Are You Suffering from Shrinkage?

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Despite being immortalized in a now iconic and hilarious Seinfeld skit – “I was in the pool! I was in the pool!” – shrinkage is also a well-known term in the business world.

And, just as its less-than-exciting biological connotation, shrinkage isn’t good news for industry either.

In accounting terms, shrinkage (also commonly referred to as inventory shrinkage, or shrink) is the loss of a product (or products) between the point of manufacture (most often a factory) and the point of sale (most often a retail location).

Of course, the stops between the point of manufacture and the point of sale are many – even the most streamlined supply chain may contain numerous points along the line. As such, there are numerous potential causes of shrinkage.

According to a lengthy 2012 PwC report on shrinkage, just some of the sources of shrinkage are:

  • Theft by employees, customers or organized crime
  • Inventory counting errors (either incorrect amount of inventory shipped, or counted incorrectly upon arrival)
  • Accounting errors
  • Fraud
  • Damaged product loss

Data for the report was gleaned from  a survey of Canadian retailers located nationwide.

Although the PwC report primarily focuses on shrinkage as it relates to the retail industry, it is instructive to stress that shrinkage doesn’t only affect retail – shrinkage is also prevalent in the construction, IT, manufacturing and distribution sectors as well.

Just as a retail location struggles to handle all of its inventory, so too does a robust IT department, that may order hundreds of laptops over the course of a year.

So, an economic problem that touches numerous spots along a supply chain and affects several large-scale industries probably costs businesses tremendous amounts of money per year, right?

Sadly, yes.

In the retail sector alone, shrinkage costs Canadian retailers $10.8 million per shopping day, reads the PwC report. Over the course of one year, that’s nearly $4 billion. By any metric, that’s a staggering figure.

To put retail shrink in perspective, total dollars lost to shrink is almost the same amount as the total investment made each year by the entire Canadian retail industry in their Information Technology (IT) departments and more than what retailers invested in their Finance departments,” wrote Paul Beaumont, director of PwC’s Canadian retail consulting services practice, in the report.

Unlike IT and Finance spending however, shrink provides no benefits to retailers and requires significant time and expense to identify, manage and prevent.

Unfortunately, businesses are struggling with the “identify, manage and prevent” portion of this scenario. And, as businesses struggle to cope and prevent shrinkage, money is being lost.

So, what is being done about the problem?

Well, according to a sweeping KPMG report – “Consumer Currents: Issues that are driving consumer organizations worldwide” – not very much.

In fact, global organizations, reads the KPMG report, choose not to analyze and fix the root causes of shrinkage because such investigation is expensive.

The problem is that actually determining what is explicitly causing shrink is expensive, it is difficult, and it needs a cross functional approach,” wrote Al Voels, KPMG’s U.S. director of advisory business effectiveness, in the report.

Yet what companies may not realize is that the rewards are considerable.

What does KPMG report as being one of the major drivers of shrinkage? Like PwC, KPMG also found that internal errors (theft, inventory errors, accounting errors, for instance) are significant factors in shrinkage.

And one of KPMG’s suggested fixes for shrinkage? Improving the design and implementation of stock control processes.

Data in the KPMG report is gleaned from a survey of global companies, from numerous sectors.

The Procurify Way

So, with such a rampant issue, pervading so many aspects of the supply chain and costing businesses so much money, surely there is a tool to help fix this ubiquitous problem?

Shrinkage can be solved…right? Right?

Glad you asked.

Procurify offers three distinct, intuitive features to help you fight shrinkage: electronic purchase order creation, our receiving function, and inventory.

From purchase order creation right through to receipt, Procurify gives you visibility into, and a record of, what you purchased. Having those tools at your disposal, regardless of industry, will provide you with a consistent and clear picture of what your company should expect to be delivered.

So, how do these individual functions help?

1) Electronic Purchase Order Creation

Purchase orders are documents sent from a buyer to a supplier with a request for an order. The type of item, the quantity and agreed-upon price are generally laid out in the document within purchase orders – the more specific the order, the more details that will be included in the purchase order.

For many small- and medium-sized businesses, purchase orders are still being done on paper. This method, while common, is very difficult to manage and organize. Critical data can be easily lost.

In Procurify, however, users create electronic purchase orders, complete with all of the required details, which are catalogued in the system. Having easy-to-produce, easy-to-read and easy-to-find electronic purchase orders is the first step along the road to fighting shrinkage: purchase orders will provide buyers with a clear expectation into what they are going to receive from their suppliers.

By knowing what to expect from suppliers, it is easy to know when those expectations aren’t met or when something goes wrong.

Procurify Shrinkage

2) Procurify’s Receiving Function

Procurify’s receiving feature, like electronic purchase order creation, gives users (buyers) full visibility into what they should expect from their suppliers. You will always know how many products are on the way.

But, that’s not all.  Procurify’s receiving function also provides users with real-time data on every product (or products) that has been received, and how many of those products have been damaged. Each time a product arrives, it is catalogued in the system.

Again, having that visibility and that electronic record of everything that has been received gives users of Procurify critical data and helps eliminate over-purchasing, or the re-purchasing of products that often don’t get recorded properly upon receipt in paper-based systems.

Procurify Shrinkage 2

3) Inventory

Procurify’s innovative inventory feature, now in beta testing, gives users up-to-the-minute data on all of the stock they have on hand, at all times.

This easy-to-use feature gives users an easy reference point for when to re-order a product, and helps prevent stock-out (a costly problem for any business).

Procurify Shrinkage 3

From the following categories, what portion (%) is attributed to your total shrinkage?

  • Internal Theft: 2012: 33.4%  2008: 19%
  • External Theft: 2012: 43%  2008: 65%
  • Paperwork errors: 2012: 19.9%  2008: 16%
  • Vendor fraud: 2012: 3.7%

Frequency of inventory counts in the retail sector

  • I don’t perform chain-wide inventory? 6%
  • Monthly: 18%
  • Quarterly: 0%
  • Semi-annually: 24%
  • Annually: 53%

93%: percentage of global companies that estimate shrinkage as a percentage of turnover in the 0%-3% range.

70%: Companies in the Asia Pacific region believe that almost 70% of loss is due to theft.

Source: PwC The 2012 Canadian Retail Security Survey.
Source: KPMG: Consumer Currents: Issues that are driving consumer organizations worldwide.

Featured Image: This photo, “Shrinkage!” is copyright (c) 2012 JD Hancock and made available under Attribution 2.0 Generic (CC BY 2.0) 

 

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About Author

Sean Kolenko

As a former award-winning journalist, Sean Kolenko covered natural resources and energy throughout B.C. He holds a Masters degree in Journalism from Carleton University and an undergraduate degree in English Literature from York University. When not behind the keyboard, Sean can found at the record store spending money he shouldn't be.

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