Chapter 11: Reducing product losses in the food supply chain – Delivering Performance in Food Supply Chains

11

Reducing product losses in the food supply chain

P.A. Chapman,     University of Oxford, UK

Abstract:

Shrinkage, the loss of products from the supply chain, warrants senior management, and in some cases government, attention by virtue of the scale of losses that can occur along a supply chain. Shrinkage is also a topic that should be of interest to supply chain and operations management professionals as it serves as an indicator of supply chain dysfunction, which means it is prudent to track performance and act to address the underlying causes even when the scale or value of direct losses does not appear at first glance to support such an investment. In order to introduce shrinkage and outline approaches to tackling it, this chapter sets shrinkage in context, describing the scale and nature of this issue and then moves on to explain a structure for ameliorative action.

Key words

performance management

shrinkage

stock loss

11.1 Describing the shrinkage problem

The focus for this chapter is on shrinkage, an issue that relates to products being lost from the supply chain and also the loss of value, summarised as: ‘Intended sales income that was not and cannot be realised.’ (Chapman and Templar, 2006).

This definition includes lost products, that is products that cannot be sold as they are no longer in the system and lines that are unsaleable because of damage or being out-of-date. Also included is the difference between the intended reduction in selling price planned over a product’s life cycle compared with products being sold at an unplanned discount. This is the case when a product’s efficacy is compromised, such as when a fresh product begins to deteriorate and also when the market demand for a product diminishes, such as when a fashion line loses its appeal.

11.2 Scale of the problem

The level of shrinkage experienced by a product is influenced by a wide range of factors, which means it is not only difficult but also unwise to suggest an ‘average’ level of shrinkage. For example, shrinkage rates differ considerably both between and within product groups, between countries and even for the same type of product when sold through different but seemingly similar channels. The point to draw from this observation is the strong influence of context on shrinkage levels, as a result of the interaction of product attributes with local conditions.

11.2.1 Shrinkage in grocery retailing

The main context in which shrinkage will be discussed in this chapter is in the grocery sector, primarily in relation to fast moving consumer goods / consumer packaged goods. This sector benefits from research interest going back a number of decades and from a variety of perspectives, including criminological, accounting and operational.

In terms of its scale, research shows that in this sector shrinkage rates along the supply chain average 2.3%, with about 1.8% being identified in stores and 0.5% upstream in distribution (Beck, 2004). In a sector with a turnover in Europe of about one trillion Euros, this means European shrinkage is worth €23 billion each year, a figure equal to the GDP of Luxembourg. Losses in the USA are estimated as being US$27 billion (Beck and Peacock, 2008).

Within this sector, considerable differences in shrinkage can be observed across product categories. An illustration of this can be seen in the data from ten retailers who were known to the author. None of the retailers were able to supply data for every category, partly because their data collection method did not align exactly with the categories used and partly because not every retailer stocked every category of item. For each category, the responses were totalled and basic descriptive statistics calculated for the minimum, average and maximum rates of shrinkage. These results are shown in Fig. 11.1 where the top of the bar represents the maximum value, the bottom of the bar the minimum value and the diamond shape the average value.

Fig. 11.1 Shrinkage rates amongst grocery retailers by product category.

Naturally care needs to be given when interpreting this data, including for the following reasons:

• The underlying data is, in a number of instances, unaudited.

• Respondents may have had to approximate values in order to align internally collated measures for the categories.

• The sample size is relatively low and therefore this sample is not necessarily representative of retailers in general. For example, the average of the five companies that provided data on their total shrinkage was 1.52%, which is lower than the industry average reported elsewhere, e.g. 1.84% by Efficient Consumer Response (ECR) Europe (see www.ecrnet.org).

• Respondents operate different business models. This means they take different approaches when balancing sales against losses and therefore it may be more profitable to incur a level of shrinkage under one model than under a different model.

With these cautions in mind, the variation in shrinkage rates can be observed between the categories, with the highest shrinkage found in deli (4.7%), in store bakery (4.0%) and floral (3.5%), all of which were significantly higher than the categories with the lowest shrinkage, that is frozen (0.5%), tobacco (0.6%) and dry grocery (0.7%). Another significant observation is the range of shrinkage rates within a category. For example, the categories with the highest range between lowest and highest levels of shrinkage are shown in Table 11.1.

Table 11.1

Grocery categories with a high range of shrinkage between retailers

This suggests that shrinkage rates are significantly affected by retailer specific factors. Another observation that points to this conclusion is that the highest level of shrinkage in each category occurred in six of the ten retailers. The lowest level of shrinkage in each category occurred in two of the ten retailers. None of the retailers with at least one lowest shrink result in a category had any of the highest shrink results in other categories, and vice versa. This means that within the ten retailers that provided data, there were two separate sets of retailers, one with high shrinkage and the other with low shrinkage.

11.2.2 Shrinkage in other sectors

In the food sector, across the whole supply chain from the farm to the home, shrinkage is estimated to be 30–35%. Research from the USA attributes these losses to various stages of the food chain, although the amounts vary considerably depending on crop, type of retail outlet and household demographics. Results from two general studies are shown in Table 11.2, together with a specific example, losses for apples.

Table 11.2

Levels of shrinkage across food chains

aThe values in the columns are not totalled by adding them because some losses are omitted and losses from farm, retail and household are not cumulative.

bIncludes food service and consumer losses.

Sources: Jones, 2006; Kantor et al., 1997; Wells and Buzby, 2007.

Research in the UK suggests that 30% of all food bought by consumers is thrown away, half of which was edible. The annual price paid from this wasted food was in the order of £10 billion and constituted 20% of domestic waste, which cost local government £1 billion to dispose of (Ventour, 2008).

These figures clearly highlight a major issue for the households and organisations involved but at this scale the implications are also societal. Losses at these levels present significant considerations in terms of the amount of additional inputs, including land, water, fertiliser and energy, required to grow the food, the waste involved in its distribution and the cost of disposal. Comparable levels of loss are also reported in the food chains of developed countries such as USA and UK and developing countries such as India, where the societal impacts of such loss is exacerbated by food scarcity. Where this is the case, this means that shrinkage is more than just a waste of resources but is also a cause of poor nutrition and the effects on health and life expectancy that result.

Losses are also known to exist in a range of other supply chains (although some of this loss may fall outside the scope of the definition offered above) including:

• cash, for example banking deposits from retail outlets, for example cinemas (Fithian, 2007)

• spare parts for capital equipment: civilian, such as farm equipment (McCall, 2003) and military (Kutz, 2008).

• energy: oil and gas (Ugochukwu and Ertel, 2008) and (more than a little worryingly) nuclear (Jameson, 2005).

• utilities, including water (Parks, 2004) where distribution loss is typically 20% (Hunaidi and Wang, 2006).

Clearly shrinkage is a major issue that affects a broad range of supply chains and their constituent organisations. However shrinkage has proven to be a resilient problem, despite concerted efforts to address it spanning more then 40 years (see for example Bernstein, 1963; Donnell, 1975). For these reasons, shrinkage deserves a greater effort to understand its nature, including its implications and causes and to identify approaches to its reduction.

11.2.3 Classifying the causes of shrinkage

Shrinkage occurs for a variety of reasons, including product being damaged, going out of date, lost in transit or stolen, where a common classification of the causes uses the following four categories:

• external theft

• internal theft

• intercompany fraud

• process failure.

There are concerns about this classification, not least because three of the four categories are ‘malicious’ and this has the effect of encouraging the view that shrinkage is predominately a crime issue. While there are clearly some categories of product where theft is a major issue, there are many others where this is not the case. This said, this approach to classifying shrinkage has wide acceptance with practitioners and it prevails particularly amongst retailers.

One way to achieve a more balanced approach to would be to take a classification system used to develop scenarios of losses in oil and gas production (Sklet, 2006) and expand ‘process failure’ into the following five categories:

1. Human and operational errors, e.g. failure to follow due process

2. Technical failure, e.g. mechanical failure of equipment

3. Process upsets, e.g. process parameters out of range

4. External events or loads, e.g. collisions

5. Design failures, i.e. latent failures introduced during design.

This would lead to the classification of shrinkage shown in Fig. 11.2.

Fig. 11.2 Classification of causes of shrinkage.

The challenge of using this and any other classification structure is the difficulty of correctly attributing shrinkage to a particular cause. In the case of non-malicious shrinkage, this requires root-cause analysis of each shrinkage event, which has a cost implication and it may be that several causes conspire together, making the primary cause difficult to isolate. In the case of malicious loss, much of this goes unnoticed at the time it occurs so there is difficulty in tracking it, a point that is discussed below.

11.2.4 Concerns over limited knowledge and misunderstandings

Efforts to address shrinkage are hampered by the ease with which it can be viewed incorrectly. Indeed, the degree to which shrinkage is misunderstood has led current understanding of shrinkage to be described as ‘myopic’ (Beck et al., 2003). It has long been known that shrinkage is frequently attributed to the wrong cause (Bernstein, 1963) and retailers often emphasise external theft as a cause of shrinkage as they are in denial of the level of theft by their own employees. Therefore retailers underreport internal theft (Oliphant and Oliphant, 2001).

A key culprit in the misunderstanding of shrinkage is the widespread misreporting of findings from industry surveys. Surveys are a valuable research instrument, but they have their limitations and caution needs to be applied when conducting surveys and reporting their findings. When conducting surveys, accurate data can only be achieved if there are accurate processes generating the data (Biemer and Lyberg, 2003). Beck (2004) reports that most shrinkage (51%) is unknown. Therefore the values attributed by survey respondents to various causal categories of total (known and unknown) shrinkage lack rigor. The findings reported from such surveys need to be considered against a question fundamental to research design, ‘Is it the things themselves or the people’s views about them that are important?’ (Easterby-Smith et al., 1991).

With most shrinkage being unknown, research into this topic lacks a foundation of measured, quantified material which means that surveys have little value as a means of describing the nature of shrinkage, the ‘thing’ in this instance. Instead the value of industry surveys lies in measuring the respondent’s views on the causes of shrinkage. Taken from this perspective, these surveys are a valuable source of data for studying the attribution process as a topic in itself and exploring shortcomings such as self-motivational biases, where failures are attributed to external factors in order to maintain self-esteem (Ross and Anderson, 1982) which may help explain why external theft is often emphasised, as reported above. However this is not the perspective generally taken when analysing and reporting the findings from such work. Instead, the lack of understanding of the extent and causes of shrinkage amongst practitioners and researchers is overlooked and various surveys are undertaken (for example Bamfield, 2004; Beck, 2004; Grasso, 2003; Hollinger and Langton, 2005) which use respondents’ estimates to apportion shrinkage into causal categories. These findings are then widely reported with little attention given to their weaknesses.

One consequence of this situation is that policy makers in retail organisations use these findings to direct their shrinkage reduction strategies and budgets without realising their investment is based on received wisdom at best and collective falsehood at worst. The poor quality of the evidence underpinning decision making and action in the area of shrinkage serves only to highlight this area as a microcosm of poor practice in management research.

11.2.5 Local effects of systemic issues

One of the issues that adds to the difficulties of understanding shrinkage is that incidents that cause shrinkage may be considered as separate and unrelated local problems or the result of a series of disparate factors coming together. That is, viewed in isolation, shrinkage incidents appear unconnected from one another and the response is to deal with them locally as and when they occur. However, if incidents were viewed more broadly, then common causes can be identified and addressed through changes at a policy level. This type of systemic approach views shrinkage as the symptom of a range of causes and by taking this view highlights the need to judge the influence of each cause using clear-cut criteria to inform decision making and the selection of corrective action. This view parallels research into high reliability systems which identifies the role of the ‘failure chain’ in catastrophic failures, for example the 2000 crash of Concorde in Paris when a tyre burst on takeoff, rupturing a fuel tank, setting fire to an engine resulting in the plane crashing. In this event there were a range of issues that occurred and while none can be said to be the single cause of the disaster, they all contributed to it in some way. These included (Donnelly, 2001):

• A component was missing from the landing gear, causing take off speed to be reduced.

• The aircraft was taking off with a tailwind instead of into a headwind, which reduced its lift.

• The aircraft was overweight, reducing its ability to climb.

• The aircraft was unbalanced. This caused its path to deviate during takeoff, where it hit a landing light that broke and appeared to damage one of the four engines.

• A strip of metal had fallen from another plane onto the runway. Allegedly this strip had not been authorised by aviation authorities to be fitted to aircraft.

• The Concorde’s tyres were not puncture resistant and one burst when it hit the metal strip.

• Pieces of the tyre ruptured a fuel tank, setting fire to an engine.

The plane tried to takeoff but with problems in two engines, a low takeoff speed, being overweight and a tailwind it was unable to maintain altitude long enough to return to the airport and crashed with the loss of 113 lives. This tragedy illustrates the way a set of events cumulatively cause a catastrophic event. The absence of any one of these events in the ‘failure chain’, that is had something not happened, could have prevented the disastrous outcome.

A less dramatic example of how thinking in terms of cumulative events applies to shrinkage can be illustrated by considering the response when fresh food, for example fish, is written off in a grocery store because it has ‘gone off’. Taken in isolation, a localised view of shrinkage will see this as the fish having become unsaleable and having to be disposed of. First, it is vital that the event is recorded otherwise it will appear as ‘unknown shrinkage’ in the next inventory. Then a systemic perspective needs to be taken of the incident to understand what caused it and whether it is the consequence of several factors combining in a critical way.

This investigation uses the category headings for non-malicious shrinkage provided in Fig. 11.2, starting with whether due process been followed by store staff, such as ensuring the fish was kept at the correct temperature? Were there any technical issues, such as problems with the performance of the shipping boxes or other packaging? Were the demand planning and forecasting process and logistics and operations processes appropriate for these products? For example, demand for fish can be variable so there may simply have been too much ordered for a flat sales period. Had external events contributed to the waste, for example high or low temperatures, or products being damaged? Finally, a ‘design failure’ in this case would be to consider whether an appropriate species of fish is stocked. Some fish are particularly sensitive and therefore unsuitable to be sold in a ‘grocery’ store environment.

The ability to evaluate this incident and others like it in this way provides the means for making decisions that can remove the underlying causes of shrinkage, preventing future loss from occurring. The perspective of shrinkage as a systemic issue recognises that there can be a significant distance and time lag between where and when the causes of shrinkage were introduced, where the loss occurred and where and when the effect materialises. Therefore in order to understand and manage shrinkage, it is necessary to look across a supply chain and the life cycle of the elements to be found there. The life cycle of the various elements in a retail business can be broken into three horizons of long-term, medium-term and short-term. Long-term issues are those that are strategic in nature, typically designed into the infrastructure of the business and are very difficult to change retrospectively, such as the location and layout of a building. In the medium term there are some significant decisions that are made within the constraints set down by design or strategy. Short-term issues are tactical in nature and relate to the day-to-day running of operations. While some incidents can be attributed to a particular issue, there is merit in considering how the various aspects of the business combine to affect shrinkage. This means that when it comes to addressing issues, the right parts of the business can be targeted at the right time.

Looking across the business, there is a need to gather data on the performance of those activities that have an impact on shrinkage and this information needs to be brought together so it can be considered in its totality. Taking a store as an example, the measurement systems would assess long-term issues linked to store design, medium-term issues like the design of store procedures and short-term issues like how these procedures are being followed. The role of this measurement system is to report results, such as the use of good practice, track trends over time and direct resources to where they will be most effective. The likelihood is that these resources will be managed at a local level, for example in-store, so the information needs to be specific and advice on what actions to take needs to be specific and relevant to that operation, allowing macro issues to be deconstructed so they can guide timely intervention at the local level.

11.3 Strategies for reducing shrinkage

Taken from almost any angle, shrinkage is an undesirable attribute of any supply chain and all organisations would benefit from its reduction. However, as noted earlier, shrinkage is a stuborn problem so efforts to address it require a considered and broad platform to work from. This platform has as its foundation the recognition by senior management that shrinkage is both a significant problem and that its resolution is an opportunity to improve profitability directly and operational performance in general. Efforts to address shrinkage benefit from taking a holistic view, one that engages stakeholders within an organisation and also beyond through collaborating with supply chain partners. Bringing together a team to work across functions and organisations has a number of important advantages but with these come conflicts that arise from competing agendas and an increasingly complex team dynamic. In order to harness the advantages and mitigate the weaknesses of engaging a range of stakeholders, this work benefits from using a structured approach to organising and focussing effort. This effort benefits from the application of good practice associated with project management and change management, not least investing time in planning. This said, a structured approach enables an action-oriented approach that increases the efficiency of effort as well as the likelihood of delivering an effective outcome and is not an excuse for delay and procrastination. Prior research can provide a useful input to this effort by highlighting likely points of leverage. These points are expanded upon below.

11.3.1 Governance

Shrinkage transcends organisational and functional boundaries both in terms of where the problem manifests itself and where the solutions need to be applied. The scope of the work to compile information, diagnose the underlying issues and address shrinkage means that a strategic response is required, one where senior management commitment is established, organisational commitment is ensured and loss prevention is embedded amongst employees at all levels of the organisation (Beck and Peacock, 2008).

Senior management commitment is necessary as the only place in an organisation with a clear view is amongst those with executive responsibility. In a societal context this lies with the most senior government officials, while in organisations this is the executive board. To this end, several retailers operate a standing committee to address shrinkage chaired by their chief executive. While a significant act in itself, this is one part of the wider response required as there is a need for coordinated action between organisations, identifying shrinkage as an agenda item for ‘top-to-top’ meetings between executives along the supply chain who build shrinkage into their joint action plan. Appreciating that executives have many demands on their time, responsibility for ensuring organisational commitment and embedding loss prevention amongst all levels of the organisation should lie with a ‘head of shrinkage’ whose position benefits from a powerful mandate from the executive team.

To be effective, the head of shrinkage needs access to information on losses, including by product, by location and by time period. In practice this means having the support of a data analyst with access to a range of transaction and audit data and the ability to query this data through data mining. In FMCG/CPG retailing it is common to find losses concentrated on ‘hot products’ and in ‘hot stores’. Identifying hot products allows losses on these specific lines to be investigated to determine the causes of these losses and to create an action plan to remove or mitigate the effect of these causes. Frequently the root causes of loss on these hot products are common to losses on other lines, which means that addressing these will deliver wider benefits. Losses in hot stores point to the underlying issue being one of ineffective management control. This highlights a need for a more peoplefocussed intervention, one that emphasises the need for the store manager to be effective in undertaking the tasks of leadership and to be rigorous about maintaining operational controls and proactive in addressing local issues faced in the store.

Armed with the knowledge of where shrinkage is manifesting itself, an analysis of root causes and an action plan for implementing solutions, the head of shrinkage plays several roles. The first of these is to engage stakeholders across the business to implement particular actions within their sphere of control. For example, if the issue was waste of fresh products in store, then one element of a programme could be to work with a logistics team to develop a rigorous regime for monitoring temperature control through the transportation network, to analyse this information and to address the root causes of failures to maintain products in their correct temperature regimes.

The second role is a facilitating one where the head of shrinkage engages functional heads from across and beyond their organisation to deliver actions within their respective domains. In the example of monitoring temperature control, this would be to ensure the head of logistics gives financial and personal support to the actions developed by the logistics teams. The head of logistics also needs to act should the logistics team fail to deliver the necessary improvements. In decomposing the plan in this way, specific individuals are made accountable for undertaking actions in their area of responsibility with functional heads retaining their authority and ensuring actions in their areas are implemented. The head of shrinkage is accountable for the effectiveness of the plan as a whole, which is reported regularly to the executive board.

11.3.2 Collaboration

There is a clear need for effort to address shrinkage in order to engage a wide range of stakeholders, to understand their perspectives and to ensure they are involved in the development and delivery of solutions. However, despite the widely reported importance of collaboration and its promise of significant interorganisational gains, it appears that reality falls somewhat short. Daugherty et al. (2006) cite Sabath and Fontanella (2002) as best capturing the underachievement of collaboration: ‘... collaboration is at the same time the most used, the most frequently misunderstood, the most popular and the most disappointing strategy that has come along to date’.

These words serve to highlight the general challenge that accompanies any effort by organisations along the supply chain to work together. In addressing shrinkage, the challenge is particularly acute as the causes of shrinkage and the success of specific solutions are often highly dependent on the context in which they were applied. Using Grint’s categorisation of situations (Grint, 2005), this positions shrinkage as a ‘complex’ problem, as opposed to a ‘simple’ one. Complex problems are best addressed by analysing them in their context in order to arrive at the appropriate solutions, as they lack prescribable solutions that can be read across from apparently similar situations. As a result, this type of problem benefits from being addressed in a collaborative manner as understanding and the means of resolution is dispersed amongst stakeholders.

11.3.3 Approach

Recognising the difficulties organisations face when working together as described above, shrinkage can be addressed in a collaborative manner using a ‘road map’ (Beck et al., 2003), a structured approach to problem solving depicted in Fig. 11.3. This approach advocates multifunctional, cross-organisational teams undertaking an ‘end to end’ review of the supply chain to understand the root causes of shrinkage and to develop interorganisational solutions that benefit all parties through reduced losses and increased sales.

Fig. 11.3 The roadmap – a collaborative approach to reducing shrinkage. (from Beck et al., 2003)

This approach provides a guideline for project teams and charts the various steps that need to be taken in order for a more holistic and systematic approach to be taken. This roadmap supersedes conventional approaches to addressing shrinkage that are characteristically partial, piecemeal and for the most part poorly conceived practices. In doing so, the intention is to guide organisations to opportunities for dramatically improving their performance.

11.3.4 Points of leverage

Managing shrinkage is a challenge because incidences of loss are diffused across the supply chain and actions need to be undertaken by a range of stakeholders. Set against this is the encouraging news that there are a number of points of leverage where action can deliver significant benefits. These points of leverage are:

• Identify where high loss accumulates, e.g. hot products and hot stores.

• Understand and exploit the relationship between malicious and non-malicious loss.

• Design solutions into the system, to achieve sustainable, cost effective improvements.

As described earlier, shrinkage is not evenly distributed. By investing in data gathering and information reporting it is possible to identify where loss is concentrated. This provides the opportunity to prioritise efforts and address the biggest sources of shrinkage first.

In consumer goods retailing it is known that a significant (although not exactly quantified) amount of loss has a malicious cause. In addition, the complexity of this sector tends to result in a range of non-malicious losses. An important mechanism that connects these two types of loss is that the operational complexities and failures that lead to non-malicious loss provide the opportunity for malicious loss to occur and to go unnoticed for a period of time. For example, underpicking and mispicking in a distribution centre means that deliveries to stores have some level of inaccuracy. Where this is a common occurrence the effect is to condition the store team to expect delivery discrepancies. As a consequence the opportunity for malicious loss is introduced where items stolen from the delivery truck result in a ‘normal’ under delivery.

Another example of process failures presenting the opportunity for malicious loss is when too much product is picked in the distribution centre (DC) and delivered to store. This presents the opportunity for the excess to be stolen without anyone noticing an inventory discrepancy. Another consequence of issues such as this is to allow the manager in a hot store to deflect responsibility for their store’s excessive loss. Where this is the case it is not possible, and would be unfair, to sanction the manager for high losses in their store. This means that efforts to ensure reliable, consistent supply chain operations deliver the multiple benefits of preventing non-malicious losses, removing the opportunity for malicious loss to occur and go unnoticed and isolating the cause of in-store shrinkage in the store itself.

Where companies address the sources of the majority of their operational failures, they benefit from a reduction in non-malicious losses and the opportunistic losses they had previously enabled. A residual amount of ‘hard core’ malicious loss will remain but this will now be much more visible, allowing a range of security solutions to be targeted against it.

When considering solutions, these will be most effective when applied to points of leverage. Several points of leverage have been termed ‘cultural practices’ and while originally conceived at the store level, these can be seen to apply across the supply chain. The nature of the points of leverage changes according to the strategic horizon, with Table 11.3 presenting examples of how these manifest themselves by temporal horizon.

Table 11.3

A list of points of leverage and solutions for addressing shrinkage, categorised by elements of a retailing supply chain and by temporal horizon

In terms of considering the elements of a retail supply chain, solutions to shrinkage incidents in one stage of the supply chain may lie elsewhere, for example through improved product and packaging design, supplier selection, store design or supply chain network design. This means that the ability to work effectively across organisational boundaries will be essential in order to leverage these opportunities. Solutions also exist in the background activities of human resource management and information management, both of which provide the foundation that enables other improvements.

It is also known that the most cost effective time to implement solutions is at the design stage. This can be seen in the case of product design, where improvements or mistakes will have implications in all market channels, all retail outlets and all homes for years. Fixing issues through design has a relatively low cost and will deliver significant benefits, although there can be a long time lag until the benefits are realised.

11.4 Potential benefits

Through the aegis of ECR Europe, a pan-European trade association for grocery retailers and consumer goods manufacturers, since 2000 a range of companies have implemented the ideas presented in this chapter and their experience gives some indication of the actual and potential benefits associated with these ideas. The degree to which these ideas have been implemented spans a range where some companies have undertaken one or more projects with the aim of addressing a specific shrinkage problem while others have adopted these ideas and integrated them into their corporate policy. In addition to the differences in scope with which these ideas have been adopted, the nature of this work varies considerably between organisations, which is appropriate as their issues and the likely effectiveness of alternative approaches are context dependent. There are, however, the following common elements across this work:

• better measurement of shrinkage

• data sharing

• addressing all aspects of shrinkage

• external collaboration

• internal collaboration

• focus effort on hot products and hot stores

• focus effort on the removal of opportunity

• use the road map to guide project work.

A range of projects have been reported over the past eight years that have involved a range of organisations, addressing issues in different product categories. A sample of the results of projects that are in the public domain is shown in Table 11.4.

Table 11.4

Results of a selection of shrinkage projects

Organisations Location Results
Tesco and Gillette Hungary − 74% losses + 288% sales
B&Q and Plasplugs UK − 50% losses + 33% sales
Feira Nova and Danone Portugal − 45% total shrink
Ahold and sausage suppliers Poland − 42% losses
Sainsbury’s spirits category UK − 40% losses + 10% sales
Sonae and Colgate-Palmolive Portugal − 29% losses
Sainsbury’s and Menzies UK − 25% losses + 10% sales
Wickes and GET UK − 7% losses

The sample of projects shown in Table 11.4 is representative of the several hundred projects that are known to have been undertaken around Europe and beyond in Latin America, North America, Asia and Africa. The results reported from these projects highlight the significant benefits that can be delivered. Of note is that many projects have focussed on a combination of shrinkage and sales. This combination helps engage a wider range of stakeholders and avoids the error of undertaking actions that improve one metric at the expense of the other.

Results from projects like the ones shown in Table 11.4 have encouraged several organisations to expand their efforts beyond a project-based approach to adopt these ideas into their corporate policy. A sample of such organisations is shown in Table 11.5.

Table 11.5

Organisations whose corporate shrinkage policy has been significantly influenced by ECR Europe

Organisation Sector Location
Adidas Sports goods Northern Europe
Ahold Grocery International
Boots the Chemist Pharmacy UK
Dollar General Discount grocery USA
DM Pharmacy Germany
Metro Grocery Belgium and Netherlands
P&G Consumer goods International
Tesco Grocery UK and International

For reasons of confidentiality and because it is difficult to isolate the direct effect of such efforts, few companies report the effect on total shrinkage of this work. One exception is Tesco. They reported (Sally and Peacock, 2005) that in 2003 their unknown losses were 1.01% of turnover. As a result of implementing a change in their approach to addressing shrinkage they were able to reduce this level to 0.69% in 2005. This improvement was valued at K150 million for 2005 and similar annual savings have been achieved subsequently. This saving was responsible for a significant proportion of the improvement in corporate performance that Tesco reported.

The work at Tesco provides a general lesson for managing stock loss in the supply chain. This is that a holistic, systematic approach uncovers opportunities to reduce shrinkage while the benefits are delivered by implementing the solutions and sustaining the improvements. Tesco proved to be particularly effective in realising and sustaining shrinkage savings, having implemented the governance structure described earlier, resourcing this with skilled and capable people and driving results by following the road map approach.

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