REDUCE INVENTORY SHRINKAGE - PUT 2% OF YOUR ANNUAL INVENTORY COSTS BACK IN YOUR POCKET

How integrated Point of Sale Systems can help reduce Inventory Shrinkage

by Jim Hawkins © 2006 Windward Software

Most retail businesses take a physical inventory of stock only once or twice a year, and when the count is completed, the difference between the inventory on hand and what it should be according to purchase and sales records is called “shrinkage” (I’m going to pass on the puns for this one…).  Shrinkage is due to employee theft, shoplifting, and paperwork error, pure and simple. 

The way I hear it, the “typical” annual rate of inventory shrinkage in the retail industry is in the order of 3 to 5% - let’s split the difference and say 4%.  “Industry Experts” (whoever they are…) suggest that of that total inventory shrinkage, 50% is due to external theft; 30% is due to internal theft; and 20% is due to “messed up paperwork”. (Some suggest that the internal theft rate is even more than 50%, depending on the industry).  Other reasons for business losses, such as breakage, robbery, spoilage, and vandalism, are separate problems that we’re not going to deal with here. 

Do the math in your head – what’s 4% of all the stock you’ve ordered this year worth?  Pretty grim numbers.  If you’re still with me, I’d like to suggest a way to reduce these figures by almost half – a way to reduce inventory shrinkage to a more manageable 2%!  I work for a company that develops an integrated point of sale software system that ties together the front end point of sale with inventory control and back-end accounting, so it should come as no surprise that I’m going to suggest such a system as a solution to reduce inventory shrinkage.  Many of our clients have reported a dramatic savings, enough to pay for the software and then some in less than a year. 

What I’m not going to do is suggest that our Windward System Five is the only quality product that does what I’m going to cover – so do your homework and consider any POS system that measures up.  A good Point of Sale system can help eliminate internal theft and “messed up paperwork” that accounts for 50% of the total inventory shrinkage.

Internal Theft Prevention

“Why would my staff steal from me!” you say? The retail industry attracts unskilled workers, often at minimum wage. Some will be tempted steal, for whatever reasons. What we will try to do is shift the Risk/Benefit ratio to a point where the risk of being promptly caught is much greater than the minimal benefits they can gain. Think of it as the ol’ “carrot and the stick” approach. The “carrot” includes things like fair compensation, a good working environment, employer-sponsored activities that improve morale, good communication and concern for the success of a company. The only way to reach some employees is through a “stick” of an effective security program and a straightforward policy of prosecuting any employee caught stealing. A good Point of Sale system should balance between carrots and sticks.

Note: Any additional cost from “carrots” will be more than made up by savings from reduced inventory shrinkage.

Carrots

• Reward good salespeople by paying commissions.  Even a small percentage sends a good message.  Your Point of Sale system should be able to easily track and report on commission sales

• People like discounts, and to save yourself from the “five fingered discounts”, set an Employee pricing level for some or all of your inventory.  Your POS should help identify the profitability of inventory items, letting you set a variety of pricing levels.  You can even expand on this by allowing staff to sell a certain amount of inventory at Employee discounts to friends and family (it does wonders for their ego).  Monitor these amounts through your POS

• Move old stock and improve staff morale with the use of SPIFs (Sales Promotion Incentive Fund).  A couple of movie tickets or a gift certificate awarded with a little bit of ceremony can go a long way.  Any cost is more than made up by having moved stale inventory.  Your POS should be able to easily report on specified SPIF-eligible sales

• Profit sharing is the quickest way to make all staff feel they have a vested interest in making the company profitable.  Think about re-investing the money saved from a successful inventory shrinkage reduction program back in to the company in the way of a profit sharing program.  Your POS system should integrate fully with an Accounting backend, so profit can be monitored on an ongoing basis, rather than a month or two after year-end

• Good communication goes a long way to make staff feel they’re part of the company.  Use the CRM part of your POS to keep track of employee birthdays and special events.  Use the e-mail features to keep in touch with all the staff

Sticks

• Each employee should have a username and password required to log on to the Point of Sale system.  This promotes accountability, especially if they know that transactions can be immediately traced back to an individual

• Run frequent Administrator Reports – daily or at least once a week.  By keeping a close eye on sales and inventory and by immediately following up on discrepancies, staff will soon learn that nothing gets by “ol’ Eagle-eye”

• Prevent unauthorized “markdowns” by setting security levels to reflect what the individual needs to do.  Frontline salespeople don’t need to access the Accounting backend, and only those responsible for receiving inventory should be able to adjust stock levels.  Your POS should have complete flexibility to customize security access and “clone” settings, so all Salespeople have similar security access

• There will always be situations where Salespeople may need to offer a discount to make a sale.  Make sure your POS can handle predetermined sales discounts on a per item basis – with or without a “Manager’s Override” required

• Brazen theft of cash from the cash register is reduced when your POS can give real-time reconciliations simply and quickly, and with the complete itemized list of who did what transactions

• Refunds are often an area of “vulnerability” that is open to employee abuse.  Your POS should be able to quickly access the original sale based on the item being returned.  A complete sales history of both the customer and the inventory item, coupled with the salesperson involved, can also identify any suspicious activity

• Receiving and Shipping are also areas prone to potential “mishandling”.  Your POS should automatically handle Purchase Orders, generate Receiving forms, and easily handle short-shipped and backordered items.  All this information should be immediately and easily available for spot checks

“Messed up Paperwork”

A good integrated POS system can also help reduce Inventory Shrinkage through the elimination of “messed up paperwork”, but that’s not the complete answer. 

Instead of just focusing on the tracking of inventory, I’d like to also talk about how a POS system can optimize your inventory – get the biggest retail bang for your inventory buck!

A fully integrated POS system (we like to call them intelligent point of sale software solutions) can help you reduce inventory shrinkage and optimize value:

• Reconcile Billings to Purchase Orders quickly and accurately, so you’re not overpaying, or in some cases even paying twice!

• Use barcodes to eliminate confusion.  Stock that is properly barcoded and labeled can’t be “accidentally” sold as something else.  Make sure your POS system can generate and print unique barcodes, or allow you to use manufacturers barcodes, if you wish

• Use data collectors to scan inventory and keep counts accurate.  New wireless models make frequent “mini-inventory counts” a breeze

• Make sure your POS can print Receiving Reports that can be matched to packing slips.  Making it easy for your Receiver to note short shipments or other discrepancies will ensure the accuracy of new inventory

• Keep track of your back orders and special orders.  Your POS should be able to always keep you up-to-date on the status of backorders and special orders – by supplier and by individual inventory item

• Also keep track of RMA’s.  Make sure you’re getting proper credit from your suppliers – it can quickly add up to be a substantial amount

• Handle superseding parts properly.  Inventory can be incorrectly written off as obsolete unless your POS can easily prompt you with correct information and alternatives

• Optimize your inventory value by keeping track of aged inventory and allowing for FIFO (first in, first out) when selling stock

• Use alternate supplier tracking to ensure you get the best price for your orders

• Take advantage of “Pay Early” discounts by having your POS prompt you with “pay by” dates and amounts to be saved

• Buy what you need, not what you think you need.  Let you POS prompt you on what to order based on past sales history, established “high-lows”, and seasonal adjustments, not on “gut-instinct” (but make sure you can enter “gut-instinct” purchases if you want)

• Negotiate better discounts from suppliers by also tracking sales volumes from your end, and not just trusting their records

Obviously, being able to put 2% of your annual inventory costs back in your pocket allows you to maximize your business investment and better grow your company.  It can even pay for your Point of Sale software system, allowing for even greater savings from improved efficiencies and increase customer satisfaction.