Shrinking shrinkage

Barry Kelly, driector of retail, KPMG
Barry Kelly, driector of retail, KPMG

Retailers who may have already sought to cut costs, should think about looking to preserve margins by addressing the causes of stock loss in their business. Barry Kelly reports



13 May 2010

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KPMG research on stock shrinkage has found that retail companies estimate shrinkage to be anything up to 3% of revenue.  Furthermore it was found that most retailers believe that the majority of shrinkage in their business is due to theft.

Many of the companies surveyed believe that shrinkage is an inevitable part of doing business and that investment to reduce shrinkage offers limited return. However, the perceived causes of shrinkage may not be the actual underlying cause of shrinkage, as errors in the design and implementation of stock control processes, which can be actively managed, may be just as important as direct theft.

Industry wide there is ambiguity on how shrinkage is defined – what should and should not be included as shrinkage – and what the causes of stock loss are.

Lack of accountabllity

In many cases there is a lack of ownership of the issue and a lack of accountability for stock shrinkage within companies.  The KPMG stock shrinkage survey found that although most companies monitor loss, there seems to be little consensus in the market on a reporting structure for this. Companies describe a wide range of reporting lines for shrinkage, with 45% of companies reporting to the CFO, the supply chain director or the commercial director. In the rest of cases shrinkage was reported to 18 different officers such as the CEO, head of audit, and sales manager. This spread of reporting lines indicates a lack of accountability over stock shrinkage within retail companies and that loss control is an underrepresented driver of value.

Taking stock of your shrinkage

In order to address shrinkage systematically a cross functional approach (incorporating for example input from finance, procurement, stock management, store staff and store management) should be taken to identify and deal with the issues within the company.  In a recent example, KPMG worked closely with a UK retailer (approximately 100 stores and 5,000 employees) with stock shrinkage of approximately 2.5% of turnover using such an approach to diagnose the causes of stock loss.  The project involved data gathering from a sample of stores and interviews with staff across multiple functions and logistics partners.

Analysis showed that causes of stock losses were almost equally shared between “real losses”, which comprised damage or theft, and process failure.  In this example, theft only accounted for approximately a quarter of the total losses incurred, while warehouse handling damage accounted for a further quarter.  However it was impact of losses that arose due to process failure which surprised the retailer the most. These were ascribed to both poor process design and poor adherence to existing controls.  

Most of the solutions put forward to mitigate the causes of stock losses identified in this example involved the amendment/implementation of simple controls.  For example more effective wrapping of pallets both reduced stock damage and removed an opportunity for theft by staff and logistics workers.  Also stock count errors were ascribed to insufficient resources for the counting process and to timing of counts – stock counts conducted at the end of the working day tended to be significantly less accurate.

Shrinkage can also be diagnosed and remedied using direct comparison between stores.  For example if one store is performing 30% better than other stores, and all other factors being equal, then there is a clear case for sharing best practice between stores to reduce stock loss across the entire chain.

Reluctant to share problems

The KPMG survey also found that companies are reluctant to collaborate closely with suppliers to reduce shrinkage.  Although a large amount of companies say they collaborate with suppliers to reduce shrinkage, few were found to share detailed data on the total amounts and likely causes of shrinkage with suppliers, as suppliers may also supply direct competitors and companies do not wish to share their problems and solutions with each other.

In the current market environment, commitment and understanding from company management to uncover the real causes of stock losses and to fine tune processes around stock control can result in significant and lasting reductions to stock shrinkage for retailers.

In the environment of reduced, often extremely low margins, even a half percent improvement in stock shrinkage could have a real impact on the bottom line and that all important cash flow.      

Barry Kelly is a director in KPMG Transaction Services whose focus includes advising clients in the Retail sector.  Barry can be contacted on 01-4101523 or via email at             



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