Top Down Shortage Management

In today's hyper competitive, multi-channel retail industry, companies are being challenged more than ever to keep their inventory losses at an acceptable level. Successful shortage management requires accurate statistical analysis, strategic planning and long term commitment at an executive level. To drive down shortage, senior decision makers must be able to accurately understand the life cycle of shortage in their company, the factors that influence that cycle and the historical effectiveness of their loss prevention initiatives and personnel. 

Knowledge, Talent and Commitment Drive Shortage Reduction 

Isaac Newton's third law of motion states that for every action there is an equal and opposite reaction. Though this is a law governing physics, its concept has relevance in business management as well. Decisions in business are made to achieve specific desired outcomes. However, sometimes rather than yielding the targeted objectives, those decisions, when based on incomplete analysis, produce unintended and even detrimental results. This principal exists within the scope of inventory management where strategic decisions sometimes inadvertently weaken the effectiveness of a company's ability to control its losses. 

Long term inventory shortage trends within a company are often cyclical. It is not uncommon for shortage to run in patterns extended over multiple years. These cycles typically encompass a steady upward climb followed by a sizeable downturn and period of stability before eventually beginning to rise again. While many industry professionals are familiar with this pattern, the reasons behind it are often overlooked or misunderstood.  

Recognition of what can trigger these upward surges is key to maintaining acceptable inventory losses while avoiding the expense and frustration of repeatedly reversing high shortage trends. Cyclical shortage is not necessarily caused by fluctuations in criminal activity predicated by deteriorating economic conditions, social pressures or any other external factor. Nor is inventory shortage ever random. Specific conditions and circumstances cause inventory shortages. The degree of inventory loss in every company is dictated by which circumstances are most prevalent, those that help the cause or those that hurt it. 

The most concise understanding of shortage requires the acknowledgement that it is nearly always driven by conditions within a business, not from an outside source. This concept, somewhat contrary to conventional wisdom, may require many industry professionals to recalibrate their approach to developing a long term shortage reduction strategy or respond to a burgeoning shortage spike. 

Consider the internal conditions necessary for a commercial jet to safely fly at high altitudes and transport passengers in a comfortable manner. In order for the aircraft to withstand the tremendous air pressure of high altitude, high speed flight, the inside of the cabin must be pressurized. Aside from all the avionics, great detail must be applied to the design of the fuselage. In fact, even the shape of the windows plays a significant role in an aircraft's ability to withstand the external stresses that could literally tear apart the plane in midflight. In the earlier days of commercial jet flight, numerous disasters were ultimately attributed to structural failures caused by weak designs. Engineers simply did not sufficiently understand the complexity of aerodynamics and severe stress on aircraft. Similarly, the root cause of increased inventory shortage often comes from a deficiency within the four walls of a company, not from an external source. Furthermore, the impetus often lies in the collective decision making process at the executive level, not from actions at lower levels.  

This, of course, is not an indictment on the integrity, competence or leadership ability of corporate decision makers. Rather, akin to Newton's law, various decisions made with the intent of improving a company's business processes, performance and profitability can trigger sudden and unanticipated activity. This underscores the necessity of firmly understanding the "mechanics" of inventory shortage and making long term, strategic decisions rooted in an accurate translation of data. 

Misdiagnosis and Faulty Logic 

The biggest challenges in the fight against inventory losses in today's retail industry are the widespread misinterpretation of the true catalysts of shortage and the accurate valuation of a Loss Prevention campaign's effectiveness. There's no shortage of statistical data available either on an industry level or simply within an organization. However, without proper insight, it becomes easy to misinterpret this data and establish programs that could foreseeably yield counter-intuitive results. 

Nearly all discussions addressing inventory loss focus on the same three issues; internal theft, external theft and systemic/human errors. This is largely putting the cart before the horse. Loss from any source can only occur in a sustained fashion if an opportunity exists for that to happen. In other words, sustained shortage increases are indicative of a deficiency somewhere within the operational processes of a business.  Somewhere within the four walls, a metaphoric door has been left open. 

Like the great pressure imposed on an aircraft in flight, the forces that contribute to inventory shortage are ever present as well. There will always be people in the workforce with the propensity for dishonesty. Likewise, there will always be customers who opt to steal rather than buy and there will always be the risk of human error and systemic anomalies. Industry professionals who have truly mastered the ability to break the shortage cycle understand the "big three" (internal, external and systemic) are not the origins of shortage. They are merely conduits created by the manner in which a business is managed through processes, policies and people. 

The original context of "Loss Prevention" was built on a tenet of taking steps within an organization to limit opportunities for losses to occur. It's essentially the adage, "an ounce of prevention is worth a pound of cure," applied to inventory management. Unfortunately, too many organizations have drifted away from this concept and are stuck in a "loss recovery" mode, attempting to recover what has already been stolen.  In the battle to keep losses under control, this operational mode amounts to a battlefield triage unit scrambling to salvage only the easiest recoverable situations. It is a completely defensive stance where "success" is measured by how much loss is recovered rather than how much is prevented.  

Organizations can position themselves on a slippery slope by measuring their success principally via how many people they arrest and how many big cases they resolve. While these "bragging points" imply success, unless they have also achieved their overall shortage reduction goal, these statistics essentially highlight a failed mission. Though they make for interesting stories, they also underscore gaping holes in a company's ability to protect itself. Until the floodgates are closed, there will always be a steady stream of significant losses to chase. 

What Comes First, The Chicken or The Egg? 

Each shortage cycle invariably has a corresponding "management cycle" defined by the efforts taken during that cycle to combat the rise in shortage. To better grasp the correlation between top level management priorities and shortage, it is important to study and compare the structure of loss prevention initiatives present when the shortage began trending upward as well as what was ultimately instituted to regain control.  

At the point where companies recognize they have a mounting shortage problem, their focus tends to move to initiating steps to counter the rise in shortage. This may include employing any combination of tactics ranging from increasing the amount of awareness training, increasing audit frequency, introducing new technologies, increasing cycle counts, enhancing physical security, adding headcount to the LP team, sweeping general loss mass interviews, and the list goes on. Such actions may be important. But, it's also necessary to take a step backward to seek an understanding of what triggered the change in the in first place. Whenever shortage begins to climb after a period of stability, something specific has shifted within the business to create an opportunity that previously did not exist. Identifying the trigger mechanism is paramount to reversing the trend.  

Because internal and external theft are most often viewed as significant sources of shortage rather than symptoms of a larger issue, most companies don't bother assessing their business in search of the true source. They believe they are responding to a changing external factor. In actuality however, the roles are reversed. The shortage factors are responding to a change in the business. In such cases, companies are essentially causing their own shortage cycles by making changes that internally destabilize their shortage management efforts. These triggers can range from reducing certain preventative measures, relaxing checks and balances, changing an inventory related process, a reduction or change in key personnel or even the introduction of new operating platforms. 

Talent Reigns Supreme 

A long term industry professional who had held directorships with 4 national retail companies was once asked about his overall success in achieving favorable inventory results. He responded, " I'm batting 500. I succeeded in two of those jobs." 

The Loss Prevention program in any organization does not have to be big, bulky nor expensive. It simply needs to be effective. There are organizations whose Loss Prevention initiatives are driven by single digit employees who outperform teams of dozens in other organizations. It would be unfair to imply all businesses can be managed the same way. It would also be inaccurate to suggest inventory shortage can be prevented with exactly the same programs and ease in all companies. Even the most comprehensive strategies are inert objects without quality personnel behind them. An effective prevention program will always hinge on the strength of the people tasked with creating and executing the plan. 

Experience in the form of tenure is not the same as experience in the form of success. Hiring to satisfy an objective is different than hiring to fill a position. When seeking key personnel to spearhead company Loss Prevention initiatives, executive decision makers must look beyond a candidate's corporate climb. To be a viable option, a candidate's body of work must clearly demonstrate the ability to achieve and maintain results significantly better than industry average. The proof is always in the pudding; there's no substitute for clear examples of inheriting a bad situation and making significant, measurable and sustained improvements. 

Companies generally don't publicize their shortage performance in great detail nor do they share the specifics of choosing new leadership. Consequently, there is very little empirical evidence available to quantify the correlation between leadership turnover and  inventory results.  Without doubt such a study would be certain to yield interesting and perhaps very valuable information. 

An informal analysis of randomly profiled Loss Prevention Directors indicated that roughly 75% have been in their role under 3 years. Moreover, in an April 6, 2016 published brief, Downing and Downing, a top industry recruiting and consulting firm, noted that 38 retail companies experienced vacancies in their top Loss Prevention leadership position during Q1 of 2016. Sixteen companies recruited new leaders while 22 companies were attempting to fill vacant directorships at that time. Eleven of the vacancies were announced in March. According to the Downing and Downing brief, at any given time, there is typically no more than 10 open directorships in the industry. 

The timing of these vacancies was very telling. By the latter part of Q1, most companies have completed their physical inventory reconciliation for the previous year and have a fresh set of shortage numbers to digest. With this new report card on their efforts, companies decide to either stay the course or recalibrate their strategies. With such an active season for director turnover last year in particular, it stands to reason many organizations were exploring new paths to improve their shortage reduction performance. Whether prompted by the company or incumbent's voluntary departure, such turnover, combined with lackluster performance results does not bode well for long term inventory shortage stability.   

Even an individual's path to directorship may yield further insight into the potential correlation between leadership turnover and inventory shortage. Of the randomly sampled Directors, those that were internally promoted had much more tenure in position than the external hires. Certainly, climbing the corporate ladder within an organization allows an individual to develop a thorough understanding of the mechanics of that business. Whereas an externally hired director has to acquire that knowledge, the internally promoted director assumes the role having already gained that insight. This is not to say that internal candidates always rate higher than external candidates. Again, the most important factor for any candidate is a demonstrated history of sustainable results.  

Leadership changes often prompt changes in direction, programs and subordinate personnel thus creating its own cycle of departmental performance.  This can be likened to a new coach taking over a football team. Plans are designed in terms of years, not weeks or months, to acquire the correct personnel and develop a scheme for winning. Leadership in business follows that same path. Goals are achieved incrementally over time.  

Stay the Course  

Shortage management is a long term commitment. It is an investment that needs to exist in good times and bad and should be managed with the mindset of "If it's not broke, don't fix it."  

 A national retail chain was opening  a new store in the urban center of a major US city. Based on the data from a crime grid analysis, it was decided that the new store would be budgeted for full time armed protection professionals at each entrance. This extra budget item was not part of the standard new store setup. During the first year of business, other than routine shoplifting incidents which were handled by a separate loss prevention staff, there were no significant security incidents. Conversely, the majority of neighboring stores, including a large department store, were plagued by numerous robberies, gang related thefts and other crimes involving violence. The sole notable distinction was that no other store was outfitted with armed guards. At the end of the first year, as executives were planning budgets, serious consideration was being given to eliminating the funding for the armed protection professionals. This looming decision was based solely on the fact that there had been no "serious security incidents", therefore the added expense of armed guards was interpreted as unnecessary. This example epitomizes the challenge to accurately translate the "cause and effect" nature of the Loss Prevention function. Sometimes the greatest testament to a successful initiative is the absence of incidents. Ultimately, in this case, the armed guards were kept. 

Even under the most ideal conditions, Loss Prevention simply helps an organization maintain what it already owns. It does not generate revenue. When competing for budgetary dollars, it is inherently  disadvantaged  compared to departments such as sales, product design or any other business component whose performance can directly drive sales increases. This sometimes also makes it vulnerable to funding reductions and an easy mark for program and personnel cutbacks during lean sales periods when executives are acutely focused on maintaining profitability by reducing expenditures.  

In the same context, periods of favorable shortage performance may seem like the right time to cut back. Once shortage is brought under control, companies often choose to scale back or eliminate many of the programs put in place in response to the surging shortage. While on one hand this makes sense, on the other, there is a risk of prompting another surge. It's not good enough to get shortage under control without understanding what specifically caused it and which tactics corrected it. Without those answers, it cannot really be managed. Without those answers there's a risk of eliminating the cure.  And, without those answers, any program reduction potentially becomes the trigger mechanism for the next shortage cycle to begin. 

Company decision makers need a firm understanding of the "value" attributed to a successful loss prevention campaign. Sometimes the best measurement of a shortage based campaign is actually the lack of any significant "incidents" or problems; that is the real definition of loss prevention and the telltale validation of a program's effectiveness.  Just as with shortage itself, the lack of a shortage problem is not random. It is a direct result of having a clear, visible and highly effective program in place. Proven talent and leaderhip are both worth keeping and a program that yields results should be maintained intact, even when times are lean and companies are looking to scale back.  In the long term, the aggregate shortage through a complete cycle will far exceed the cost of maintaining an ongoing effective loss prevention program. 

Decision time is approaching. Most companies are now in the midst determining their 2016 shortage performance and within a month or two will have to decide to either stay the course or consider new tactics. For some companies, a change in leadership may be the best course of action. Will the leadership turnover trend noted last year continue or have the new incumbents been successful? By April, the industry will have those answers.

About the Author:

Michael Long is a principal partner at Strategic Risk USA, Inc., with over 30 years experience in loss prevention, criminal investigations, inventory management, compliance auditing, employee training and workplace safety.

For more information or to arrange for a confidential inquiry, please contact: 

 Michael Long  

Principal, Strategic Risk USA, Inc.  

Email: [email protected]