Convenience Store Industry
Shrink: The Fast Track to the Bottom Line
By B2
Mar 10, 2003, 1:40pm

Shrink: The Fast Track to the Bottom Line

Shrink comes in many sizes, shapes and colors. Economic and geographic boundaries are non-existent. It is evident in virtually all industries and all sectors within those industries. No one person is unaffected by shrink as it affects the price of every good and service bought or sold around the globe.

Now that we have stated the enormous size and depth of shrink let's try to understand the sources of shrink relative to the convenience store industry.

The most popular mantra has always been "employee theft". Huge sums of money are spent every year to watch, track, and monitor every move that an employee makes while they are at work. For lack of better term, loss prevention interrogations occur at the drop of a carton in a cigarette count. Software designed to investigate employee theft, consultants, and more thrive on and deal out this mantra with a passionate tone. But shrink is much more complex than blaming it on employee theft. In fact, more often than not shrink is relative to errors that occur within the distribution, transportation, inventory control, employee training and marketing channels.

Let's follow a product through a normal system looking at potential areas that shrink may arise. (Assuming everything is correct from the manufacturer to the distributor.

a) Distributor
A distributor receives an order for delivery to a specific location. Methods of order placement include automated (based on software systems in place at both ends), faxed, phoned in, handheld transmitted via phone line, in person with a distributor representative or via a manufacturers representative (normally for promotions). All of these options have manual errors that can and do occur either from the store side, rep side or the distributor side even when using the highest levels of automation.

The distributor pulls the order (by hand), boxes it and prepares it for shipment. Something as simple as a bad printer ribbon that was used to print an order for pulling can and does create errors. Automated methods such as hand held tablets (wireless communications systems) can also have glitches occur due to setup, improper use and lack of maintenance.

Once the order is prepared it is staged for shipment. Here again errors can and do occur due to mishandling a shipment (sending product to the wrong destination, borrowing product for another order, etc...).

Now the order is ready and billing is created. A multitude of errors can and do occur at this point. Has the proper pricing for the account been setup? Did the account have special promotional incentives such as free product or special markdowns from the manufacturer? Was the quantity shipped entered correctly? Were back orders notated correctly? And more...

b) Transportation
Errors can and do occur within the transportation channel in ways such as product meant for your store ending up at another store, product damaged during the shipping process, loss of product off the back of an unwatched truck, and much more.

c) Receiving
Now comes what I believe to be one of the most crucial parts of inventory control, receiving. With some facilities using category accounting and some SKU level accounting I will have to break this out in two parts. The bottom line is that your inventory accuracy is directly relative to how it was received.

Receiving by category is a common method used by many facilities large and small. It requires a group total for each category in the accounting system for both cost of goods as well as retail pricing. Receiving product here can be skewed by improperly assigning the wrong retail price to a product, miscounting, and not paying attention to product size on hand vs. the shipping receipt, among others.

Receiving by UPC or SKU is easier in most cases as product is normally scanned in for accuracy, but normal areas of errors are not processing an unknown UPC properly, not sticking to a predefined system of receiving based on individual units or multi-pack, and more.

A couple of common factors that can affect shrink are using an isolated check in area instead of in aisles of the facility to reduce confusion and eliminate a customer from pulling a product prior to receiving, having a person dedicated to checking in a vendor start to finish without interruptions,

d) Marketing
We all know how crazy even a well oiled marketing machine can run. The key to success here is communications and planning. Marketing has to have a clearly defined path (or process) designed to do the following:

1. Store level communication that includes start dates, end dates, product SKU, description, size, packaging type, adjustments to current inventory, buy back provisions, signage requirements, plan-o-gram placements, vendor contact data, vendor merchandising schedules, and more.

2. Vendor level communication that includes start date, end date, SKU, vendor product number, description, size and packaging type, signage placement allotments, plan-o-gram placement, merchandising schedule, stores effected data, contact information, retail price, wholesale price, buy back provisions, buy downs, coupon requirements, and more.

3. Corporate level communications that include all vendor and store level communications as well as expected revenue flow company wide, expected profit flow and more.

With a high level of communications as well as follow up before, during and after a sale event to ensure accuracy you can reduce shrink significantly.

e) Adjustments
Adjustment accuracy is critical in the convenience store industry. Whether it is during receiving and daily books processing or at the register as the sale is underway, making accurate adjustments to inventory in units and dollars will greatly reduce shrink. For example, in a general category system (non-SKU) a 12 pack of soda is received as 12 cans of soda and an adjustment is made after the sale to bring the retail value down from 12 x 1 can to a 12 pack sale price. You have to know the retail that the 12 cans were brought in as to adjust it down to the retail it is sold for accurately. With a SKU system the retail discount happens at the register during the sale transaction. This is done by associating the 12 pack UPC with 12 can UPC's. And by reducing your total can inventory by 12 with each 12 pack UPC scanned. The price for the 12 pack is associated with the 12 pack UPC and an adjustment is generated either automatically or by hand based upon the total days sales of 12 packs.

f) Sales Processing
Accurate scanning and tagging accuracy (for products without UPC's) is everything here. Keeping a balance between good customer service and ringing accuracy is a real balancing act to say the least. The weight of accuracy here really lies upon how the product is received. Basics as well such as accuracy when manually entering a UPC or SKU is also critical.

h) Billing
Last but not least is billing. And there are many ways which billing can be less than perfect from virtually any vendor. While most all companies strive for perfection in billing even the very best can and do make mistakes. The order, shipping bill and payment billing all need to match and accurately reflect the order as it was received. Mistakes here can have a dramatic effect on the bottom line as normally the mistake covers a larger amount of product.

The better you are at handling shrink issues with prevention the more inventory turns you can try to achieve. What does this mean to you? Simple, more profit! If you turn your inventory over during a billing cycle the product pays for itself. If you turn it twice then you compound the profitability due to the spread or float caused by the multiple inventory turns during a single billing cycle. Of course if you are not so good with shrink control you cannot try for the higher turns in inventory because it also compounds the shrink number in the same manner that it does profit.

Controlling shrink from the onset is key. Take the time to follow each of your chains processes and look for areas that potential errors can and will occur within the distribution, transportation, inventory control, employee training and marketing channels.

One thing to remember about all this, balance is important. Every dollar you spend to reduce shrink must have a long term benefit. If not it is a dollar spent to save a dollar and that is not an acceptable tradeoff. Your employees are your greatest asset towards accuracy in inventory control. Have them actively participate in roundtable meetings to develop plans of action for the reduction of shrink. The best supervisors in the world do not point the finger at shrink, they shake the hand of success.
 

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