DRESSING UP OF SHRINK FIGURES


BUSINESS PARAMETERS

1. An organized retailing business using SAP for inventory management, would design the following parameters to measure shrink (ie what inventory it is physically holding measured against what it ought to have as per books – negative variation is termed ‘Negative Shrink’)

(a) At stipulated intervals, it would carry out physical count of all its merchandise at its business site. That data would be then uploaded in SAP, which shall then generate data on ‘Overall Shrink’ (in terms of monetary values and also by individual articles).

(b) All Goods Receipt Notes (GRNs) have to be closed before a physical count document is generated.

(c) Once the physical count document is generated from SAP, it would give current book stock against each SKU. Thereafter, a physical count of all SKUs is taken separately and is posted in SAP. SAP would then calculate negative and positive shrink.

(d) Overall Shrink is the cumulative effect of ‘Negative Shrink’ and ‘Positive Shrink’.

(e) ‘Negative Shrink' will get thrown up by the figures of Physical inventory count, wherein, the articles that have physical count less than that of book stock would get posted as negative shrink. Their monetary values shall also be reflected in negative.

(f) ‘Positive Shrink’ will get reflected in the system, when the physical count of a particular SKU is more than what is given in book stocks. Its monetary value shall be reflected in positive.

(g) BOTH THESE FIGURES COMPENSATE EACH OTHER WHEN FINAL SHRINK FIGURES ARE ARRIVED AT.

EXPERIENCES ON THE PROCESS

3. Experience indicates that the Negative Shrink and Positive Shrink come up due to one or the following factors:-

(a) Negative shrink can come up due to one or combination or all of the following :-

(i) Malicious Intent (Internal and External) ie SKUs getting stolen by internal staff or customers.
(b) Non Malicious Issues – could be problems in supply chain, wrong deliveries, wrong documentation, process issues, due to wrong physical count etc. etc.

(b) Positive Shrink can come up due to one or the combination or all of the following :-

(i) Malicious Issues – when the operations team deliberately decides to dress up shrink figures (wanting to project lower shrink figures when actual shrink figures are higher).

(ii) Non Malicious Issues – ie when mental intent of operations team is not to fudge but it has happened due to some errors like – wrong deliveries of merchandise to some store whereas they were actually meant for some other store or due to procedural lapses or due to wrong PI count in previous cycle or due to errors of omissions in supply chain or due to the fact that material is in transit ie it has been physically received at the store but document has not been closed in SAP.

4. Experiences show that when there is a pressure on operations team to control negative shrink, they could devise means to post positive shrink, with an aim to effectively off set negative shrink.

PREVENTIVE MECHANISMS

5. The following business process is suggested to discern if the operations team is resorting to dressing up the shrink figures :-

(a) Carry out a test PI count. That could be done with the support of data exported to Microsoft Excel which can randomly pick up articles as per defined parameter. Such a process shall impose caution of store team and improve their efficiency.

(b) Data warehouse can be designed to carry out pattern recognition and be suitably designed to pick up abnormalities in historical perspective.

(c) There needs to be dedicated PI Count teams which should be staffed by different stake holding teams like, it should have members from store, commercial, internal audit and loss prevention team.
(d) Under no circumstances, store holder should be tasked to carry out PI count process all by himself.