shrinkage policy have been significantly influenced by ECR Europe OrganisationSectorLocation AdidasSports goodsNorthern Europe AholdGroceryInternational Boots the ChemistPharmacyUK DMPharmacyGermany MetroGroceryBelgium & Netherlands P&GConsumer goodsInternational TescoGroceryUK & International Corporate Policy

Concluding Thoughts Shrinkage offers an enormous opportunity Need to measure the problem accurately Need to adopt a systematic and systemic approach Collaboration is key Solutions need to be ‘fit for purpose’ Shrinkage is the last free money on the table

Thank you for listening!