February 28, 2005, 12:00 AM

Shrinking Shrink

The web and a dual CFO/CIO role reduce shrink at Chase-Pitkin.

Professional shoplifters in central New York state are suddenly finding their jobs more difficult when they get to a Chase-Pitkin Home & Garden center. Once able to walk off with such items as miter-saws, which come in TV-size boxes, today they are being thwarted by a unique combination of web technology and the coming together of the finance and IT departments at the 15-store chain, a unit of Wegmans Food Markets Inc. Ditto for any Chase-Pitkin employees who may be tempted to take products out the back door.

Chase-Pitkin`s controller, Chris Dorsey, is also its CIO. With that combination of financial and technology responsibility, which retail analysts say is unique, Dorsey is leading an effort to give the chain a competitive advantage against the giants moving into its market, The Home Depot and Lowe`s Inc., by using a web-based analytics system to exert more control over the way Chase-Pitkin manages information. The first application: identifying shrinkage down to individual product SKUs, combining data that comes from stores via the web with inventory and financial records, then drilling down to the time period during which products are disappearing through theft or other means.

The system from SPSS Inc. has already saved Chase-Pitkin several hundred thousand dollars, reaching about a third of its goal in loss prevention. "This clearly is a competitive advantage for us," Dorsey says. "When we think of how we can compete against larger retailers, being a small and regional player we realized we should be able to manage our inventory a lot better, securing it and making sure people are paying for it. In the past, we just couldn`t get our hands around it."

Chase-Pitkin has historically lost about 2% of sales to shrinkage, amounting to $4 million out of recent annual sales of $200 million. With its ShowCase Suite analytical system from SPSS, it has already reduced shrinkage by more than $600,000, or 15%, Dorsey says.

With information on missing SKUs and time of shrinkage occurrence, Chase-Pitkin can take any of a number of actions to prevent goods from getting stolen or lost. It can closely monitor cashiers or warehouse workers scheduled at times when shrinkage has been known to occur, for example, or review tapes from surveillance cameras focused on shelves of missing products, POS terminals or doorways.

$34 billion problem

In taking on shrinkage, the loss of inventory through theft, damage or misplacement, Chase-Pitkin is addressing a problem that results in more than $34 billion in retail industry losses each year, according to the University of Florida`s National Retail Security Survey. It`s also a problem that has long frustrated retailers, who have attacked it with labor-intensive policies that relied on spreadsheets, physical inventory counting and lots of guesswork.

But a new breed of analytics software, combined with the advantages of transferring and accessing information over the web brings a new dimension to the job, experts say. The uses for this blend of technology are appearing in several areas. In merchandise optimization, for example, it provides retailers with reports on how to price goods for maximum sell-through at the best margins, says Will Ander, senior partner at retail consultants McMillan/Doolittle.

But one of the most productive applications is in controlling shrinkage, because preventing goods from getting misplaced or stolen adds value that previously was completely lost, he adds.

It`s also one of the easiest to implement because shrink is easy to define. And it`s relatively simple to justify because the results are almost immediate. Other providers of web-based systems for controlling shrinkage include CRS Retail Systems Inc., PerformanceRetail Inc. and Triversity Inc. "If you can prevent a half percent of shrinkage, that`s a half percent added to pre-tax sales," Ander says.

Zeroing in

Chase-Pitkin`s program to control shrinkage started a year and a half ago when it began to deploy SPSS`s ShowCase Suite of analytical software. Using the web, Chase-Pitkin downloads nightly reports of inventory records and combines those with POS data and other financial records to look for discrepancies that would indicate shrinkage. And because it drills down to item-level financial data, rather than department or category level as in more conventional methods, it`s able to identify individual SKUs that are unaccounted for. "It`s taking information from multiple locations and putting it in one view," says Rich Kurnick, account manager for the ShowCase Suite.

Dorsey arrived at Chase- Pitkin several years ago as a financial controller with experience in IT systems, and soon added the chain`s IT department to his responsibilities. With combined skills in finance and technology, he strives to push the ShowCase system to its limits by incorporating more information than is usually gathered and analyzed in loss-prevention programs, he says.

In more typical loss-prevention technology applications, Dorsey says, retailers rely on IT experts who focus on inventory and basic POS data to identify where shrinkage is occurring within product categories or departments. Simply combining inventory records with POS data, for instance, can help to show discrepancies within categories or departments where sales don`t match changes in inventory.

Chase-Pitkin goes a step further, Dorsey says, by mixing in more in-depth financial data from general ledgers; for example, records on product transfers between departments or stores, on damaged products and on markdown prices. "As a bean counter, I understand that forward and backwards," Dorsey says. "The challenge is to understand what should be on the shelf in terms of units and dollars."

Inventory, sales and general ledger information are pulled over the web into the ShowCase application, which sits on Chase-Pitkin`s corporate intranet. Managers use web browsers to view reports based on this aggregated data to identify SKUs most likely lost to theft.

Physical counting

Before it implemented the ShowCase system, Chase-Pitkin had to physically count inventory in each of its 17 departments--with a total of more than 39,000 items--then compare that to sales records and summarize results at a department level.

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