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Want to Boost Profits? Focus in 2019 on Cutting Shrinkage

Source: 2018 National Retail Security Survey

A recent article by LBM Journal columnist Bill Lee provides a timely reminder that, particularly in this time of sales growth uncertainty, one way to keep boosting your profit is to refocus your attention on shrinkage.

Much of what Lee recommends is timeless; I reported many similar best practices in a March 2012 article for ProSales. But this advice remains worthwhile because the problem hasn't gone away. According to a 2018 report produced in partnership with the National Retail Federation (NRF), "Whether perpetrated by a dishonest employee or organized retail criminals, shrink costs retailers about 1.33% of sales, on average—a total impact on the overall U.S. retail economy of $46.8 billion in 2017."

That 1.33% average is for all retail establishments; there weren't enough building material dealers who took part in the underlying survey to merit using just their numbers. But the general wisdom in the LBM industry is that losses of 0.5% to 1% of retail sales are acceptable. That said, a half-percentage-point reduction in losses at a yard carrying $1 million worth of inventory will boost net profits by $50,000.

While the numbers aren't entirely transferrable, the NRF-sponsored National Retail Security Survey (NRSS) does suggest some things have changed this decade while other problems remain stubbornly fixed.

It used to be that employee theft was the biggest source of shrinkage, but for the past four years shoplifting has led all categories. Shoplifting accounted for 36.5% of all retail stores' losses in 2017, according to the 2018 report, while employee theft was second at 30% of all incidents.

Meanwhile, losses because of administrative and paperwork errors got worse, rising to 21.3% of all shrinkage in 2017 from 16.5% two years earlier. That's a key target for you to attack.

What to do? Among other tips, Lee's article this year and my story from 2012 suggest these steps:

* Create and reinforce a credit return policy. To Lee, this includes specifying where returned materials get placed back on the yard, what paperwork gets sent to whom, and which person gets to decide whether the returned material should be restocked.

* Sell what you can salvage and quickly dump the rest. Materials that just sit around don't make you money, and eventually they get in your way.

* Stamp out failures to report. Suppose your builder needs 2x10s and you only have 2x12s, so you put those on the delivery truck instead. If nobody gets notified, you've tripled your problem because: a) You're still short of 2x10s; b) You now have fewer 2x12s on hand than your computer system thinks; and c) Your lack of a reporting system means this problem is likely to crop up again.

* Promote a culture that sees damaged goods as systemic failures. Likewise, you might not realize you're short of drywall until a yard worker confesses to damaging the material and then throwing it away. Accidents happen, so you need first to create a culture in which people can admit something broke. You can do that if you promote each error as an opportunity to review your systems and figure out how to improve them.

* Check your numbers. Tindell's, in Knoxville, Tenn., over the years has included in its financial reports five metrics that help spot and potentially reduce shrinkage. Over/under counting reveals how close inventories are to what was expected. Numbers on damaged goods show how careful the yard crews are. Conversions (like cutting the damaged end of a 16-foot stud to make it a 12-footer) can point to several systemic issues. Close-outs give a sense of buying issues as well as what might have happened with special orders. And credits can point to opportunities to resell returned product.

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