Putting Your Best Loss Prevention Tool to Work
Most companies ignore statistical analysis capable of guiding LP strategies simply because they don’t know how to use it.
For all the differences between retailers across the huge industry spectrum, there is one universal truth: they all analyze existing sales in an effort to improve product offerings. Companies spend huge amounts of time and effort sifting through sales data looking for clues as they decide how to invest merchandise dollars for the greatest returns. There are many techniques, but they all want to make those critical decisions based on evidence.
The same does not apply to LP investments. Few companies do the same kind of analysis when figuring out how to get the biggest bang for their LP buck, even though they already have all the raw data collected. It’s there in the physical inventory results compiled over the last few years. The annual exercise gathers an enormous amount of information, but for most companies, it gets reduced to a single figure: “In the year since the last inventory, shrink has been X% of total sales. The year before it was Y%.” Maybe it gets divided into a few broad categories, but LP does not get anything close to the analysis that sales does.
Sure, managers of the locations have some idea of where they think they have observed the most loss, but there is probably little hard data to back up those beliefs. So when it’s time to decide how to approach the CFO and make the case for improving LP efforts, the evidence is usually a little thin. CFOs don’t like making decisions based on anecdotes and hunches, they want numbers.
Digging into the huge database of SKUs divided into departments and aisles can help pinpoint where losses are happening. Comparing multiple years provides the evidence and financial data needed to quantify your general knowledge and observations. But the question is, who is going to do the analysis? Very few companies have people with the time to dig around in all those lines hoping to find some insights. Random hunting can be enormously time consuming, and without a clear plan, will probably get nowhere.
Most companies find it necessary to engage outside help to open the chest of information and find the value inside. The right analyst can make sense of the numbers and help design an LP strategy based on evidence. Here are your areas of greatest shrink—what do we need to do to tighten them up? Here are areas where you have been successful—what are you doing there that can be expanded to other areas? Now when it’s time to face the CFO, the situation will be much different: “Given the losses measured in these specific areas, we recommend implementing this LP strategy across these locations. Based on successes in other areas, this LP investment should reduce shrink on these products by X%.” The CFO may even smile a little.
One USS client at a large retail chain characterized this kind of analysis as a “laser-guided approach to LP decision making.” The company knew it was suffering serious losses within its cosmetic departments, but lacked enough detail to determine the best defensive strategy. The analysis helped it zero in on the most problematic products, allowing it to tailor a solution for those items and areas. For today’s retailers, statistical analysis is playing a crucial role in helping companies identify their highest loss areas and put into action a strategy to defend them at the lowest cost. This has helped set a new industry standard for return on LP investment.