Working with the Buyers and Merchants – A Critical Imperative for the Loss Prevention team?

How can loss prevention teams work with buyers?

Much is written on the benefits and value of collaboration. Consider Helen Keller, an author, playwright, and lecturer, who said, “Alone we can do so little; together we can do so much.”

This principle was the foundation on which the ECR Retail Loss Group was built, and since 1999, the value of working together to sell more and lose less has been proven time and again across many types of retailer and categories of products, from razor blades to tile cutters.

However, my observation would be that most of these case studies have been reactive project-based responses to a major shrink crisis. What I don’t see evidence of is the presence of long-term, continuous, and sustained working relationships on shrink between retailers and product manufacturers.

My view is that at the root of this problem is the absence of strong collaboration between the loss prevention and buying functions. If the buyer can see value and rewards for them in managing shrink, they will value the capabilities, solutions, and resources that the loss prevention team and product manufacturers can deliver, and in turn, collaboration will strengthen.

To explore the state of collaboration between these two functions, Lisa La Bruno, senior vice president of retail operations of the Retail Industry Leaders Association (RILA), commissioned Nicole DeHoratius and Dragana Pajovic, a faculty member and a student, respectively, of the University of Chicago’s Booth School of Business, to undertake a major research project, generously supported by research grants from Checkpoint Systems and Ernst & Young.

The study, published in September 2015, conducted face-to-face or telephone interviews with thirty-one retailers with retail sales in excess of $1 trillion, representing 23 per cent of total US retail sales. In addition, 336 retail buyers were sent an online survey.

In this article, I will share the key findings from this research and put forward some ideas on the next steps that you, as a loss prevention leader, could take to improve collaboration with your buying team.

But let’s first start with the three major findings from this study:

There was a clear absence of a deep understanding of shrink among buyers. In part, this could be explained by a lack of buyer training and education; only 22 per cent of buyers claimed to have received training on shrink in the last twelve months, but it could also be explained by a perceived lack of relevance of shrink to their work plans. When buyers were asked how much their organisation takes into account various measures, for example, gross margin, sales, inventory, and so forth, when determining their bonus, only 18 per cent claimed that category shrink was a measure that was very much or much part of their incentive plans. Clearly, other than for general awareness, there appears to be little incentive for busy buyers to invest time and effort in attending training on shrink when it is not one of their core measures.

There was a potential conflict between the goals of loss prevention and those of the buyers that constrained collaboration. Traditionally, shrinkage has been perceived as primarily a theft problem, where the responses can often lead to the adoption of theft prevention techniques. These can include restricting shopper access to products, limiting the quantity of products on the shelf leading to empty shelves, and adding layers of security measures such as security stickers, alarms, and exit checks that can inconvenience the shopper, dampen sales, and reduce shopper satisfaction. No surprise then that only 32 per cent of buyers saw the loss prevention team as a partner in their efforts to drive sales. Put another way, the majority (68 per cent) of buyers perceived the loss prevention team to be an obstacle to achieving their targets. Some buyers even went further and gave the loss prevention team a new name, the sales prevention team!

There was a large gap identified between what the buying function expected a good internal partnership to look like and the one being delivered by a typical loss prevention team. Buyers are busy individuals. A typical buyer in the survey was deciding on, setting up, forecasting, and buying 13,000 stock keeping units (SKUs) while managing up to thirty-four different vendor relationships. Their workload pressure forces
them to focus on what matters most, which is the shopper and their shopping experience. They expect any communications and meetings from and with other functions to be sharp and short. The issues, problems, challenges, and ideas presented to buyers, therefore, need to be focused on improving the shopper experience, sales, and gross margin. Any indicated new actions or solution proposals should be based on insights, deep data analysis, and root-cause understanding, and supported with a robust business case assessment. In the research, the majority of buyers interviewed were unable to clearly articulate how they thought the loss prevention team could or does play a role in the prevention of shelf out-of-stocks, the issue that 80 per cent of buyers saw as one of the leading sources of shopper dissatisfaction.

Best Practice in Action

While for many organisations the distance between the loss prevention and the buying functions is at best wide and for some non-existent, the research did identify several retailers where there was a close and strong relationship between the two functions. These retailers were able to overcome the three most significant barriers to collaboration noted by the buyers, namely organisational silos, the lack of both real-time information and analytics, and root-cause analysis. Three of the common traits or habits they discovered in those retailers with strong buying and loss prevention collaboration were noted as follows.

First, there was a deeply embedded culture of operational excellence. In one of the case study retailers, Costco, almost all the buyers had many years of operations experience, for example as an hourly associate or an inventory control specialist, before they came to the role of buyer. This experience gave them a very clear and intuitive understanding of the role they can play as buyers in reducing loss through approaches such as better packaging, removing complexity, and the good management of inventory.

Second, they found that a common language and a set of shared metrics had been established. At the retailer Best Buy for instance, a focus on great customer service and inventory accuracy had been established as critical and common measures of their success as a business. To keep inventories accurate requires all parts of the organisations, especially buyers, to play their roles in loss prevention.

Finally, they found that new skills, techniques, and tools had been acquired so as to enable better collaboration. In Autozone, for instance, they had built strong relationships with vendors and buyers to deliver innovative packaging solutions; they dedicated time and effort to track and document results so that the organisation learned; and they developed an extensive training tool box that educated buyers on the relevance of loss prevention and the expectations of buyers to help reduce shrink in their categories.

Given all the time and effort that loss prevention and buyers need to invest in order to more effectively work together, the big question is whether it really makes a difference to the management of shrinkage. Unfortunately the research was not able to explicitly prove this point, but it could be seen that shrink at the three retailers highlighted in the case studies referenced on page 33—Costco, Best Buy, and AutoZone—all reported industry-beating shrink rates for their retail channel of 0.1 per cent, 0.4 per cent and 1.5 per cent, respectively. So good to know, but not the answer some may need to justify the extra investment in people, time, and resources.

From my point of view, there is some additional evidence that could support the hypothesis that a high level of collaboration with buyers and low shrink will be negatively correlated. It comes in the research from Professor Adrian Beck of the University of Leicester, UK on how high-performing retailers keep their shrink low. In this research published in the November 2007 issue of the Harvard Business Review, he identified nine common traits of low-shrink retailers, with two being particularly concerned with collaboration between functions:

Ensure organisational commitment from managers throughout the company; otherwise, any attempted solution will be short-lived. The loss prevention department’s role is primarily to lead a cross-functional effort to manage the problem continuously.

Embed loss prevention at all levels. Employees throughout the company must take responsibility for reducing shrinkage. The company should see loss prevention as equal to sales in importance.

So if, like me, you conclude that collaboration matters and is worth investing in and that the buying function is a good place to start or improve, how might you go about doing this through reapplying some of the insights from the US-based research?

Here would be my thoughts, and to steal an insight from Henry Ford on collaboration, I propose that your journey should take the form of three steps: “Coming together is a beginning; keeping together is progress; working together is success.”

Step 1: Coming Together Is a Beginning

The industry has forever struggled with defining the term shrinkage with little consensus still apparent as to what it actually means, what is included, and how to value it. It should be no surprise then that the majority of buyers in your organisation are also likely to be as equally confused as many others in the business are about what shrink actually means to your company.

To encourage collaboration and to de-mystify shrink, an important first step is to ensure that all buyers in your organisation have a very clear understanding of how your company defines loss, the scale and nature of the problem, and the possible drivers. Most importantly, the training and education needs to articulate how the problem impacts the overall financial health of the organisation and for buyers how loss and loss prevention management can negatively impact the shopper experience and on-shelf availability.

Once the problem becomes relevant, buyers then need to know the contributions they can make to reduce loss. In other words, what are the actions, decisions, and choices they can make that can reduce loss (and grow sales) in their categories? In the research, five key areas where the buyer can make a direct impact were highlighted.

Managing relationships with product manufacturers— Buyers can request that vendors support the product protection requests from the loss prevention team where packaging changes could reduce damage, theft, and error. Buyers could also consider, with the support of the vendors, expanding the number of categories where the retailer pays only for the items scanned.

Product selection—Buyers can, in a more holistic approach to category management, consider loss in the development of the category strategy and design the appropriate responses to the potential of loss before they make their final product selections.

Merchandising decisions—Buyers have decision rights on many dimensions of merchandising that can reduce theft, damage, and error. For example, they can reduce the assortment to make it simpler for stores to avoid mistakes; they can design layouts with low-level shelving to deter thieves; and they can reduce the frequency of range changes, promotions, and product recalls to reduce the complexity that can drive shrink.

New product introductions—Buyers can ensure that the information they and their vendors create is accurate at all times. Simple errors in input on master data files will impact all stores, leading to loss. One retailer estimated that if the errors they had identified in their master file database through an audit had not been detected, the associated losses would have accounted for in the region of 10 per cent of their unknown losses.

Determining product flow—Buyers can determine how the product flows to the store (direct store delivery, via the distribution centre, and so forth) and the form it takes on that journey, including importantly the minimum store-order quantity and the case-size count. If the supply chain is very long with the inventory taking many days to reach the store from the warehouse and the case size relative to sales is large, the store will likely need to hold more inventory, increasing the risk of damage, error, and theft.

The above is not intended to be an exhaustive list. You will need to develop a more specific set of actions with, I am sure, many more relevant examples of the decisions the buyers do and can take to impact positively on the shrink and sales in your organisation.

Perhaps as important as identifying your learning objectives and creating the right content is the question of execution and how you can deliver the necessary training and insights. As the US research found, buyers are very busy, they change responsibilities frequently, and there is a constant stream of new hires to train. In this context, the traditional classroom-based “shrink school” training programme is becoming harder to get approved, so you may need to consider how shrink training and education can be delivered through other means. Perhaps it can take the form of a unique and high-impact stand-alone digital training, or maybe it can be embedded in or be part of a new module in an existing buyer training programme. With either approach, the close collaboration with the human resources function is likely to be important. In addition, you may like to consider extending this type of training to the product manufacturer community to improve their awareness and understanding of how their products are impacted by shrink.

Step 2: Keeping Together Is Progress

Data is the glue and the common language that will bind the loss prevention and buying functions together. However, as the US research concluded, simply presenting the buyers with a list of the top loss items will not be enough. Buyers want to be presented with metrics that are relevant to them, together with deeper analysis of the data and supporting evidence to help them make the right investment choices for possible new interventions. Metrics beyond sales, and loss could include category and item level data on:

• Gross profit after loss
• On-shelf availability and shelf out-of-stocks
• Inventory accuracy (percentage of inventory records, per store, per category)
• Predicted category loss rates based on mathematical models

Deeper data analysis could help buyers understand the impact of range extensions, range changes, promotions, price changes, inventory levels, master-file accuracy, and other choices and decisions they can control on the rate of shrink, inventory accuracy, out of stocks, and more. Finally, insights that can be shared include an 80/20 analysis on loss data, shopper and thief responses to possible new interventions, and sales and loss changes from field experiments on new interventions.

In practice, some of the mechanisms for keeping the two teams working more closely together include changing the name of the loss prevention group to reflect a more common purpose, for example profit protection. To make this change meaningful, the loss prevention team could also consider adding to their scorecard the measures that matter to the buyer. Other practical ways of binding the groups might include allocating individual members of the loss prevention team to partner the different buyers, supporting them in a more holistic approach to managing profitability of the category. It might also help to physically change location of office space, with some loss prevention colleagues being situated closer to the buying function to aid collaboration and greater awareness.

Step 3: Working Together Is Success

In time, loss prevention and buyers working together will become the norm in your organisation. On a day-to-day basis, this might look like regular reviews of a dashboard, focussing on understanding emerging issues, how categories are tracking against plan, consideration of possible interventions and new ideas that could be piloted, and analysis of trends and practices from other retailers and countries. In addition, each and every year, the loss prevention strategy is included in annual category reviews and renewal strategies. Internally, there will be a robust and far-reaching discussion on loss, including debates on whether shrink is actually too low and whether the current loss prevention techniques are potentially holding back sales. Could the category profits be greater if the organisation aimed to lose more and sell more for instance?

Externally and via joint business reviews set up with product manufacturers, changes in the losses on particular vendor’s items are reviewed, successes noted, and opportunities for improvement agreed. The plans for the next year, to grow sales, improve availability, reduce shrink, and grow margin, are agreed and targets set. Importantly, in addition to the loss prevention function, this joint business review process also includes representatives from operations, whose agreement to the execution of any agreed plan is critical.

A CASE STUDY IN SUCCESS:

Wrigley & Tesco—Selling More and Losing Less in High-Impulse Categories

The Problem

Chewing gum is known to be a high-impulse purchase category, and in order to stimulate and maximise sales, buyers and the manufacturers of these products recommend that the stores place the product in many prominent locations on the shop floor. However, chewing gum is also a product that is attractive to thieves, who often steal it to re-sell, sometimes to small convenience stores.

In response to the actual problem of theft and the fear of it, about three years ago Tesco store managers started to remove chewing gum displays from the shop floor. This was an inconvenience for shoppers who wanted to buy chewing gum without asking a member of staff for it, and it reduced sales. However, there was a belief that this approach also reduced shrink, which explained why they made this unusual decision to reduce customer access to the product. It was also the only solution they had available to them, so the opportunity for greater collaboration across functions and organisations became very obvious.

Coming Together

In response, a joint Tesco and Wrigley working group was formed including representatives from supply chain, buying, selling, loss prevention, stores, and Wrigley’s merchandising team. In the initial stages, the joint team followed a pack of chewing gum from the order being placed with Wrigley through to dispatch via the distribution centre, the onward journey to the store, and its eventual replenishment on the shelf once it had been sold. This not only was a fun exercise that “broke the ice,” but also meant that there was a common view on the available data, the problems, and possible solutions.

Keeping Together

In the beginning, a project charter was created with the approval and sponsorship of very senior management, where the expectation was that regular updates would be shared. To support the project charter, a scorecard of the key performance indicators (KPIs) was created. The metrics they tracked included on-shelf availability, shrink, stock holding, and sales. This scorecard became the glue that bound the team together.

Working Together

As a consequence of this deeper collaboration, several initiatives were deployed that would not have happened if the two companies had not collaborated. Examples include a new shipping case that reduced the number of touches in the Wrigley supply chain; in the Tesco supply chain, the number of distribution centres handling the top shrinkage lines was reduced from seven to two; in the stores, a security trolley was trialled that kept all the high-shrinkage chewing gum products together; new fixtures that restricted the easy removal of whole cases of gum were installed; and finally, new packaging was designed to include a “not for resale” notice to help prevent the re-sell of products sold in multipacks being sold as singles.

Results

Since the start of the project, in the large format stores, shrinkage has decreased by 40 per cent, availability has improved to be 0.3 per cent ahead of target, and sales have grown by 4 per cent year on year. In the convenience format, the introduction of the new fixture has reduced shrinkage by 50 per cent and grown sales by 7 per cent.

Time for Change

This case study and the three stages describe the series of actions you can take over time, but to make it happen, loss prevention leaders must consider also the changes needed in their own organisations. What are the new skills, tools, and techniques needed? Does the team have the expertise to develop and deliver new training and education materials? Are external training experts needed? Does the team have the skills required to manage and oversee such a training project? On data analysis and root-cause understanding, does the team have these tools and the skills? Is an investment needed in new data tools? Can the budget be found to pay for this? Will more head count be needed, or can existing team members acquire new skills? If there is no head-count change, what other priorities will have to be dropped in order to prioritise this work?

These important questions are the key to successful execution of a more collaborative strategy with the buyer and indeed other functions. Knowing what to do has been made easier thanks to the insights from the US study. Knowing how to execute these changes in people, process, and technology is now the hard bit.

In closing, the aim of this blog was to help you think about why and how you can improve your collaboration with buyers. Perhaps a very simple starting point could be an online survey of your organisation’s buyers in order to understand how they currently think about loss, how they currently feel about working with your loss prevention team, and what good collaboration looks like to them. If this is of interest, in the appendix of the US report is a list of questions they asked buyers as part of the research.

However you decide to move forward, I do hope this blog has helped stimulate some new ideas. Maybe it can be a topic for your next team meeting? Maybe it could be the start of a conversation with some buyers? Maybe you want to go ahead with a buyer survey? Whatever you decide, I am confident that the full report will be a useful resource. You can download it from the RILA website.