Preventing theft, damage and errors such as food spoilage has long been an unyielding and poorly understood problem for retailers. But a few companies stand out in their ability to limit losses, and if every retailer were as successful as they are, the sector could save billions of dollars annually—as much as $27 billion in the United States alone.

Despite growing investment in electronic article surveillance and other loss-prevention approaches, inventory loss in the United States has remained stubbornly high over the past 15 years, fluctuating between 1.54 percent and 1.95 percent of sales, according to the University of Florida’s annual National Retail Security Survey, with the average rate in 2006 being 1.59 percent. Longer supply chains, growing product assortments and labor cuts have contributed to making loss prevention ever more challenging.

The lesson of five companies we studied—Target, Limited Brands, Best Buy, Gap and CVS—isn’t that security people should arrest more thieves or spend more on technology, the approaches that have dominated retail loss prevention. While catching criminals may appeal to the former police officers who are so often hired to deal with this problem, success requires a companywide strategy focused on operational excellence. These companies have shown that demonstrating strong leadership, embedding effective procedures and ensuring compliance can drastically limit situations where shrinkage can occur.

The companies in our study were recommended by a panel of specialists on the basis of their innovative approaches and their success in keeping shrinkage low. The average shrinkage rate of the five was 44 percent below the US mean, and one company’s rate was 70 percent below. We determined that these companies tend to rely on nine practices in developing an effective approach to loss prevention.

Three strategic practices must first be in place:

§          Establish senior management commitment to making shrinkage a priority, overseeing an action plan, allocating resources and monitoring results. (Figures on inventory loss are a closely guarded secret at most companies, but one of the five in our study gives shrinkage data to outside financial analysts so that they can better assess the company’s performance.)

§          Ensure organizational commitment from managers throughout the company; otherwise, any attempted solution will be short-lived. The loss prevention department’s role is primarily to lead a cross-functional effort to manage the problem continuously.

§          Embed loss prevention at all levels. Employees throughout the company must take responsibility for reducing shrinkage. The company should see loss prevention as equal to sales in importance.

Next the company must focus on five cultural practices:

§          Provide strong leadership and develop a team. Heads of loss prevention must command authority and be passionate and energetic, and they must create and lead multifunctional loss prevention teams.

§          Use evidence-based management. Decisions must derive from detailed and timely data, not intuition. (Most of the five companies’ store managers received item-level shrinkage data every week.)

§          Innovate and experiment. Team members must listen and have open minds so that they can stay ahead of such new challenges as self-checkout scanning equipment.

§          Talk shrinkage. Companies can help keep shrinkage on the agenda by, for example, providing regular shrinkage scorecards.

§          Prioritize procedural control. All parts of the company must see the link between shrinkage and poor adherence to process. Checking the accuracy of stock deliveries should be viewed as on a par with catching thieves.

Traditionally, a store’s operational staff has been the starting point for controlling shrinkage, but for these retailers it was the final piece of the puzzle. Thus the ninth, operational excellence practice: Empower store workers and hold them accountable. Store managers and front-line workers should be asked for their views as the shrinkage-prevention plan is being developed and then given the necessary tools, training and data to implement the plan. (One of the companies we studied goes a step further, giving store associates a share of any savings in shrinkage beyond the store’s agreed-upon target.)

Inventory loss has always been regarded as an unavoidable consequence of doing business, but these five companies have shown that by adopting a proactive and integrative approach, a firm can successfully reduce shrinkage’s drain on profitability, thereby increasing shopper and shareholder value.

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Preventing theft, damage and errors such as food spoilage has long been an unyielding and poorly understood problem for retailers. But a few companies stand out in their ability to limit losses, and if every retailer were as successful as they are, the sector could save billions of dollars annually—as much as $27 billion in the United States alone.

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