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RETAILERS OFTEN THINK of protecting product from theft only after it is on their shelves. But the first opportunity to reduce shrink arises when a retail merchant is negotiating to purchase product from a supplier. For example, one case that I worked on involved a high-level retailer negotiating to purchase expensive perfume products. The retailer had previously purchased these products in cardboard boxes that were easy to open. The company liked that packaging because customers could access the product to test the scent. But thieves were taking advantage of the easy access to open the boxes, take the fragrance, and return the box to the shelf. Shrink was becoming so severe that it was eroding the retailer’s profit margin.

To combat the problem, I negotiated a new packaging strategy with the supplier. The packaging included new security tape installed on the lid of the package. The entire item was shrink-wrapped, making it much more difficult for thieves to open the box and remove the contents when the boxes ultimately made it to the store shelf.

The retailer then increased the number of testers used in the store, allowing customers to smell the product without needing to open the box. Theft of the fragrances decreased, as did the amount of product unfit for sale because a previous customer had used it.

That’s just one example of how a comprehensive loss prevention strategy that addresses the problem throughout the product lifecycle can benefit the store’s bottom line without sacrificing customer service.

A product’s retail life begins long before it hits the store shelves. It starts during the product identification and selection process and moves through purchasing to delivery, where product becomes inventory, and then to the shelf, where it becomes merchandise. Each of these stages has its own unique challenges relating to shrink. Let’s look at some of the steps that can be taken to reduce shrink in four critical stages of the product lifecycle: purchasing, packaging, receiving, and merchandising.

Purchasing

The first loss prevention efforts should take place when the product is purchased and shipping and packaging terms are negotiated with the supplier. If done correctly, these negotiations will help reduce shrink throughout the lifecycle of the product, from shipping to sale.

When a product is purchased from a supplier, the buyer should take into account the historical shrink associated with the product and work proactively to improve those numbers. The easiest way to predict the level of risk associated with a product is to evaluate how the product, or similar products, performed in the past.

Another issue to consider is how the cost of shrink should be factored into the price paid to the supplier for the merchandise. For example, some products, such as cosmetics, electronics, music, and videos, are easy to conceal and have a relatively high street value, so they are often stolen. The merchant should research and compare historical loss margins for these types of products and factor loss into the price negotiations. By making the supplier share in the cost of shrink, the merchant creates an incentive for the supplier to help reduce shrink, perhaps by, for example, putting electronic article surveillance (EAS) technology into the packaging.

Another consideration is quantity as it relates to shrink. If the company understands that a small percentage of the product will likely disappear, it can order a slightly higher quantity of the product to ensure that it does not run out of stock. By factoring shrink in ahead of time, the store helps to improve customer satisfaction and avoids losing business to another store that does have the product in stock when a customer comes looking for it.

Packaging

As shown in the example in the beginning of this article, well-designed packaging can significantly reduce loss from shrink or other causes. Packaging should be evaluated on its ability to protect products from damage, deter theft, and facilitate operational processes.

Low quality and minimal packaging may fail to protect the product during shipping, inventory, and movement to the store shelves. This may make goods appear damaged, which may make a portion of the shipment unfit for sale at full retail price, if at all.

Proper packaging will ensure that goods arrive in top condition. In addition, appropriate packaging will reduce shrink by making it more difficult for thieves to extract the product. For example, DVDs are a high-shrink item. When they were first introduced, they came in shrink-wrapped plastic cases that consumers could simply unwrap to access the DVD. It was easy for dishonest customers to open the case, remove and conceal the DVD, replace the case on the shelf, and leave with the product.

In response to the high levels of loss, executives at a major retailer and a Hollywood studio combined resources to revolutionize the way DVDs were packaged. Today, DVD cases are shrink-wrapped, taped, and source tagged. This packaging requires thieves to undertake a much more extensive and noticeable effort to remove and conceal the product.

Before the new packaging was launched, retailers that wanted to prevent theft had to keep DVDs in glass cases. The new packaging allowed for a more open shopping environment with less restricted access, while still creating a solid deterrent for theft. This new environment had a direct impact on sales, because consumers no longer needed personnel assistance to open the case and purchase the DVD. The consumers could now pick up the DVD and purchase it immediately, leading to more impulse buying.

As that example illustrates, premium packaging may increase the price of an item, but it may also lower the average cost by reducing loss of the product, and it may boost sales if the packaging allows the store to make the product more accessible.

Although security is an important component of packaging, it cannot impede the functional qualities of the object. All packaging, for example, must give easy access to bar codes for scanning. This can also have a positive effect on shrink because carefully tracked product is less likely to be lost or priced incorrectly.

Labeling. In addition, shipment packaging needs to be easily recognizable to the retailer and the warehouse personnel.

The quantities should be clearly marked on the invoice and the bar code. For example, if a product is shipped in sets, the packaging should define what makes up a set. Bar codes on the outside of the box should provide information about the contents of that box, not information about a single product within the box.

Lawn chairs, for instance, are often sold in the same box they are received in, with four chairs per box. However, the bar code on the outside often reflects the price of a single chair. At the point of sale, the cashier probably is not aware that he or she should scan the bar code four times to correctly charge the customer. The retailer ends up shrinking the value of three chairs at the point of sale.

Similarly, if the product will be sold in bundles, individual bar codes should be hidden to ensure that the cashier refers to the bundle’s bar code for correct pricing.

For high-risk items such as jewelry, vague descriptions should be used on packaging to avoid drawing too much attention to the item. At one major retailer it was decided to place “jewelry” on the outside of shipping boxes to help with inventory and receiving at the warehouse. Unfortunately, because the box drew so much attention to its high-value contents, thefts increased. The company reversed its policy and removed the explicit product description.

Receiving

Whether product is delivered to a warehouse or direct to the store, there is risk of loss at the point of delivery. Inadequate receiving, inventory, or tracking processes can increase shrink and can increase the risk of having product incorrectly priced at the point of sale.

Warehouse managers should clearly define processes for receipt of product. Employees should be trained on these procedures to ensure consistency. That makes it easier to spot problems.

Processes should include ensuring that shipments arrive at scheduled times and that someone is always there to receive the merchandise. One person should be responsible for inspecting, verifying, and tracking inventory. Having someone verify what is received makes it more difficult for dishonest suppliers or delivery personnel to short deliveries, pilfer products, or make incorrect adjustments to payments.

At one successful warehouse, every item that comes into the facility is given a unique receiving number, which represents the date of receipt, the invoice number from the supplier, and the quantity of the shipment. This practice ensures that a store has the ability to accurately track what has been received and also makes auditing much easier.

The warehouse also performs random auditing of package contents. When a package is received and entered into the system, a notification is produced, asking that the receiving clerk perform an audit of each item in the package. This process helps ensure that the correct number of items is received from the supplier.

Special procedures should be applied to direct-to-store delivery (DSD) for credit and claims processes. This is especially important where perishable goods are involved. In those cases, the supplier will typically reclaim product that has not been sold by the expiration date and issue the retailer a credit for the unsold product. If DSD delivery processes are not in place, the issuance and application of that credit can be inconsistent. By always applying the credit to the next order first, retailers can ensure that they receive their credit every time.

In short, the savvy warehouse manager makes it easy to spot problems by maintaining uniformity and precision in the receiving and inventory processes. The goal is to receive the correct product, in the correct quantities, bar coded with the correct information. This does not require extensive new technologies, but rather attention to detail and consistency.

Merchandising

Once the product reaches the store, it is subject to significantly more loss prevention attention than is typical during the purchasing and receiving phases. For example, video surveillance is common among retailers. There are, however, additional steps that can be taken by merchandisers to protect the product while it is on the shelf.

Thoughtful product placement can help to reduce loss. For example, high-risk items should not be placed in remote, low-traffic areas. These high-shrink products should be shelved in high-traffic, high-visibility areas of the store, making it difficult for dishonest customers to remove product from packaging without being noticed.

Pricing. Promotional labeling at the store shelf, such as sale prices, is also the responsibility of the merchandiser. Merchandising managers should ensure that promotional pricing is reflected on product bar codes by checking it regularly with pricing scanners before the consumer buys it. By taking time to compare each product’s bar code with the promotional price, the merchandising team can save customers frustration and can prevent significant loss by ensuring consistent pricing on the product and on the shelf label.

Often the promotional price, if inaccurately scanned at the cash register, will increase price overrides and open the door for many more errors if it is not corrected. Dishonest consumers can take advantage of these errors to purchase product at incorrect prices.

Display. Product should also be displayed so that it is accessible to customers, while remaining secure. For example, electronics that are secured using a recoil wire are protected but also accessible to the customer to touch and feel. This is a creative and effective display method that is superior to placing the goods behind a glass case, for example, as that inhibits the customer from accessing and trying out the product. Merchants should always consider creative options for product display to offer their customers a satisfying and informative shopping experience, while also protecting the product.

These measures are just a few examples of programs retailers can implement to prevent loss by addressing shrink issues before the product reaches the cash register. Retailers who implement them will not only prevent loss more effectively, but they will also streamline their businesses and ultimately serve their customers more effectively.

Joe Davis, CPP, is director of loss prevention and operations strategy for Encapsulon, a software and solution provider. A veteran of the retail industry, Davis has more than 15 years of experience in both operations and loss prevention in respected retail organizations.