INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH AND REVIEW

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1 INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH AND REVIEW MANAGING RETAIL SHRINKAGE MANAGEMENT: AN INDIAN EXPERIENCE Sumanta Dutta* 1 1 Assistant Professor, Department of Business Administration, Dinabandhu Andrews Institute ABSTRACT of Technology & Management, Garia, Kolkata. The shrinkage or fraud in retail is a key issue that is becoming a cause of concern for Indian retailers. Various categories of fraud constitute a major component of the shrinkage. Among the factors responsible for shrinkage losses, employees and vendors are critical factors that need to be managed by retailers. With rising challenges in the sector, the key to success is staying competitive without compromising on the quality of services. Cost effectiveness is necessary to achieve this, and is possible where there exist an effective fraud risk management. Hence, shrinkage management will help companies to identify potential leakage points and opportunities to save. Keywords: Shrinkage management, Retail theft, Fraud, Customers INTRODUCTION A big challenge for the retailers across the globe is the increased diversity of threats contributing to global shrinkage. Indian retailers reported the highest loss of stocks to theft in the world for the fifth year in a row in 2011, with about half of the loss attributed to shoplifting by customers 1,2. Retail shrinkage is basically the difference between the value of stock as per the book and the actual stock in a store and includes loss due to shoplifting, employee theft, supplier fraud and paperwork errors. As per Global Retail theft Barometer,2011 (GRTB-2011) 4 shrinkage or stock loss in India was estimated at 2.38 per cent of total retail sales, costing local retailers Rs.3, 470 crore loss 1. *Corresponding Author

2 Source: 4 Shrinkage affects shoppers in a number of ways including reduced on-shelf availability, decreased assortment and adoption of defensive merchandising. As a consequence, it will decrease shopper satisfaction and hence it will adversely impact the top line of retailers. Hence, addressing shrinkage is a relevant issue for Indian retailers. Following is the general procedure to calculate retail shrinkage. Shrinkage (as a %)=[((Opening Stock-Closing Stock)+(Deliveries-Sales))/sales] #100 TYPES OF SHRINKAGE 1. INTERNAL THEFT Internal theft is the biggest cause of shrinkage worldwide. This generally includes employee theft and Employee pilfering. The primary reason is that contracted staffs that are employed in large. 2. EXTERNAL THEFT External theft is one of the most common reasons of shrinkage. It means theft of goods from a retail establishment or money from the cash register, by an ostensible patron. People who do this kind of crime are often known as shop thieves or burglars. 3. PROCESS FAILURES It can occur during the physical flow of goods along the supply chain. The effect of failure in any one of these is that stock will be lost and/or payment of goods will be incorrect. When Copyright 2012 Published by IJMRR. All rights reserved 1201

3 considering fresh products, process failures are the biggest cause of shrinkage. Process failures or supply chain failures are a result of the following Production loss/waste Shipments & invoice matching errors Wrong delivery Inter- company fraud/vendor fraud Supplier returns Product recalls or customer returns. 4. IN STORE PRODUCTION In store production or waste is another type of shrinkage that is very common in the Indian markets. The primary cause is poor monitoring on account of lack of technology intervention. 5. ERRORS Errors are very common and frequently are not noticeable and hence are other important causes of shrink, Errors happen due to multiple causes such as human/machines/systems loss. Some of the most common occurrences are:- Accounting errors Wrong pricing Physical counting errors Point of sale error Master data mismatch Financial reconciliation Stock discrepancies 6. RETURN FRAUD A consumer comes to exchange a product which actually hasn t been purchased from the store in the first place. This is especially visible in case of high-value merchandise such as apparel. 7. SLIP & FALL A consumer deliberately fails down in the shop and sues the retailer for negligence. In the Indian context, it has been seen that a consumer claims some valuable thing is missing from the bag; he/she had kept with the security and sues the retailer. 8. SWEET HEARTENING An employee colludes with a friend or another colleague who poses as a customer. The sweet heart friend then purchases some high-value item but is billed for a much-cheaper product. Copyright 2012 Published by IJMRR. All rights reserved 1202

4 Most Flicked items in India 5 Shaving Products Chocolates Cosmetics Apparel Biscuits Toys Source: The Economic Times dated Source: 4 MANAGING RETAIL SHRINKAGE Fear of shrinkages could limit the ways goods are merchandised. Retailers are now looking for sensitive yet robust operations management can provide a safe environment in which to work and shop that is compatible with a good shopping experience. The growing motivation among employees to lead a luxurious life, high reliance on skilled resources, weaker internal controls, and overdependence on existing systems and processes give rise to increased risk of fraud in retail sector. a. TECHNOLOGICAL SUPPORT Large retail outlets such as Big Bazaar and Pantaloon have investments in RFID, CCTV and antennas to reduce retail shrinkage. RFIDs in particular are being adopted widely by these retail majors. Copyright 2012 Published by IJMRR. All rights reserved 1203

5 b. TRAINING Retailers such as Future Group (having formats like Big-Bazaar, Pantaloons, food Bazar etc.) have highlighted the importance of Indian values like honesty and integrity and also focus on building a sense of ownership among employees in their training modules. c. PERFORMANCE MANAGEMENT SYSTEMS Retailers like Hyper City and Subhiksha have linked their performance management system with shrinkage. Financial incentives of the front-end staff are linked to shrinkage percentages. On the other hand these retailers have been strict in case of employee theft and have adopted zero tolerance policy. There have been cases where they have terminated the dishonest employees and have initiated criminal proceeding against erring employees 3. d. MANUAL SURVEILLANCE All the retailers have appointed security agencies for manual surveillance. In most of the retail format, plainclothes security-men walk through the store, constantly monitoring activities. e. MYSTERY SHOPPERS Some major retail formats has a team of mystery shoppers who visit its various outlets looking out for suspicious behaviours from customers and employees 3. f. PERPETUAL STOCK TAKINGS Retailers like Subhiksha. Future Group. Shoppers Stop has well laid process for stock taking. Some of the retailers have moved to perpetual stock taking process like what Wills Lifestyle has done. g. INTRODUCTION OF DUMMY PRODUCTS Big Bazaar has experimented with dummy models of high-value products that are used for explaining product features. The real product is brought out of the store only when the customer confirms purchase. h. OTHER MEASURES With potential risks and marked instances of fraud and theft, it is imperative for retail companies to follow the following steps 6 : a) Adopt robust internal controls backed by strong data analytics to mitigate key fraud risks and to raise red flags at early stages. b) Devise a whistle blower policy allowing employees, customers and vendors to report malpractices directly to the management. c) Determine polices pertaining to prevention, detection and investigation of frauds and to have action plans defined for conducting investigation if an incident occurs. Copyright 2012 Published by IJMRR. All rights reserved 1204

6 d) Setup dedicated team internal/external to handle stock checks at each of the stores periodically. e) Collate an end-to-end study of material movement from source to destination, including counter checks and cross tallying. CONCLUSION India is one of the most sought-after shopping markets for the global retailers to get into, but India is also the place where retailers are most prone to shoplifting and employee theft. Historically, managing shrinkage cost has not been a priority area for retailers and responses to shrinkage have been crisis driven. Mot reactions have been local and ad-hoc or unilateral solutions have been imposed with limited analysis. This has especially been the case with Indian retailers as their focus thus far has been on rapid expansion of operations. In the rapid expansion mode, Indian retail cannot afford to ignore shrinkage any longer. In order to effectively manage shrinkage and to stay competitive, retailers need to take a more holistic view with approached which driven by hard data and analysis. To achieve this retailer s would have to overcome several challenges. REFERENCES an-retail-sector-lost-rs crore-to-shoplifting-theft&catid=123:business&itemid= The Economic Times dated The Economic Times dated Copyright 2012 Published by IJMRR. All rights reserved 1205