How Retailers can Uncover Operational Shrink Impacting Profit Margins.

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Posted by Eric Miller - 29 August, 2019


Operational shrink, including losses caused by systemic issues and poor promotion execution, is more common and costly than fraud. However, many loss prevention solutions are unable to identify these hidden issues, and as a result, retailers do not realize the full extent of losses taking place that are not fraud-related and that are significantly impacting their bottom lines. To identify the causes of operational shrink quickly and before they cause substantial losses, retailers require solutions that enable them to efficiently investigate every irregularity, provide both data and corresponding video, and deliver actionable insights to key decision-makers.

Operational Shrink: Hidden and Costly

Point-of-sale (POS) losses cost retailers 40 billion dollars annually and substantially impact bottom lines. While some of this shrink can be attributed to employee theft and fraud, the majority of it is actually caused by common and costly operational issues. Operational shrink is much more significant than retailers realize and often goes unnoticed. While fraud is typically isolated to a single employee, operational shrink, including losses caused by systemic issues (UPC incorrectly entered, manufacturing issues, etc.) and poor promotion execution (unclear promotions, promotions not dropped to the POS, etc.) often span the entire chain and are exponentially more costly. As staggering as 40 billion dollars is, it is actually an underestimate of the true loss that occurs. The problem is that many retail loss prevention tools are not designed to find certain patterns of operational shrink, instead their focus is purely on fraud and individual cases or people. Thus, these types of activities are unknown to retailers and unaccounted for in the statistics.

Because of the inefficiency and limited impact of current loss prevention solutions, retailers and loss prevention (LP) professionals are only seeing the “tip of the iceberg.” The reality is that there is a substantial amount of operational shrink that retailers are unaware exists and that are directly impacting their profitability. Retailers need to see and be aware of everything, including small operational errors, because these mistakes quickly add up, and new data shows that these losses are much more significant than previously thought.

Systemic Issues

Operational shrink is much more common and costly than instances of fraud and theft. In fact, for every one fraud case, there are twenty-one operational incidents occurring at the point-of-sale and in the supply chain. Whereas fraud is isolated to a single person or a small group of people, operational shrink can often be systemic. If one cashier is making a particular mistake, then it is very likely that many cashiers are making the same mistake chain-wide.

Poor Promotion Execution

Retailers are increasingly running promotions and loyalty discounts for their customers. These promotions can range from basic buy-one-get-one (BOGO) free offers to more complex deals aimed at helping to launch new products. While these promotions are aimed at building loyal customers and improving sales, they are also common causes of significant losses. Sales circulars and loyalty discounts are changing all of the time and some promotions, such as Buy One A, Get One B for free, can be read incorrectly, causing confusion amongst employees and customers alike. The order that discounts or promotions are calculated within the POS system can impact a company’s margins.  Promotions and incentives must be executed correctly from the very beginning, but unfortunately many are often mishandled or poorly executed. Retailers are often unaware of these issues, or realize them too late, and as a result suffer huge losses.

Technology Considerations

Several sources of operational shrink go unnoticed because most tools today do not allow analysts to view many transactions. Many solutions focus on trends and look for outliers, providing “top 10” or “top 100” results. This is because the solutions are not efficient enough to enable LP professionals to view every irregularity, leading them to simply look for abnormal exceptions occurring at the macro level. For instance, retailers consider a certain number of voids as expected and acceptable. As a result, they utilize reporting tools that only look for cashiers that process an inordinate number of voids, which helps detect employee theft. This is limiting, however, because every irregularity within a transaction is potentially a symptom of an operational issue that is causing significant shrink, proving that no void should be considered normal.

A normal transaction can only be defined as a scan and anything beyond this, such as an open ring, a void, or a price check, is an irregularity. Unless retailers have the technology to view all voids, they will miss operational issues that are causing considerable losses. Therefore, they need software that enables them to review a large volume of suspect transactions. To do this, these solutions must be able to synchronize every scan and button push to corresponding video. The efficiency of immediately accessing data and associated video allows analysts to view several more transactions a day, thereby enabling them to identify patterns of hidden, costly operational losses.

Many retailers are still employing loss prevention tools that provide only data, giving them just a one-dimensional view of activities occurring at the POS. Video, however, enables retailers to dig deeper into data that reveals a potential shrink activity, giving them more visibility and insight into patterns of operational shrink that they are unaware of. Once exceptions and patterns have been identified in data, corresponding information found in receipts and video can be used to confirm suspicions.

Immediacy of Data-Driven Insights

Transactional data, payment information, video streams, inventory and other sources offer mass amounts of data just waiting to be collected in a single place and analyzed. Using outdated technology that delays your access to actionable insights, or keeps data isolated in silos, will limit your ability to succeed. Data itself is meaningless – it requires a robust tool that can decipher unique insights that apply to your organization, not just provide industry averages or educated guesses. While no software can guarantee reduced shrink or cost savings, those that quickly identify exceptions provide insights and reveal patterns will contribute significantly to reduced shrink and cost savings. Today’s data analytics and reporting software provides your LP team with more insights than could be identified 5, 10, or 20 years ago.

Addressing loss requires understanding what drives it. Taking an advance approach to capturing, analyzing, and reporting helps LP professionals get to the root of revenue loss and take specific actions to correct it. Instead of sorting through millions of lines of POS records for unusual voids, refunds, or discounts, today’s solutions can automatically scan your data for these and other “red flags” such as cash drawer skims, loyalty/rewards abuse, multiple low value sales, and more. By automating the distribution of vital reports, prescriptive alerts, and customized dashboards, LP professionals can focus on staying proactive and efficient.

Invest Wisely

Mistakes will always happen, and they will occur frequently. The problem is that many operational incidents are often overlooked by retailers, an omission costing them billions of dollars a year. In order to drill down further into point-of-sale data and discover the buried inefficiencies, retailers need to invest in technology that efficiently synchronizes data with video and delivers this information in real-time. These solutions will reveal issues that retailers would otherwise never discover nor would ever even know exist. Tools that identify not only theft and fraud, but also hidden operational shrink enable retailers to successfully address all losses that directly affect their profitability.

Faced with the daunting task to do more with fewer resources, it’s never been more important that loss prevention professionals work smarter, not harder to combat enterprise loss like operational shrink.  Learn more about Loss Prevention best practices in our new whitepaper, “5 of the Biggest Mistakes you can make as a Loss Prevention Leader.”

5 Mistakes LP

Topics: Blog

Posted by Eric Miller

Eric Miller is the Sales Engineer at Agilence. He is also a Certified Fraud Examiner and Certified Forensic Interviewer with over 12 years experience as an analyst in the Loss Prevention industry. When he is not using analytics to find theft or fraud, he enjoys traveling, sipping bourbon and making ice cream for friends and family.


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