Shrink VisibilityThe forensics ofintegrating item-levelRFID and loss preventionSafer. Smarter. Tyco.TM
/ 2 / ShrinkVisibility / Tyco White Paper// Executive SummaryLoss Prevention (LP) departments face twoobstacles in their attempts to control retail“shrink.” First, the definition of shrink itselfis imprecise: often, it tracks financial lossesat the category level instead of individualevents at the SKU level. Also shrink lumpsin losses from shoplifting, internal theft,and Organized Retail Crime with receivingmiscounts and vendor errors outsideLP’s area of responsibility. Second, mostLP analysis and response are backward-looking: useful for staffing and long-termmitigation, but less effective in organizingreal-time response or quick adaptation tonew tactics in retail theft.The integration of item-level RFIDinformation and Loss Prevention datacreates a real-time understanding of what,when, and how specific items go missing.We call this new understanding ShrinkVisibility, combining information fromElectronic Article Surveillance (EAS), videosurveillance, and new Radio-FrequencyIdentification (RFID) inventory-visibilitytechnology to give a complete picture ofloss events—at the SKU level and in fullcontext—at the moment they occur. ShrinkVisibility helps retailers:ShrinkAt a time when store margins are underintense competitive pressure, “shrink”—shortfalls in physical inventory comparedto information contained in the systemof record—can make or break a retailer’sbottom line. But today’s shrink numbersare vulnerable to blind spots and imprecisemetrics that misrepresent inventoryon-hand, distort incentives, misdirectremediation efforts, and hurt financialperformance.In principle, shrink calculations are simple.Inventory Management Systems (IMS)capture data about incoming goods usingRFID, barcodes, or manual checklists. Bysubtracting sales recorded at Point-of-Sale (POS) terminals, adding returns andadjusting for other inventory transactions,the IMS would ideally track sales-floor andback-room inventory at the SKU level. Butin the real world, SKU records often areincomplete and subject to distortion froma variety of sources, lumped together as“gross variance.” To reconcile these errorson their books, retailers conduct periodic orrolling physical inventory counts to calculatenet variance—a financial measure obtained// Track and manage retail shrinkage fromall sources, in real time// Differentiate between actual store shrinkand other forms of inventory distortion// Pinpoint shrink sources, in the store andall along the retail supply chain// Replace after-the-fact follow-up with real-time response and predictive analyticsShrink Visibility improves Loss Preventioneffectiveness, and simultaneously correctserrors and gaps in Inventory Visibility. Byintegrating multiple store technologies anddatabases, Shrink Visibility delivers a moreintelligible, accountable, and ultimatelymore profitable retail environment.IntroductionStore Intelligence.Retail Excellence.
ShrinkVisibility / Tyco White Paper / 3 /by subtracting the value of physicalinventory (typically at the category, not theSKU level) from the value assigned to it inthe IMS. The value of any shortfall iscalled “shrink.”But this definition of shrink is whataccountants call a plug, or reservenumber—it’s calculated, not measured.Shrink doesn’t really explain discrepanciesbetween IMS data and physical inventories;it just provides a convenient accountingbucket to collect and reconcile losses thatactually stem from multiple root causes.And like most plug numbers—“goodwill”on corporate balance sheets is anotherexample—shrink numbers can beunreliable, with unpredictable variationacross stores, seasons, and regions.This calculation of a single number forshrink also is misleading. In addition toshoplifting and employee theft, inventorydiscrepancies can occur from administrativeerrors like incorrectly tagged merchandise,product substitutions markups/markdownsand other retail price changes, or vendorfraud—all difficult to measure, frequentlyunderestimated, and difficult to correct.1An in-depth University of Florida studyrevealed that shrink from such unknownInternal Error$19.356 billion16.2%Shoplifters$51.457 billion43.2%EmployeeTheft$41.650 billion35.0%Suppliers/Vendors$6.629 billion5.6%Sources of Retail Shrinkage 2011(Total losses $119.092 billion)Figure 1: Best estimates of retailshrinkage are based on manyassumptions and are calculatedat category vs. at individual itemlevel. These category-level shrinknumbers combine and disguiserecoverable losses from vendorfraud, supply-chain miscounts,and other sources, and obscureitem-level detail that could helpmonitor, analyze, and preventlosses due to multiple rootcauses.Source: 2011 Global RetailTheft Barometer
/ 4 / ShrinkVisibility / Tyco White Paperby the time they’re compiled, and can’t everbe used to guide real-time adaptivealarming or staff deployment. And shrinkmetrics that fold in receiving shortagesand other inventory distortions obscurerather than highlight trends like the rise inorganized retail crime.Lacking details of what is missing where,and at what times, Loss Preventiondepartments fall back on historical trendsto make key decisions regarding high-riskmerchandise categories, stores, days andtimes, or security-camera views of thesales floor. Also they lack information aboutthe direct impact of their enforcement andremediation efforts. Operating withoutreal-time data and item-level analytics,Loss Prevention teams do the best theycan with their tools and budgets, but don’tnecessarily concentrate on after-the-factforensic measures, which can spread theirlimited resources thin.ShrinkVisibility: IntegratingInformation SourcesAdding item-by-item RFID reads at keypoints in the store is a step toward “ShrinkVisibility”—a comprehensive view of store-wide shrink achieved by integratinginformation across multiple store systems.Shrink Visibility is an alternative to theblind spots and shortsightedness createdby current tools for assessing and reducingshrink. Capturing quality data in real timeenables predictive, analytics-based strategyand response—at the exit, in receiving, andon the selling floor. Adding video analyticshelps verify exceptions, and providesimportant detail surrounding each event.Full integration pulls together informationfrom all technologies deployed withina store. RFID, EAS, and video LPtechnologies may include innovations likemulti-technology read points, specialtyhard tags, video, and smart surfaces thatdeactivate and detach tags based onsources often is misattributed to shopliftingor internal theft. Physical inventories cantrack it to the department level, but can’tidentify its source.And shrink—whatever its source—isexpensive. When shrink numbers conceallosses from vendor errors and substitutions,they block legitimate efforts at recourse.Markdowns of “phantom” inventory that isnever available for sale underestimateactual losses, which may be many timesthe value of discounted paper losses.And when “real” physical shrink takesmerchandise off the sales floor withouttriggering replenishment,2it can create“frozen out-of-stock” conditions thatcost a store all the inventory turns on anitem until a physical count corrects theerror and triggers replenishment. At atime when organized criminal gangs raidspecific categories and sizes,3out-of-stockconditions are most likely with popularitems—exactly the ones that will cause themost financial damage.Loss PreventionMinimizing shrink is the primaryresponsibility of Loss Prevention, and thediscipline has developed robust processesand technologies to deter or detect fraudand theft, often backed by enforcementand recovery. Loss Prevention usesinformation from sales-floor surveillance,POS exceptions, theft deterrent devices,and EAS alarms at entrances, backedby exception-based reporting andanalytics—valuable but backward-facingapproaches. They give retailers limitedability to anticipate or respond in realtime to organized criminal campaigns ormerchandise processing errors, untanglecomplex thefts like POS “sweethearting,”or identify long-term trends in merchandisetargeted by thieves.Distorted IMS inventory records offer littlehelp. Physical counts are badly out of dateShrink by the Numbers:Impact on RetailProfitabilityShrink is cited consistently as amajor operating challenge forretailers, as the impact is felt on manylevels. Following is an example ofthe potential impact of shrink onprofitability:A retailer selling fashion accessoriesloses 20 handbags during a particularmonth, against sales of 300 unitsduring the same month. Assumingthe retailer’s average sales price isUS$30 with a profit margin of 25%,the associated shrink cost could becalculated as:(items lost) x (item cost) x (sales price)20 $0.75 $30= (loss) $450During the same period, profit onhandbags sold would be:(items sold) x (item profit) x (sales price)300 $0.25 $30= (profit) $2,250Therefore, shrink costs the retailer$450/$2,250, or 20% of its profits onthis merchandise – not counting profiton those handbags that might havebeen sold, or lost sales opportunitiesfrom stockouts.Impact to the RetailerThe retailer would have to sell 3handbags (or .75/.25) for every item itloses to theft.Retailers deploying RFID for inventoryvisibility are realizing the addedbenefits to shrink management.RFID-enabled shrink visibility offersnew insights around how, when andwhere merchandise goes missing.And, understanding losses at theSKU level can help retailers identifyhigh risk locations and times, enablingloss prevention resources to beadapted accurately.
ShrinkVisibility / Tyco White Paper / 5 /activity at the POS terminal. Integrationextends the store’s Inventory ManagementSystem, and includes SKU-level data fromproduct receiving, point-of-sale terminalsand returns databases. And it addsdata from store security and businessintelligence solutions to keep item-levelinformation in full context of other events.Shrink Visibility is store-wide, item-levelvisibility of merchandise, including all thedifferent ways inventory can escape thesystem—information that stores oncelumped together in a single number.Consider how Shrink Visibility could helpa big-box electronics store address thesystematic theft—with possible insiderassistance—of high-value consumerelectronics. Using item-level RFIDinformation to augment alerts from itsEAS-based LP system, the retailer can setits Loss Prevention platform to alert staffwhenever the number of tablet computersleaving the store crosses an hourlythreshold. By setting alarms to triggerAcousto-MagneticEAS withEnhanced DetectionRFID basedInventoryIntelligenceVideoSurveillanceShrinkVisibilitySeparate Solutions• RFID InventoryVisibility often focuses on theselling floor, resulting inblind spots at exit • Acousto-MagneticEAS provides robust protec-tion at the exit, but lacksvisibility into item-leveldata • Video Surveillance needs exception eventsto provide actionabledataLeveraged Solutions• Adaptive deployment ofLP personnel • Theft trend analysis bystore/region/country/time/day • Selective alerts for keyloss categories• Fewer nuisance alarms;better LP staffresponsiveness• Indexed video detailsitems, times andlocationsShrink Visibility VisionRedefining Security with Information-Based Loss PreventionBringing Together EAS, Inventory Visibility and VideoFigure 2: A 360° view of shrinkintegrates information fromEnhanced Electronic ArticleSurveillance, RFID InventoryVisibility, in-context VideoSurveillance / Verification, andPoint-of-Sale data.video captures of POS scans and storeexits, the store can know when, where,how often, and in whose hands every itemis leaving, so the LP team can dig into rootcauses of losses instead of chasing aftersymptoms—and even use images of theftsin progress for use as evidence at trial.Detailed context information, integratedwith store systems, attacks persistentproblems in Inventory Management andLoss Prevention described above, andadvances Loss Prevention capabilitiesbeyond their current limits.At receivingAutomated processes up and down retailsupply chains are accelerating purchasingcycles, reducing receiving delays andcosts, and helping to distinguish in-storefrom supply-chain shrink. Small processadjustments—integrating SKU-levelinformation into Advanced ShippingNotices, for example—can automateaccuracy checks on receipts and accelerate
/ 6 / ShrinkVisibility / Tyco White Papervendor recourse for any discrepancies.More sweeping changes such as vendor-managed inventory agreements offer evengreater savings, but require very high-quality information about the source andscale of any loss.Shrink Visibility is essential to the integrityof receiving information. With RFIDtechnology, retailers can check inmerchandise with 100% verification ofcontents. Cartons intended for other storescan be flagged for immediate re-routing.Product substitutions or errors can beidentified without pulling associates off thesales floor for SKU by SKU counts. Andidentifying losses due to administrativeerror, fraud, or theft improves accuracy andrecourse for all supply chain participants,including suppliers and carriers.On the selling floorAddressing shrink on the sales floor—especially in high-risk areas with limitedstaff visibility—is a persistent challenge forLoss Prevention. Thieves use quiet cornersof stores, areas with tall shelves, and fittingrooms to remove EAS tags and labels,conceal items, and stage merchandise forlater theft. Staff video surveillance andpublic-view monitors improve visibilityand deterrence, but can’t offer SKU-levelinformation about item movement that LPstaff need to anticipate and intercept a theftor staging event.RFID-enabled item-level tracking in criticalzones—high-margin “boutiques,” consumerelectronics and media, and secluded areaslike fitting rooms—gives Loss Preventiona powerful tool to analyze the processby which retail gangs stage merchandisewithin the store for later concealment andremoval. For example, movement of tenidentical SKUs of high-end jeans from adesigner’s boutique to a fitting room or thesporting goods department is a tip-off tothe LP team that an Organized Retail Crimeevent may be in progress.At checkoutMany forms of retail fraud depend oncollaboration between an “outside”thief and an employee staffing a POS1 2 3Blocked: RFID-POSData MismatchDetachHard TagRemoveFrom StoreReturnto StockRing OutDesignerJeansEAS hard tagRFID TagBargainJeansEAS hard tagRFID TagFigure 3: Shrink Visibility stops POS “sweethearting.” Hard-tag detachment requires acompleted transaction for the same item, so dishonest store employees can’tcollude with thieves by ringing out inexpensive items while detaching and baggingexpensive ones.terminal; it’s one reason front-of-storevideo surveillance often covers checkoutstations as well as store exits. But videoalone can’t detect paperwork-basedcrimes. In “sweethearting,” for example,a thief presents both an expensive and aninexpensive item from a single category likejeans, asking the sales associate to ring outthe cheap pair and return the expensive pairto the shelves. The POS collaboratordetaches the EAS tag and bags theexpensive pair, but scans the cheap pair andshelves it for restocking.Detection of sweethearting and relatedcrimes requires integration of informationacross item-level tracking, POS, andpossibly video systems. Comparison ofitem-level and POS data can detect thecrime; real-time solutions that allow hard-tag detachment only after items have beenscanned can prevent it; and video-captureintegration can identify the outside thiefas well as the corrupt or compromisedemployee.
ShrinkVisibility / Tyco White Paper / 7 /At the exitAdding RFID capability to EAS exitpedestals produces dramatic improvementsin Loss Prevention. RFID tags can detectindividual items leaving the store withoutproper transactions, and trigger videocaptures to deter future losses and collectevidence against suspected thieves.Improvements in inventory visibility areequally dramatic. Item-level data frommerchandise leaving the store, correlatedwith tag or barcode reads from POSterminals in the immediately precedingtime period, reliably measures totaldecrement from inventory-on-hand. Basingreplenishment on total lift instead of saleskeeps planned levels of inventory on thefloor and avoids out-of-stock conditionsdue to undetected shrink. Exit readsuncorrelated with preceding POS readsreflect actual shrink—errors and theft. Andbecause this is an actual measurementrather than a plug number, the informationisn’t obscured by other kinds of inventorydistortion.And data from RFID tags on returned goodscan be checked against POS data,reducing opportunities for merchandisesubstitution and other forms of return fraud.Shrink Visibility at the store exit gives LPdepartments the information they needto protect profitability on multiple fronts,instead of just following up shopliftingevents.But in addition to improving theeffectiveness of current LP operations,a core contribution of RFID exit data forLoss Prevention is the opportunity to takeLoss Prevention to an entirely new level,by applying predictive analytics to time,location, and exit data from every exit read,for benefits like these:// Adaptive deployment of Loss Preventionpersonnel to the departments atgreatest risk at specific times of the day,week, or season, for improvedeffectiveness without the costs ofblanket coverage.
/ 8 / ShrinkVisibility / Tyco White Paper// Trend analysis by store, region, orcountry, time/day/season and more, tocompare theft patterns and identifylong-term trends for key items.// Selective alarming based on price,category, or item to focus on key losscategories, cut false alarms, improveLP staff effectiveness, and improverecovery.// Indexed video surveillance of individualloss events, adding video context toitem, time, and location data for forensicanalysis, training, and compellingevidence.Shrink Visibility fills in today’s LossPrevention and Inventory Visibility blindspots, sharpens their focus, and improvestheir cost-effectiveness. Integrated EAS,RFID, POS, and video data consolidatetime/place/item information with item-levelsales data, providing plenty of informationto improve Inventory Management andLoss Prevention processes in establishedand entirely new ways.New retail insightsRetail stores can start their move towardShrink Visibility today, to achieve rapidimprovements in the ways they protectmerchandise and manage inventories. Bycombining proven technologies, retailerscan gain important visibility into theft eventsby opportunistic shoplifters or organizedcrime teams, restock or reorder stolenitems to prevent out-of-stock conditions,and identify offenders using informationshared across stores, within their ownorganization or with consulting, retail, orlaw enforcement partners. They can minethe data to identify trends, and change theirloss prevention processes to prevent ormitigate future incidents.Shifting Loss Prevention efforts froma reactive to a real-time predictive,information-based approach multiplies theireffectiveness, driving new benefits thatwould not be possible otherwise.A variety of technologies are available rightnow to help retailers address theseoperational and business challenges:// Point-of-Sale analytics help track salesprocesses and productivity// Video Surveillance to maintain safety andsecurity, and provide context andevidence for shrink events// Electronic Article Surveillance to deterand detect shoplifting, and// RFID-based inventory visibility solutionsto enhance the speed and accuracyof store operations.Each solution is valuable in its own right—but together they deliver a new level ofbusiness intelligence. For the first time,retailers can understand not only whatthey sold, but also when and under whatcircumstances it was purchased. And, withshrink visibility, retailers can make the mostof their technologies to understand exactlywhat was stolen, when it was taken,and even who was involved. Informationcan be reconciled without resorting to“plug numbers” and other shortcuts,and confident actions taken to improveoperations, maximize sales opportunities,and improve profitability.RFID and Store-LevelInventory VisibilityRetailers—especially in Apparel—are implementing RFID technologyto achieve inventory visibility,with accurate counts and preciselocation of high-value seasonalmerchandise. Pointing out the addedvalue of Shrink Visibility creates anopportunity for LP departments toinfluence the discussion about RFIDadoption, and deliver additionalbenefits from the technology.Continuous store-level replenishmentand quick correction of out-of-stock conditions improve sales andshopper satisfaction. And extendingitem-level inventory visibility acrossmultiple store “zones,” such as backrooms, fitting rooms, and the sellingfloor, gives retail inventory managersthe kind of up-to-the-minuteoperational awareness previouslyavailable only to online retailers.A North American based retailerof branded apparel basics soldinternationally has applied theseconcepts to achieve replenishmentwithin an average 10 minutesafter each sale—keeping popularmerchandise on the selling floor,adjusting stocking and reorderprocesses to reflect color, style,and other item-level trends within acategory, and more. The resultingimprovements in sales, margin,and operational efficiency are inaddition to an overall 25% reductionin shrink—a transformative event forthis retail innovator.
ShrinkVisibility / Tyco White Paper / 9 /1 Richard C. Hollinger, Ph.D. and Amanda Adams,M.A., 2009 National Retail Security Survey FinalReport. (Gainesville, FL: University of Florida,2010). www.crim.ufl.edu/research/srp/srp.html.2 Rebecca S. Miles, Yana Mitchell, and Bill C.Hardgrave. Item-Level RFID for Apparel/Footwear:The JC Penney RFID Initiative. (Fayetteville, AR:Information Technology Research Institute, SamM. Walton College of Business, University ofArkansas, 2010). http://itrc.uark.edu.3 Tyco Retail Solutions Organized Retail CrimeWhite paper, Titled “Building your defencesagainst organized retail crime ”Footnotes:
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