Loss Prevention & Shortage: Cause and Effect?

During the recent economic slowdown, several of my friends have asked me the same basic question, “When retail sales are slow, do companies invest more in loss prevention because they need to protect every dollar of profit?” It might be easy to chuckle at their naiveté about the realities of the retail landscape. However, it is interesting, that my friends, who are not in the retail business, intuitively understand the cause and effect relationship between investing in loss prevention and shortage results.

There continues to be many companies where the senior executives seem content to live with higher than necessary shortage results as a “cost of doing business.” One must wonder why this would be the case. I can only come up with three possible reasons.

  1. We really don’t add value and investing in loss prevention does not have a cause and effect relationship to shortage results. I don’t believe many of us would want to subscribe to this theory.
  2. We do add value but senior retail executives are not a very bright bunch and are unable to see this cause and effect relationship that my friends are able to see clearly. This, too, seems to be an untenable premise (except, perhaps, in a few cases).
  3. We do add value but we have done a poor job, individually and collectively, at demonstrating the return on investment to our senior executive leadership in our organizations and our industry. This, in my opinion, is the likely suspect.

Of course, there are success stories and I can think of several companies over the past few years who have invested in loss prevention by bringing in quality senior loss prevention executives, giving them the mandate for change, funding the necessary resources, and, as a result, seen shortage reductions of 30%, even 40%, over their historical results. In fact, I just got off the phone with a Vice President of Loss Prevention who just received their latest round of inventory results. Over the past 2 years, they have been able to reduce shortage by over $40 million by investing in the loss prevention function. However, I can think of at least as many organizations that seem to be resigned to their fate when it comes to shortage and fail to appreciate the opportunity it represents to their bottom-line. They view shortage as something that is done to them by external forces that are beyond their control and have little faith in their own ability as an organization to mitigate or control this number.

How do we change that mindset?

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Originally published in RILA Report – Asset Protection – August 2008

One Response to Loss Prevention & Shortage: Cause and Effect?
  1. Kevin Lynch
    May 28, 2009 | 11:42 PM

    Great post Walter, and at the heart of what I have questioned for years. I think part of the problem lies in the fact that shrink numbers for companies are not a matter of public record so many retailers really have no idea what good shrink really is. I am amazed at how many retailers I speak with and when I ask them their shrink numbers the answer is almost always the same.

    “We are doing okay. I think we can probably do much better, but I know we are pretty much in line with the industry.” And then they proceed to spit out any number ranging from 2-8% shrink. I walk away shaking my head wondering how so many can be so out of touch with what is going on in the industry.

    I think your three scenarios probably all have some basis in reality as to why people don’t invest more in LP. How do we change that mindset? When I come up with the right answer I am not telling anyone because I will have found the secret to make millions!!!