# Infosys Whitepaper 
Title: Fighting retail shrinkage through intelligent analysis and validation 
Author: Infosys Limited 
Format: PDF 1.7 

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 WHITE PAPER FIGHTING RETAIL SHRINKAGE  THROUGH INTELLIGENT ANALYSIS  AND VALIDATION - Naju D. Mohan and Jayamohan Vijayakumar Abstract While striving to achieve greater profitability in a landscape  characterized by aggressive competition, retailers keep racking up  losses due to retail shrinkage. In this white paper we take a look at  the various sources of retail shrinkage and discuss the benefits of  establishing effective validation for loss prevention systems. The  paper also reveals how loss prevention Quality Assurance (QA)  solutions can reduce retail shrinkage. We also outline how the right  testing approach and techniques can help avoid loss.<|endoftext|>

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 In their effort to stay ahead of competition,  retailers are employing innovative  measures to minimize operational costs so  that they can increase their profitability.  Today’s retail dynamics are impacted by  a volatile global economic environment  and diminished consumer spending. These  issues are pushing retailers to evaluate  various techniques they use to reduce  losses that adversely affect the bottom line.  Retail shrinkage or shrink is the fraction  of inventory that is lost in the supply  chain from the manufacturing unit  to the point of sale (PoS). Analysis  of enterprise information, collected  throughout the supply chain and stored  in data warehouses, along with historical  transaction data is used to identify and  qualify loss data. However, the success of  loss prevention techniques depends on  the quality of data used for deriving these  analytical reports. To ensure the quality of  data, retailers need to develop benchmarks  for each relevant business parameter,  which can help them identify inventory  loss and flag anomalies in their operations.  These threshold levels must be managed  centrally with business rules developed  specifically to provide systematic alerts for  corrective action.  A proper validation of the loss prevention  system along with an effective approach  for their business intelligence solutions,  enables retailers to obtain a holistic view  of their enterprise data and make smart  decisions to fight retail shrinkage.<|endoftext|>External Document © 2018 Infosys Limited 

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 What causes retail shrinkage? Inventory shrinkage can be attributed  to several sources such as shoplifting,  employee theft, vendor fraud,  administrative errors, and other unknown  reasons. According to the National Retail  Security Survey Report 20111 the five  major sources of retail shrinkage in order of  frequency are: • Employee theft (44.2%) • Shoplifting and organized retail crimes  (35.8%) • Administrative errors (12.1%) • Unknown reasons (5.3%) • Vendor fraud (4.9%)  Total retail shrinkage amounts to $35.28  billion in the United States alone.<|endoftext|>To understand the nature of inventory loss  better, let us examine the various causes of  retail shrinkage in detail.<|endoftext|>electronic surveillance and automated  alert mechanisms to deter shoplifters.  Advanced electronic surveillance systems  offer analytical capabilities that work with  captured video footage to proactively alert  loss prevention (LP) executives in real time.<|endoftext|>Administrative Errors Pricing mistakes like incorrect mark- ups and mark-downs can lead to large  losses, especially over time. This area  has seen some improvement from the  previous years. Three segments which  recorded the highest retail shrinkage  due to administrative errors are jewelry  and watches, home center, garden, and  household furnishings.1 Vendor Fraud Vendors can steal merchandise in the  course of the supply chain, either during  buying or fulfillment. They contribute  the least to the total volume of retail  shrinkage. Fraud prevention strategies  include delivery audits while receiving  merchandise at the warehouse or when the  customer receives the merchandise in case  of direct fulfillment.<|endoftext|>Other sources of shrinkage are not related  to store inventory.  These include cash  losses, check losses and credit card losses.  Return and refund fraud also contributes  to retail shrinkage. In most such cases, the  shrinkage does not leave a clear audit trail.  Hence the LP management is required to  deduce the root cause of shrinkage.<|endoftext|>Employee Theft Employee theft continues to be the most  significant source of retail shrinkage in the  US. Among the various retailer categories,  convenience stores or truck stops suffer the  most from employee theft.1 This involves  ‘sweethearting’ where a cashier unofficially  gives away products to family or friends  for free using fake scan or offers discounts.  Cashiers can also slide items into the cart  without scanning it at the PoS system.  Other instances of employee theft are:  voiding items from sale, reducing the price  without authority, under-ringing (selling  products at a lower price while collecting  the full amount), no ringing, ringing  fraudulent return, and using staff discounts  inappropriately.  Conventional theft detection mechanisms  include electronic surveillance, audits,  and review of till receipts followed by  investigation.<|endoftext|>Shoplifting and Organized Retail  Crime (ORC) Shoplifting and ORC is the second  largest source of shrinkage in the US.  Craft and hobby stores, accessories and  men’s and women’s apparel are the top  three retail categories worst hit by retail  shrinkage.1The trails of organized retail  crime can be found supporting terrorism  and money laundering. This problem  warrants immediate attention and a  focused approach. Most retailers use  Table 1 – Sources of retail shrinkage Shoplifting and ORC, 35.8% Administrative, 12.1% Vendor Fraud 4.9% Unknown, 5.3% Employee Theft, 44.2% External Document © 2018 Infosys Limited 

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 Leveraging business analytics  for loss prevention Loss prevention is always a moving target.  The key is to stay on top of the changing  LP requirements and be able  to respond to  them faster than the time the contributing  factors take to adapt to the circumstances  – be it shrinkage or salvage.  The key objective of a business analytics  (BA) program is to empower business  owners, the finance team and LP  management to take timely informed  decisions. The overall success of this  program depends on the strategies  adopted for data warehousing and  analytics, the quality of the underlying data  used for analytics and the granularity of  the data.  While retail shrinkage affects all types of  retailers, certain categories are affected  at a disproportionally higher rate. The  strategies each retailer needs to adopt  depend on and vary primarily with the  business model, line of business, sources  of retail shrinkage, and major contributors  to the loss. Usually, the BA strategy for loss  prevention can be classified at a high level  into two distinct areas – operational and  strategic.<|endoftext|>Operational LP Analytics Operational LP analytics aims at identifying  the retail shrinkage and its sources for  shorter periods. This provides near real- time view of the shrink and salvage.  The  method aids the LP management to  identify shrink quickly, thereby providing  them the ability to respond faster to the  situation and prevent further loss. LP  data average out over longer periods;  hence for the method to be effective, the  identification must be as close to real time  as possible.<|endoftext|>Not all categories and items are treated  equally in loss prevention methodology.  Products such as shaving items, clothing  accessories, cheese, meat, perfumes, etc.,  fall into a high-risk category. Departments  like cosmetics are more prone to retail  shrinkage than fresh produce.  Operational analytics report at the  category level, providing the ability to  drill down to sub-categories and even to  shrinkage at the level of stock keeping  unit (SKU). Comparative reports with  other sub-categories or averages enable  the prevention strategy to be devised at  the department level or SKU level. For  example, when a new range of perfumes is  introduced in a store, operational analytics  can provide a view of the retail shrinkage  for this range, or for a product within the  range, for a specific time period, compared  with other products in the range.  Operational analytics reports can provide  the average shrink for that department or  sub-category or even industry averages.  This enables the department managers to  act quickly and prevent loss.<|endoftext|>Another dimension of operational LP  analytics is based on the source of  shrinkage. Retail shrinkage can take place  right at the aisle where shoplifters sweep  out or at the till where an employee or a  member abuses a discount or in a vendor’s  unit where fraudulent transactions are  conducted. Horizontal analytics offers a  different perspective to loss prevention  thereby enabling the adoption of more  comprehensive and efficient strategies.  For example, reports on void transactions  at the cashier level, price exceptions at the  tills, reports at the return tills at cashier 