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

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

3. Defining Shrinkage

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

5. 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 Invoice Errors  Quality and Weight of Items  Inventory Errors  Promotion Errors  Pricing Errors  Stock Going Out of Date  Damage to Stock  Product Delivery/Scanning Errors  Theft of Stock and Cash  ‘Grazing’  Collusion  Shoplifting  Till Snatches  Returning Stolen Goods 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’

6. 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

7. Scale of the Problem

8. International Comparisons YearSourceSize 2002National S’market Res. Group (US)2.32 2004ECR Europe1.84 2003Retail Council of Canada1.75 2006Food Marketing Institute (US)1.69 2006NRSS (US)1.59 2002ECR Australia1.52 2003Otago University (New Zealand)1.50 2006European Theft Barometer1.24 2003Eurohandelinstituts (Germany)1.23

9. 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

10. Causes of Retail Stock Loss Study ExternalInternalProcessVendor Otago Univ (New Zealand)6812203 European Theft Barometer4931146 ECR Europe3828277 Retail Council of Canada3540187 Food Marketing Institute (US)3538188 ECR Australia35252911 NRSS (US)3347155 National S’market (US)2057??

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

12. 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%

13. Shareholder Value Net IncomeShareholder Value €1 Incremental Sales € 0.15 € 3.00 €1 Inventory Reduction € 0.20 € 4.00 €1 Shrinkage Reduction € 0.70€ 14.00 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.

14. Principles of Effective Shrinkage Management

15. 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

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

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

18. 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

19. BeforeAfter End to End Solutions

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

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

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

23. 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

24. 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

25. 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

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

27. Hot Products Example

28. 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

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

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

31. 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

32. Guiding Principles Document learning and disseminate success

33. 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

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

35. The Problem - 2003 Products Locked UpShelf “out of stocks” Failing to serve the customer and failing to support their businesses

36. Tesco UK Shrinkage - 2003 Unknown losses at RetailAs % of Sales Health and Beauty3.0% Wines and Spirits1.0% Clothing3.0% Home Entertainment3.5% Total Company1.01%

37. 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

38. Plan Hot Products Hot Stores Look for Internal Process Failures

39. Hot Products... Health & Beauty

40. Hot Stores...

41. Tesco UK Shrinkage - 2003 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%

42. P&G Hot Products - 2003 Unknown losses at RetailAs % of Sales MACH39% OralB Braun15% Duracell20%

43. Map & Measure Picking Shelf

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

45. Solutions Developed Secure Supply Chain for top 500 hot products

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

47. Solutions Developed Modified Packaging to enable product protection in all stores

48. Solutions Developed Introduced regular counting of hot products to measure results

49. P&G Hot Products Unknown losses at Retail 20032005 MACH39%3% OralB Braun15%9% Duracell20%2.5% Sales Growth 2003 Vs 2005 +27% +13% +47%

50. Tesco UK Shrinkage Unknown losses at Retail20032005 Health and Beauty3.0% Wines and Spirits1.0% Clothing3.0% Home Entertainment3.5% Total Company1.01%

51. Tesco UK Shrinkage Unknown losses at Retail 20032005 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%

52. 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

53. 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

54. 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

55. Thank you for listening!