Making Retail Shrinkage Visible and Actionable

Shrink or shrinkage (i.e. the unrecorded loss of goods for sale) is a perennial problem in the retail industry, with huge impact.

The 2018 National Retail Security Survey estimated retailers suffer an average loss of 1.33% of the value of their total sales – see https://nrf.com/resources/retail-library/national-retail-security-survey-2018 for more details. Even worse than that, for one in five retailers this loss increases to more than 2%. With tight margins and growing competition this is clearly an issue - and a major opportunity to improve the bottom line.

Common causes of shrink include fraud, theft by employees or third parties, short deliveries, simple process errors and unrecorded breakages, waste and transfers. With such a variety of issues, there’s clearly not one silver bullet solution here.

Due to the size of the prize many retailers are focusing on reducing shrinkage. Loss prevention teams are deploying increasingly sophisticated security solutions. For example, some are combining video and advanced analytics technologies to combat theft. Supply chain and stock management improvements, such as RFID tracking, can also be used to drive a positive impact but more can be done.

In the war against shrink, store managers and associates are on the front line. Although some store managers are measured on shrinkage in their store, more often than not they don't have the information needed to really understand the current issues and take action.

The challenge here is “How to make shrinkage visible and actionable for our store?”

Having worked with clients in this area, it’s clear that one of the first questions to ask is how should each retailer measure shrink? By definition it consists of unrecorded items. In one recent client innovation project, the IBM team took the decision to use the best proxy. In this case we focused on stock adjustments - anomalies identified by shelf checks and stock counts.

For example, the system says we should have 20 items of this SKU in the store but we only have 5, so a manual adjustment is needed to the stock system. The other 15 items have been lost, so effectively they're shrinkage. They may have been stolen, broken but not recorded as breakages or even never delivered to the store in the first place. Once you understand where the problems are, and the size of them, they’re much easier to action.

This information is critical but is it enough? To find out, the IBM team worked directly with store managers to understand what they really needed. I'm a huge fan of Design Thinking and the empathy the team developed for the store managers was crucial. The team discovered a number of things which would make a huge difference to the store managers, along with their priorities. These included being able to quickly view the right information and receiving actionable recommendations to reduce shrink in their specific store.

The team created the IBM Shrinkage Visibility Dashboard. The solution combines multiple data sources. A series of easy to understand views are visualised through an interface which is viewable on virtually any device. The store managers loved it.

The solution enables a store manager to quickly and easily understand what's happening in their own store, regarding shrinkage and related issues. A series of actionable recommendations are generated using store specific data and context, past history and best practice processes. In future, machine learning and AI techniques will make the solution even better.

The Shrinkage Visibility Dashboard is very much a template-based solution. The detailed design will be tailored for each retailer, depending on the systems used, data available and shrinkage challenges etc. I think this is a great approach.

Going back to the NRF survey there’s huge business value to go for here. If anyone’s interested in finding out more, just let me know.