Shrinking Shrink

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.

"We`d say to a store manager, you have $200,000 shrinkage in power tools," Dorsey says. But without a way to drill down into information on the status of inventory at the item level, it was nearly impossible to tell managers which SKUs in power tools had most likely been stolen, which had been debited from financial records due to damage, or which had been transferred to another store. The problem is often exacerbated by the fact that many general ledgers sit on home-grown systems on old mainframes, he adds. "They`re out of sight, out of mind, so people overlook them," Dorsey says.

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The lack of item-level data can leave store managers and loss-prevention managers guessing at which SKUs were being stolen and which were accounted for by some obscure accounting entry, Dorsey says. "We didn`t want to be chasing accounting phantoms," he says. "We wanted to know how shrinkage was tied to the general ledger."

Once Chase-Pitkin has identified the SKUs most likely lost to theft, the next step is to zero in on the time period that theft occurred. Using ongoing reports on inventory levels and sales transactions, the retailer is able to view updates that show how many of the targeted SKUs should still be on retail shelves or in the warehouse. "The system will say we had five widgets in inventory today, but we sold three, so there should be two left on the shelf," Dorsey says. "If only one is left, then we go to surveillance cameras or other means to find out what happened."

Realizing that theft may occur at various points in the store by employees or store visitors--at the display counter, in the checkout line or in the warehouse, for example--Chase-Pitkin will resort to any of several loss-prevention measures after it identifies targeted SKUs. It may increase surveillance on possible points of theft, such as the shelves where the SKUs are displayed or POS terminals, by relocating video surveillance cameras or by deploying corporate loss-prevention staff as floorwalkers who blend in with customer traffic.

The thief on a schedule

One advantage that plays into the retailer`s loss-prevention efforts is that theft often recurs at the same place and time of day, Dorsey says. Even if a perpetrator isn`t caught, the retailer may be able to scare someone off by doing things to frustrate the would-be thief. "The really good ones tend to have a routine, a regular schedule, and if we can disrupt that schedule, they may go elsewhere," he says.

As effective as the ShowCase application has been in identifying SKUs in shrinkage, Chase-Pitkin expects to develop the system further to produce even better results, Dorsey says. "We`re tying our inventory system into the SPSS application on a more real-time basis, instead of through batch-processing overnight," he says. "Right now we can see shrinkage by day of the week, but not by time of day. When we get a more instantaneous feed of data, we can better track the specific times when shrink is occurring."

Operating as a web-based system makes that possible, Dorsey says. The web connection not only supports real-time data flow, but also makes information immediately accessible via a web browser. He adds that the ShowCase system supports customized views of data for multiple users, letting managers view reports related to overall corporate shrinkage as well as to the stores or departments for which they`re responsible.

The system can also lock out personnel from certain data, providing for checks and balances to guard against fraud perpetrated from inside the company, he adds.

Closing the barn door

The ability to narrow down loss-prevention efforts to small numbers of targeted SKUs, combined with the easy access to data, he adds, also makes it possible for Chase-Pitkin to battle shrinkage during busy periods when it is most likely occurring.

"Under the old system, the opportune time to take physical inventory was when there were few products on the shelves, but counting in a slow season puts you in a reactionary mode," Dorsey says.

But because Chase-Pitkin is now equipped to focus on only a few targeted SKUs, it`s feasible to check inventory against sales records frequently during peak seasons. "With the ShowCase tool, we zeroed in on 22 items in the garden department every week during the busy spring season last year, and our shrink came down dramatically," Dorsey says.

The web-based system also helps to boost employee morale in the arduous task of checking inventory, he adds. "When we first told employees we`d be counting inventory in the garden department every week, they almost fell off their chairs," Dorsey says. "Then we said we were only going to count 22 items, and they realized they could do that in 15 minutes."

Although the new system makes it easier to identify and act on inventory problems, it also presents new challenges to store managers and loss-prevention managers in maintaining improvements over the long term, Dorsey says. "It`s one thing for departments to get better at controlling shrinkage, but then they have to continuously go back to manage the loss-prevention process and see how well it`s doing," he says.

Further expansion

The cost of the ShowCase system is based on the number of concurrent users accessing its data reports over the web. A typical application starts at about $150,000, covering the software and access by five concurrent users, Kurnick says. He notes that a typical application would have about 15 users, with about five concurrent users at any time.

Dorsey says he expects to continue expanding use of the ShowCase application, which so far operates only within five of 17 departments - power tools, kitchen, bath, millwork and garden. The other dozen departments should go live over the next three to six months, he says. In addition to moving to real-time data reports, Dorsey says he expects to eventually feed the system with information on products through a future radio frequency identification, or RFID, network for tracking item-level inventory.

In the nearer term, he adds, Chase-Pitkin will expand the use of the ShowCase application to a broader range of product management as well as product departments, providing the regional retailer with additional clout in competing against its national rivals. Store merchandise managers, for instance, have already started to use the web-based data to better manage product lifecycles, as they see the effect on sales of price markdowns or transfers of products between stores. "We can see how multiple operations impact products further down their lifecycles," Dorsey says.

paul@verticalwebmedia.com