Welcome to Episode 5 of Solink in the Cloud! Today, our host is Cathy Langley, Senior Leader of Asset Protection at Solink. Cathy is speaking with Larry Foster, Managing Consultant at The Store Consulting Group, LLC. Larry is here to discuss everything operational shrink. While many AP/LP professionals have a handle on internal and external theft, the third bucket of shrink, operational, is harder to overcome. It’s important to know what can be controlled so you put your limited budget to work in the right places.
Larry Foster is an accomplished retail executive who has worked in retail businesses such as Wegmans Food Markets and CVS for over 20 years. He then moved on to be a Senior Vice President at Merchant Analytic Solutions for several years before joining The Stores Consulting Group, LLC, as a Managing Consultant in 2015. At The Stores Consulting Group, LLC, Larry leads projects on shrink reduction, operational efficiency, and sales enhancement.
The three buckets of shrink
Cathy starts by staging the conversation with the three buckets of shrink: internal theft, external theft, and everything else that is not theft-related but due to breakdowns in processes, or operational shrink. This conversation regards the third bucket, operational shrink.
“Traditionally, retailers tend to think of shrink as being in three different buckets. We have internal, we have external, and then we have operational. Some people call it ‘process’ or ‘paperwork.’ Whatever you want to call it. It’s ultimately that loss that’s not theft.” ~ Cathy Langley
Shrink consulting
Larry decides to take the listeners through a mock consultation, giving hints at the causes of operational shrink as he walks through a new client’s retail location.
“I’m going to talk as if I am on a project with my consulting group, as though I am doing an assessment, because that’s what we do, Cathy.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Sight lines
Upon entering a retail location, sight lines are the first thing that stands out for Larry. While internal and external theft are the other buckets of shrink, it’s an operational issue if, for example, the point of sale (POS) is positioned so that the store isn’t visible to cashiers. This is a small change that can make stealing much more difficult.
“We walk in the front door, which is what we see first, but where the customer is engaging last. When we walk in, we are looking at: How are the registers designed? Where’s the line of sight? Bad guys don’t like to be seen, but I’ll try not to be thinking about bad guys during this conversation. Sometimes you walk into a retailer and, with that line of sight, the cashiers are looking towards the back of the store or out the window. It depends on how the POS is set. But we’re very focused on line of sight first, and for sure the engagement between the employee and the customer. We all know that an employee deeply engaging with customers is one of the biggest things that we can do from an operational perspective.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Point of sale (POS) and other technologies
The point of sale (POS) system is a key point for all forms of shrink. What’s available in the POS software, what individuals are allowed to do on their own, how the business processes data, and whether it is integrated into your security system will all impact your operational shrink levels.
“When we think about the POS, we want to know: What can the register do? What does it doesn’t it do? Operationally, when someone is doing price overrides, do they need a manager to come over to take care of that? Are there old sales signs left up on the shelves that are causing you to lose margin because you didn’t do your price changes? From a training perspective, are employees doing a lot of line voids? If someone is doing a lot of line voids, maybe things don’t get re-rung, so you have opportunities to reduce shrink at the POS. We’re always looking at the limits of those POS systems, what they can do and can’t do. A lot of it comes down to the fact that you see a lot of errors when you’ve got a lot of employee turnover, which retailers do.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Self-checkouts
Self-checkouts have become well-known in the retail industry for their security risks. However, the labor cost reductions, matched with the ongoing labor shortage, makes the prospect of a single person monitoring four to six self-checkout units too enticing to give up. How you manage this operational risk can determine whether your self-checkout rollout is a success or not.
“These days with self-checkout, we are very focused on whether the self-checkout person is attentive. Are they looking at the things that it would make sense to look at? Are they engaging the customers? What is the retailer’s ratio, one on six, one on four? That is, one person versus four units, one person versus six units. So, when we think about self-checkout, there’s a lot of things that go on obviously. A lot of times, walk-offs are the biggest problem. Those walk-offs are happening because of an error on the self-checkout. Mostly it’s user error by the customer thinking that the transaction is completed and they didn’t mean to walk off with it, but it just happens. I want to know what the retailer is doing to manage that so that it doesn’t happen, but also, importantly, I want to know what the retailer is doing to at least know that there is a self-checkout walk-off problem.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Cash management and handling
Cash management, both at the POS and in the backroom, by cashiers and managers, is a huge operational risk. Not only internal theft but other operational shrink can occur due to cash handling errors.
“Another question out front I want answered is whether the retailer is assigning cashiers to certain lanes. Cash management is the big piece that we look at. When we think about cash management, we always think about overs and shorts, but we’re also, as a consulting group, looking at how intense the process is. Is it cashier accountability versus lane accountability? How often are you reconciling the cash office? From a labor improvement perspective, we are really moving cash offices to balancing once or twice per week. That’s a big paradigm shift for folks to get used to. Some of our clients are once a week or once a month depending upon their business level and their management of cash.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Nothing will get by you unless you aren’t looking for it
With modern technology, especially cloud-based video surveillance integrated with every other system, Larry is confident that a retailer should be able to catch everything. While that doesn’t mean operational shrink can or will go to zero, a vigilant company should at least be aware of all their sources of loss. When they aren’t, that’s usually because they aren’t looking.
“With all of the technology that’s out there today, for example, exception tools, we really, as a consulting group, believe that, if you have good tools in place and you’re really looking at them, then nothing’s going to get by you. Therefore, you can give some autonomy to cashiers. You can free up your folks on the front. That way they can be more focused on the customers and getting the sales.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Pricing and restocking
Larry identifies inventory management broadly as the biggest source of operational loss. This is broken down into several issues. The first part is pricing and restocking.
‘Pricing is certainly part of the issue. Pricing includes what’s going through at the front end, what’s on the label, and what’s in your unit. You need that information. Then, when it comes to center store, we will look at people, what they’re doing, the process to restock, and the technology that they’re using. For example, do employees know whether they have something in the back room that they can get?” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Using planograms and facing shelves
Keeping stock to the front, zero holes on shelves, and all stock organized per the head office’s planogram are keys to reducing operational shrink. This makes it harder to shoplift, keeps items where they should be to increase sales, and leaves the store clean and pleasant for customers.
“Planogramming for sure is important. I’ll discuss the labor side a little bit. Are you still facing? Are you still pushing back? What’s your bottom shelf look like? What’s your top shelf look like? Certainly, when you start to see holes being covered, we think of that as part of the planogram. Here’s an example. ‘I’m out of sweet corn so I move over my green beans so that it doesn’t look like there’s a hole.’ Then, you lose a sale or the opportunity to order something if you’re doing any type of manual ordering. Another side of inventory management is how the store brings in items? A lot of people use perpetual inventory. The ability for people to do any type of adjustments to that is a very big thing that we look at. It’s one of the KPIs that you think about for inventory adjustments, whether it’s the quantity of them, how often they’re done, or the dollar values associated with them.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Higher risk inventory
For the most part, retailers look to keep as much product on the shelves as possible with as little left in the backroom as possible. However, this isn’t necessarily the ideal system. For example, for higher risk inventory, it might be better to keep a handful of units on the shelves at a time with an empty box behind them to keep the items in line. This reduces the chance of a major theft.
“Whether I’m at a drug chain, a grocery store, you name it, there’re always items that are a little bit higher risk. What do those shelf minimums and maximums look like? Tide is always a fun example to talk about. You can’t be out of Tide because it’s important, but how are you managing inventory for that high-risk item? Are there staff deterrent labels in place? I don’t want to go down the whole of AP, but that’s still operational. I’m still managing how that shelf looks. We do a lot of grocery store work, so we’ll engage and see if they have a high-risk item program in place. We call it a red dot program. The shelf tells the person stocking that this item is a high-risk item. You want to have only three or four on the shelf. That’s going to remove the ability for a bad guy to do a sweep on an item.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Access to inventory
For every bucket of shrink, the amount of inventory on hand is going to dictate the total potential risk. Too little inventory is a risk to sales volume. Too much inventory increases the risk of theft, as well as damage or wastage.
“I would say that one of the biggest correlators to shrink or future shrink is access to inventory. Retailers should be measuring some type of inventory turn. Days of supply is an important KPI. If you want to use inventory dollars as a rate to sales and you can get that data, that’s very important from the operational side.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Direct store delivery (DSD)
Direct store delivery (DSD) is where individual vendors deliver to your location. Depending on the size of the retailer and the relationship you have with the vendor, they either put the items directly on the shelf or that is left for the employees of the store. DSD has its own operational and inventory management risks.
“Vendors are a very important piece of the retail business. In the grocery world, that’s 25-30% of your sales. That’s a big piece to have as a whole. There aren’t really these strict barricades, so center store has a lot of DSD in it. When we think about out of stocks, expiration dates, or rotation, we find those are all big opportunities on the DSD side.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
5S (sort, straighten, shine, standardize, and sustain)
Sort, straighten, shine, standardize, and sustain, also called 5S, is a quick fix for better inventory management and therefore lower operational shrink. Larry, upon walking into the warehouse side of a retail location, can immediately see whether 5S has been instituted.
“If my back room is not organized, I don’t have a good 5S program where everything has a place and everything should be put into that place. Going back to the inventory conversation in general, it’s not uncommon to see that, if you have excess inventory, your back room might be just as bad from an organization perspective.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Wastage from overproduction
Wastage doesn’t affect every retail location, but even in clothing stores it is found upstream in the manufacturing facilities. In the food sector, wastage from overproduction can be the main cause of operational shrink.
“Is a business scanning out their known loss? That’s a huge piece on the fresh side so that you understand whether you’re making too much or ordering too much. What’s being thrown away? Am I recording what’s being thrown away? What rates of known loss do you have versus your true loss? We have a good understanding from the perishable side of what those rates should be to give folks a target. A lot of retailers get big, they get big fast, and they’re all about sales, so we try to help them become profitable too by understanding waste and loss.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Operational shrink KPIs
There are a lot of operational shrink KPIs. Cathy brings up the first two, sales reducing activities (SRAs) and sales reducing transactions (SRTs). This is the jumping off point for Larry to discuss understanding and actioning KPIs in the loss prevention/asset protection department.
“When we talk about KPIs from the POS standpoint, we’ve always talked about sales reducing activities or sales reducing transactions, SRAs and SRTs. Do you find that the majority of retailers that you’re working with have sales reducing transaction KPIs that they are looking at?” ~Cathy Langley
Retailers aren’t using, even if they’re collecting, operational KPIs
Unfortunately, Larry doesn’t believe that retailers are tracking and benchmarking on SRAs, SRTs, and related KPIs.
“I hate to say this to you, but no, I don’t. I don’t see it in an aggregate format that we would encourage retailers to do. For sure, a lot of folks have exception tools, they’re looking at it, and have queries around that type of activity. They’re basing a lot of their return on investment on cases, case values, recovery, flipping over your folks, and all that part of the AP process. However, I don’t see a lot of retailers aggregating SRAs to create one common number. We always ask questions like: What’s your refund rate to sales? How often are refunds done? Some folks have it, some don’t. Actually, more don’t, believe it or not.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Control the controllables
While a company can’t prevent all operational shrink, it can reduce it. One point that Larry emphasizes with new clients to reduce the feeling that it is too hard or big of a problem to solve is that you can solve part of it, and solving part of it is still meaningful.
“The question is, whatever that percent is, can we get better at it? Having an understanding of what that excess inventory looks like is important or some type of a turn. That would be one of the first things. The second thing from a data perspective for sure is, if you’re not bringing in your adjustment data into some type of tool where you’re aggregating and looking at it, that’s a big one. As you said, control the controllables.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
Create new KPIs
Not every sector, or even every business in a sector, is facing the same operational risks. With that in mind, it could be time to create new KPIs that shine a light on the specific issues faced by your business.
“If there’s something that you really want to take a look at, create a KPI around the frequency with which that happens. You and I both grew up a little bit in the chain drug industry, and that’s what we did at CVS. We called them high theft drugs. We needed to understand how often they were being adjusted at the store level, because folks that were doing things they shouldn’t be doing were bringing those items in to steal them basically.” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
You aren’t going to do this overnight
Along with telling clients that they should strive to control that which can be controlled, Larry also set expectations on how long operational shrink projects last. The fact is that you can do some tasks in a day while others take months. Similarly, some results can be seen in a week while others take months or years to be visible.
“That’s the hard part about consulting. You go into it with all of your experience and you want to lay out a plan for somebody to grow and become more profitable. We always have to have that caveat that, ‘Look, you’re not going to do this overnight. Here’s the plan and the steps to get there.’ It might be a one to three year plan. We’ll tell people, ‘Here’s some quick wins that you can get in the next three or six months that can help fund a project.’” ~ Larry Foster, Managing Consultant at the Stores Consulting Group, LLC
To see how Solink can help you get a handle on operational shrink, sign up for a demo today.
Cathy Langley:
Welcome to Solink in the Cloud, where we are talking to industry leaders about topics that matter. I’m Cathy Langley, senior leader of asset protection with Solink. Solink’s mission is to protect people, places, and profits, which is why we’re bringing together thought leaders within the loss prevention, asset protection, and retail security industries to share their expertise and passion. So, today we have Larry Foster. Larry is with The Stores Consulting Group, and we are going to talk about operational shrink. So, Larry, for our listeners, if you could just introduce yourself, give us a little bit about your background, that would be great.
Larry Foster:
All right, that sounds good, Cathy. Thank you so much for having me today. I’m in the back room of some retail establishment as we speak now, so that’s the blue tile. And I’m not in the bathroom. So, currently I work for The Stores Consulting Group. I’ve been with the group for almost going on eight and a half to nine years, and been doing professional services for quite a bit of my career. But I will try to bucket my career in three different sections. I’ve worked for retailers. I started off with Wegmans Food Markets. I worked for them for about 15 years. And then I’ve also worked for CVS as the director of analytics for about seven years.
So, I have that retail background, which hopefully will be pretty important with this conversation. But also have had some consulting with The Stores Consulting Group, but also with Senn Delaney. That’s where I started back in 1999 with Senn Delaney, Arthur Andersen. And then we moved over to Cap Gemini, Ernst & Young. And then the third way I would bucket is I actually had the opportunity and pleasure to work for a couple of our LP/AP community vendors, if you will. So, Appriss back in the day was Secure, so now owned by Appriss, and also with Profitect, which is now part of the Zebra organization. So, that’s probably a pretty quick version of what I’ve been doing for the past 30+ years.
Cathy Langley:
Thanks, Larry. But I think what it does is it frames up your extensive knowledge. And what we’re going to be talking about is operational shrink. So, your extensive knowledge, not only just in individual retailers, but almost taking a step back and looking at it from a broader view. And I think sometimes from a consulting view and professional services, you actually look through a different lens because you’re not, I’m going to say, immediately tainted by, “What are my resources? My limited resources, and what can I do?” So, hopefully during this conversation we’ll come up with a few things where, for a retailer with limited resources, maybe here’s a few little nuggets for them that they can do with, I hate to say little or no effort. Not a lot of investment, right?
Larry Foster:
Sure.
Cathy Langley:
Keeping investment to a minimum. So, traditionally, retailers, we tend to think of shrinking three different buckets. We go internal, we have external, and then we have operational. And operational, some people call process. Some people call paperwork. Whatever you want to call it. It’s ultimately that loss that’s not theft. So, that’s what we’re going to dig into. And there’s a lot that we can do. And I always think of that statement that we’ve all said, “Control what you can control.” We make it sound simple. We all know that it’s not. But operational shrink is really what that statement’s all about. You cannot always impact those folks coming into your store. You can’t always impact the behavior. You can influence the behavior, but you can’t control it. So, operational shrink is really one of the things where we have the best ability, I believe, to control what we can control.
And although it’s a huge topic for our listeners, what we’ve tried to do is bucket it together. And so as Larry and I talk about it, we’re going to group it into buckets. And again, the ultimate goal is to always have folks have a few takeaways, that there’s value in the time that you invest in listening to this. And there’s something either for further investigation, further thought or implementation. So, Larry, let’s start with, I’m walking into the store. I’m walking into the store. Really, my first line of sight is that POS. So, let’s start with operational shrink as it relates to point of sale.
Larry Foster:
Yeah, that’s a great starting point. And I’m going to probably talk a little bit about it as if I was on a project with a consulting group a little bit or doing an assessment, because that’s what we do, Cathy. We’ll walk in the front door and that’s where what we see first, but it’s what the customer is engaging in last. So, when we walk in, we are looking at, how are the registers designed? Where’s the line of sight? Sometimes you walk into a retailer and that line of sight, the cashiers are looking towards the back of the store. Sometimes you’ll see them looking out the window. It just depends on how the POS is set. But we’re very focused on line of sight first, and for sure the engagement between the employee and the customer. So, we all know that a very engaged employee engaging a customer is probably one of the biggest things that we can all do from an operational perspective.
Bad guys don’t like to be seen, but I’ll try not to be thinking about bad guys during this conversation. But for sure, when we think about POS, we think about technology. What can the register do? What doesn’t it not do? And so operationally, whether I’m doing price overrides, do I need a manager to come over to take care of that? Do I have a sign that’s still left up out there that’s causing me to lose margin because I didn’t do my price changes? That’s a big piece. From a training perspective, am I doing a lot of line voids? If I’m doing a lot of line voids, maybe things don’t get re-rung. So, you have opportunities at POS. We’re always looking at the limits of those POS systems, what they can do and can’t do. And a lot of it comes down to, you see a lot of errors if you’ve got a lot of turnover, which retailers do. So, there’s a big challenge there on the POS side.
From a visible perspective, and especially these days with self-checkout, we are very focused on, is that self-checkout person very attentive? Are they looking at the things that it would make sense to look at? We’re engaging the customer. What is the retailer’s ratio, one on six, one on four? So, one person versus four units, one person versus six units. So, when we think about self-checkout, there’s a lot of opportunity and a lot of things that we see with self-checkout. And mind you, there’s a lot of things that go on obviously that are nefarious, but a lot of times walk-offs are a big problem. And those walk-offs are happening because of either an error on the self-checkout. Mostly it’s user error by the customer thinking that the transaction’s completed and they didn’t mean to walk off with it, but it just happens. So, what is the retailer doing to manage that so that it doesn’t happen, but also what’s the retailer doing to at least bucket that there is a self-checkout walk-off problem?
Other things on front would be, are we assigning our cashiers to certain lanes? Cash management is the big piece that we look at. So, when we think about cash management we always think about overs and shorts, but we’re also, as a consulting group, looking at how intense the process is. Is it cashier accountability versus laying accountability? How often am I reconciling cash office? From a labor improvement perspective, really moving cash offices to balancing once or twice per week. And that’s a big paradigm shift for folks to get used to. Some of our clients are once a week or once a month depending upon their business level and their management of cash. So, that’s what we look at from a POS perspective at least. And I’m sure there’s a whole bunch more there, but that’s gives you a little bit of an idea of what we look at.
Cathy Langley:
Yeah, thank you. That’s a great overview. I know one of the things that is important, you talked about management approval code, but a piece that also is, what percentage of your transactions require management approval code? Because if you have a high level, we know to your point, when you sit there, you observe it, that manager may not even be looking at the transaction because they’re being called up every 10th transaction. That’s a little extreme, but still, it can be that extreme. So, what are you requiring a management approval code and what do you gain by giving your cashiers a little bit of authority and autonomy to go through line voiding a $4 item or $5 item? So-
Larry Foster:
Yeah, for sure. I mean-
Cathy Langley:
… again, that’s also analyzing that data.
Larry Foster:
Yeah. We can certainly spend the next four hours talking about that, which I know you and I would love to do that. But for sure, and with all of the technology that’s out there today, the exception tools, we really, as a consulting group, if you have good tools in place and you’re really looking at those and you’re looking at management overrides as part of your tool and you’ve got your patterns or queries set up, then give some autonomy. Free up your folks on the front. Nothing’s going to get by you unless you’re not looking at it, unless you’re not focused on it. But yeah, we’re all about get that customer through. It’s much more important. And then we’ll manage all the other stuff on the backside, making sure we’re looking at it the right way and creating the right KPIs for that.
Cathy Langley:
So, when we talk about KPIs from a point of sales standpoint, we’ve always talked about sales reducing activities or sales reducing transactions. SRTs, SRAs. Do you find that the majority of retailers that you’re working with that they have sales reducing transaction KPIs that they are looking at?
Larry Foster:
I hate to say this to you, but no, I don’t. I don’t see it an aggregate format that we would encourage retailers to do. I think sometimes, again, I don’t want to go down the wrong rabbit hole here in this conversation, but for sure a lot of folks have exception tools and they’re looking at it and have queries around that type of activity. So, they’re basing a lot of their return on investment on cases, case values, recovery, flipping over your folks, all that part of the AP process.
But I don’t see a lot of retailers aggregating SRAs to create one common number. So, that’s just really taking all of those SRAs across and just adding them all up and creating this indicator that’s a leading indicator to loss. I don’t see that a lot, but I do see it in pieces. So, we’ll always ask question like, “So, what’s your refund rate to sales? How often are refunds done, every other customer or whatever?” Some folks have it. Some don’t. More don’t, believe it or not. I think there’s this, I guess, willingness to just be, “Well, I’ve got a query set up for that, so I don’t really need to focus on that.” But we try to get a little bit more of a focus on that with folks.
Cathy Langley:
Okay. All right. So, point of sale. Walking in, that’s my first line of sight as a customer initially. When I’m walking in, I see it. And from a consulting and even an AP professional, I see that. So, now I’m moving on. What’s next after the POS?
Larry Foster:
Yeah. That’s a great question. So, as we’re walking through the store, we think of center store, all the fun and frolic of the operationals of running inventory and inventory management. So, I think of it as inventory movement, what’s coming to the shelf, what’s leaving the shelf. Perpetual inventory or not perpetual inventory. But very focused on, when we’re looking at these stores, out of stock. What’s your in-stock position? How do I restock the shelves? So, from a labor perspective, we’re always looking at your restocking capabilities and how you’re doing that and what technology are you using?
We will get into pricing. Lately we stay away from it. But pricing is certainly the triangle. Pricing, what’s going through the front end, what’s at the label and what’s in your unit that you’re using, whether it’s some type of handheld unit, Motorola, Zebra? Plug for Zebra. So, having that information. And when it comes to center store, we will look at people, what they’re doing, the process to restock, but the technology that they’re using also is very important these days. Do I have the understanding to know that I have something in the back room that I can get? So, I’m generating tick lists. I’m going through that process. But one of the things that will really stand out to us the most is your in-stock position, because that’s going to tell you a lot of things on the floor.
Planogramming for sure how you’re setting. We’ll walk in and people do a lot of facing, so I’ll get on the labor side a little bit. Are you still facing? Are you still pushing back? What’s your bottom shelf look like? What’s your top shelf look like? But certainly when you start to see holes being covered, we think of that as planogram. But, “I’m out of, whatever, sweet corn, and I’ve moved over my green beans so that it doesn’t look like there’s a hole.” So, we have a tendency then we lose a sale or an opportunity to order something if I’m doing any type of manual ordering. The other side on the inventory management is, how am I bringing items in? So, we have perpetual inventory generally. A lot of people do. The ability for people to do any type of adjustments to that will be a very big thing that we look at and certainly will be one of those KPIs that you think about inventory adjustments, whether it’s the quantity of them, how often they’re done, the dollar values associated with them, and how you’re managing your high risk goods.
Whether I’m at a drug chain, a grocery store, you name it, there’s always a retailer and there’s always the items that are a little bit more higher risk. So, what do those shelf minimums and maximums look like? Do I need to have, if I’ve got a high risk item… Tide is always fun to talk about. We can’t be out of Tide because it’s important, but how are we managing inventory on a high risk item? Do we have staff deterrent labels in place? Again, I don’t want to go down the whole of AP, but that’s still operational. I’m still managing how that shelf looks.
Cathy Langley:
Yeah. And too-
Larry Foster:
Yeah.
Cathy Langley:
Yeah. I was just going to say, to your point, I think multiple times through this we’re going to branch over to the other buckets. It’s all connected, right?
Larry Foster:
It is. Yeah.
Cathy Langley:
It’s hard not to. So, it’s actually a little bit of a difficult conversation to stick only to operational because it crosses over so many barriers.
Larry Foster:
If you think about HBC… We do a lot of grocery store work, so we’ll engage and see if they have a program in place. We call it a red dot program. It could be whatever you want to call it. But the shelf tells the person that’s stocking it that this item is a high risk item. We want to have only three or four on the shelf. We’re going to use an inventory clip behind it or an inventory tube or a dummy box behind it so that the appearance still looks good, but that I’m going to remove the capability for a bad guy to do a sweep on an item, whether it’s…
Whatever, pick one. Allergy season’s coming up so Claritin is a big one. So, if that’s on the program for inventory management, then that shelf should have certain quantities of inventory that the retailer has decided upon. And also, it needs to be replenished probably more often. So, now that causes a little bit of a labor piece. And then how are we managing that high risk inventory in the back room? If I’m doing something at the shelf with it to minimize risk, I should be doing some very good things in the back room to minimize risk of internal.
Cathy Langley:
That’s right. I think oftentimes we find the need to control it on the sales floor and it’s just out there in the back room unprotected, right? And so-
Larry Foster:
Yeah. And for all the folks that are out there going, “Is it internal or external that I’m really worried about?” Right?
Cathy Langley:
That’s right.
Larry Foster:
But back to your point, it’s control the controllables.
Cathy Langley:
Right. So, when you think of inventory management, and this is a tough question because I know you love data as I do, but what are your top two or three KPIs for inventory management that you feel with that data you can then make the largest impact?
Larry Foster:
Yeah, I would say that one of the biggest correlators to shrink or future shrink is access to inventory. So, I would say some type of inventory turn. Days of supply is very important. And even if you wanted to use inventory dollars as a rate to sales, if you can get to that. I would say that’s very important from an operational side. I want to just share with you something that we do as a consulting group from an assessment. So, if we’re going to go in and take a look at your store, let’s say you have a load of two or 300 items that came in off the truck. We’re working with a smaller retailer so that that’s common with what’s happening with our small retailer today. But how much of that inventory goes to the shelf versus how much goes to the back room immediately from the truck?
So, one of the things is, whatever that percent is, can we get better at it? So, having an understanding of what that excess inventory looks like is important or some type of a turn. That would be one of the first things. The second thing from a data perspective for sure is if you’re not bringing in your adjustment data into some type of tool where you’re aggregating that and looking at it, especially… I would say I really don’t care how often tuna fish is adjusted. Hopefully it’s not being adjusted a lot. But if Claritin is being adjusted a lot or family planning or you pick a category in HBC, right?
Cathy Langley:
Right.
Larry Foster:
Those would be something that you’d really want to take a look at, is creating a KPI around the frequency with which that happens. And you and I both grew up a little bit in the chain drug industry, and that’s what we did at CVS, was understanding, we called them high theft drugs, but high risk drugs, the ones that are all the fun stuff. And understanding how often that’s being adjusted at the store level. Because folks that were doing things they shouldn’t be doing are bringing those items in to steal them basically, or take them.
Cathy Langley:
That’s right. And if you know, because you take a look at your inventory adjustment, and if you don’t know, if you’re new to an industry, you don’t know what your high theft items are, you look at your inventory adjustments, that points you in the right direction in putting more effort on those. Not necessarily a mayonnaise approach where I’m spending the same amount of time on everything, but where can I get the most for my effort?
Larry Foster:
Yeah, for sure. We just did an assessment with the retailer that was looking at adjustments for all of their items in their store. And you’re trying to use that as a KPI to suggest either how I’m classifying my stores or what countermeasures need to be in place. So, sometimes you can offer those suggestions with folks. Like, “Just look at the ones that are really the cause of your pain.” But it could be theft, but it also could be sales. Sometimes I’m doing a lot of adjustments on items that sell a lot because maybe my perpetuals aren’t working or maybe I have a lot of fraud on the front end that’s screwing up my adjustments. So, I would say that. And the third one I would probably leave with is out of stock frequency. What are your out of stock? What’s your out of stock rate? Because that’s really hurting. For all of us that are in the asset protection world, the best thing we love is sales. Let’s get us some more sales.
Cathy Langley:
That’s right. That’s right. Great. I know one of the things that, when you talk about measuring the inventory, excess inventory, if you can build something that’s point in time, when was my physical inventory and then how much inventory do I have, I’m going to make this up, four periods from that inventory date and then compare it to the same period last year, right?
Larry Foster:
Oh, that’s-
Cathy Langley:
Right? Because it’s interesting. You go, “Well, Christmas happens the same time every year.” You’re not building inventory anymore this year then you did last year because it’s Christmas, right?
Larry Foster:
Yeah.
Cathy Langley:
So, you know you have a little bit of flow with Easter, et cetera, but your holidays are pretty much set. So, if you compare same time previous year to your inventory date, it gives you a really great calculation. And that can be month over month. Again, you have to get to the data, right? And if we-
Larry Foster:
Yeah, and I love that.
Cathy Langley:
… have time we’ll be able to talk about, what are the pieces of data. If you walk into a company, you’re like, “I have nothing.” I don’t say I have nothing. Somebody has it. Where do you go? How do you get it? So, we’ll see if we have time to do that.
Larry Foster:
Right. Yeah. I love that, Cathy. That’s great. That’s awesome. Yeah, great point. Love it.
Cathy Langley:
So, inventory management. We did POS, inventory management, center store. What’s next? What’s number three?
Larry Foster:
I don’t want to say we’re going to end up here because there’s one more thing, but it would be in the back room. So, I’m just following the flows of us walking into a store. And really, it’s really the opposite way. When I think about all this stuff from a retailer perspective, it comes in the back door first, goes on the floor, and then out the front. But anyways, as we’re walking in the store, back room is a very, very big piece of our business and our assessment and concerns operationally. So, we would definitely be interested in warehouse receiving and DSD receiving, and really focused a lot on the DSD piece because those are… Well, a lot of people are very good at warehouse in general. They have a program set up with either I’ve got a way to manage my shortages or I’m being short-shipped or whatever.
There’s some process that someone has in place for warehouse management and supply chain. Where we see most folks, and struggle’s a bad word because there’s a lot of smart people out there and they know that vendors are very important, but where we see opportunity is vendor performance code of conducts, what we expect when a vendor comes in, what we expect them to be and do, and how they check in and how they check out and when they do deliveries and especially credits. Credits are a big, big opportunity. So, that’s really a big focus when we think about the back of the store. Other than, why is the store being left open all day long and there’s a bunch of cigarette butts out there? But I digress. But that certainly is a problem too, is how we manage our backdoor security, all of our egress points.
But operationally for sure, vendors are a very important piece of our business. In a grocery world that’s 25 to 30% of your sales in grocery as a rate to your grocery sale. So, that’s a big piece to have as a whole. And that goes back to the floor again. So, that center of the store includes a little bit of this back room stuff. There aren’t really these strict barricades, so center store has a lot of DSD in it. So, when we think about out of stocks, expiration dates, rotation, we find those are all big opportunities on the DSD side. I didn’t talk about rotation on just the center store in general. What’s your rotation program? A lot of the goods that we have in center store. But obviously when you start talking about dairy departments and the fringes of those things.
And so the back room for sure and DSD, because those folks generally are putting their own tags up or in many stores they still do, unless you’ve got a good vendor program. But yeah, DSD is a big issue. back room organization. It’s sort of like when you walk into the front of the store and you see all these shopping carts all over the place, the garbage out in the parking lot is overflowing. All the baskets are gone on the front end. You know that you’re walking into… Something’s going on. They just got a busy period or what’s happening. But the back room’s the same way. If the back room is a disaster at eight o’clock in the morning or three o’clock in the afternoon or six o’clock in the evening, that’s a piece that you should be concerned about.
If my back room is not organized, I don’t have a good 5S program where everything has a place and everything should be put into that place when the day is done. And that could be as simple as all of my U-boats have a little section called the U-boats, and that’s where they go every night. During the day I’m using them. But at night everything gets put back where it was. So, organization’s a big piece that, if you think about what we talked about earlier with back room inventory, I’m sorry, with center store and inventory and all the excess inventory, it’s not uncommon to see, if you have excess inventory, your back room might be just as bad from an organization perspective.
Cathy Langley:
And a couple things there. So, when you think of your back room’s a train wreck, that leads to so many other things. And not just inventory. Are your fire exits blocked? Are your electrical panels blocked? There’s so many other things. And I know there’s a ton of tools out there that can help with that. You mentioned 5S program. Can you dig into that just a little bit?
Larry Foster:
Yeah. When we think about 5S, it’s really about organization. And I am not prepared to tell you what each of those S’s are. Shame on me. But it is in stock back there. It’s stealth. It’s cleanliness. It’s having a place for everything. You can walk into a back room that has all of their bays and their warehouse area is all labeled beautifully. Right here is soda. My coke is set up over here. My Pepsi is set up over here. Here’s where all my pet food is. Your back room is just beautifully set. Inventory levels look good. The floors are clean. The garbage is picked up. How I handle my excess inventory, whether they’re in banana boxes and they’re all disheveled all over the place. So, you’re really looking at all pieces of organization and cleanliness.
If you can go back there, I don’t want to say eat off the floor, but you can tell when that back room is taken care of just as good as your floor is out on the sales floor, then you’ve got people that are managing that part to the best of their ability, which you make some suggestions that they’re probably managing their inventory pretty good too. I’ve been in back rooms and I know you have too, that you just go back there and you’re like, “Oh, I don’t know how you’re finding anything.” Because then the first thing you think about is everything that comes off that truck is probably going right to the shelf because nobody wants to manage the back room first.
Cathy Langley:
Right, right. And so regardless of what you call a 5S program, essentially it is a back room management program, right?
Larry Foster:
Exactly.
Cathy Langley:
What are the most important things? And then building a program and obviously inspecting what you expect. One other thing on this before we move to our last, I don’t want to say last topic, but next topic. When we talk about DSD deliveries, and I think ultimately that is perception of control. Whatever your program happens to be, if that delivery driver knows that when they walk in that door, they need to check in and they need to check out and there are certain expectations. Just like the outside of my store is clean, the floors are clean, et cetera. It does establish an overall perception of control. So, I think if listeners don’t currently have that strong DSD program, and also, let’s be real, we all have tons of programs, are they being executed, right?
Larry Foster:
Right. Yeah.
Cathy Langley:
So, is that actually happening?
Larry Foster:
Yeah. We really do think about DSD the same way we think about point of sale. So, even the data side, very interested in all of the deliveries that come in by vendors. Because you’re building a vendor performance scorecard across all your stores, but you’re also building all your stores across your vendors that were in that store. So, there’s two ways to look at that data-wise. And the KPIs and the frequency of credits are important. Your average invoice failures are important on the delivery side versus your credit side as well. So, it’s a great opportunity to garner and grab more data and put it into tools that allow us to just understand and be more intelligent about the business. And you understand how important that vendor is in so many ways, right?
Cathy Langley:
Yeah. Okay. So, we’ve done POS, center store, back room. What’s next?
Larry Foster:
So, we do a lot of grocery work. So, we cannot talk about grocery without talking about fresh item management. And the perishable side of the business is so very important. While center store garners a lot of sales and not necessarily high rates of shrink on your center store, comparatively speaking, a lot of your shrink operationally comes on the perishable side. So, we’re very focused on space to sales, aging analysis. Is the customer getting the item that’s the freshest? Are we giving that to the customer? Planograms are very important on the fresh side. Production planning. How do we know how much to make in our bakery departments? So, these are all things that generally all good retailers have things in place, but these days you still find folks using paper. Or if they’re not using paper, they’re using some Excel version of production planning. And there are a lot of tools out there these days, and that’s the biggest pieces over production.
Am I scanning out my known loss? That’s a big, huge piece on the fresh side so that we understand, am I making too much? Am I ordering too much? What’s being thrown away? Am I recording what’s being thrown away? What rates of known loss did I have versus my true loss? So, we have a good understanding from the perishable side of what those rates should be to give folks a target. So, if I’m in the bakery department, I really should know 80+ percent of the things that I’m throwing away, if not more. The more we know that’s being thrown away, the better we are of what we need to produce. The less we know, the more mistakes we make. That’s just generally, and I think we all have a good grasp on that. But a lot of retailers, they get big, they get big fast and they’re all about sales. But we try to help them when it comes to really the profitability and understanding waste and loss.
Cathy Langley:
Yeah, that’s good. So, if we think about, let’s just say you went into a retailer, QSR, et cetera, whoever you’re evaluating, and the AP or the operations team, I’m going to say lacks data. Most of what we’ve talked about, there’s data that drives the decisions, right? Because if not-
Larry Foster:
Sure.
Cathy Langley:
… you’re just fortune-telling. Sorry. So, if you could get your hands on two or three pieces of data, inventory turns is at the top of your list?
Larry Foster:
Mm-hmm.
Cathy Langley:
Okay.
Larry Foster:
You were talking about complete store now, right?
Cathy Langley:
Complete store.
Larry Foster:
Complete store. So, for sure I would say inventory turns would probably be the biggest understanding. At least overall inventory disposition. But I would say that it’s hard to say three for the whole store. I would definitely say that when we think about SRAs as a leading indicator, I think that’s important. I think whenever we think about data, it should all be that data that’s highly correlated to shrink or future shrink loss. Just when we talk about shrink, right?
Cathy Langley:
Mm-hmm.
Larry Foster:
Because there’s a whole other things. Obviously we all know the importance of other things that we all do, labor rates and things of that nature. But from a shrink side, I would say that that would be one of the big pieces. On the fresh side of the business, you really want to know, obviously shrink rates to department sales and to the rate to the whole store. But that known loss component is very big in the fresh side. And on the center store side, I would say inventory turns, data supply. Data supply is also very, very good on the fresh side too. I can’t not say that. That’s very important data supply there.
And then for sure DSD. I would say credits and invoice ratios are very important. And then POS, SRAs, inventory also adjustments. So, when we go do assessments, our data requests can be astounding for people. Because they get like, “Holy cow, what are you looking at that for?” Because at the end of the day, we’re looking for a way to show folks a way to get better. And if we start thinking about all this data as a prediction of what your store is coming to when they do their physical count, and we can get ahead of that, I think that’s important. And that can be very helpful for clients.
Cathy Langley:
And if there’s somebody listening that doesn’t have all of this data or access to all of this data, I think the other important thing to remember is you can step your way into this. If your ultimate goal is shrink by category or shrink by item ultimately, shrink by item so you can execute at a higher level, you may have to sacrifice by category at first. There’s ways that you can step into it, right?
Larry Foster:
Yeah.
Cathy Langley:
So, I think that’s interesting is you don’t necessarily have to bite it all off at one time.
Larry Foster:
That’s the hard part about consulting. It’s like, Cathy, you go into it with all of your experience and you want to lay out a plan for somebody to grow and become more profitable. We always have to have that caveat that, “Look, you’re not going to do this overnight. Here’s the plan and the steps to get there.” And it might be a one to three year plan. We’ll tell people, “Here’s some quick wins that you can get in the next three or six months that can help fund a project.” And I think that’s important. “Close your back door, for God’s sakes,” things like that. That’s going to help you and then you can start to fund some of those other things. So, I don’t know if people still like to use the crawl, walk, run, but I think that’s still very true for people. And you just can’t start running because that’s when mistakes happen.
Cathy Langley:
Yeah, true. Very true. All right. So, we’re going to wrap things up here, Larry. One of the things I like to do with all of our guests is to talk a little bit. You and I both obviously been in the industry a long time and we know it’s a very relational industry. You build great relationships with people. You have a problem, you have people you can call because you’ve built a relationship with them. So, if we talk personally, as much as we ever care to, start, stop, and continue.
So, we all do it from a professional standpoint. You sit down and you do an evaluation, whether it’s the end of the day, the end of the week, the end of the month, the end of the year. What is one thing I’m going to start doing, one thing I’m going to stop doing, and one thing I’m going to continue doing? If you take that and flip it to you in what you do when you’re off the clock, what are some of the things that you would come up with for a start, a stop and continue for the listeners to get to know you a little bit better?
Larry Foster:
Okay, that’s fair. It’d be so easier if I could talk professionally, because I would definitely say I would love to start being more networked. Because I think what you talk about is very important. In consulting, we lose some of that networking. So, I think it’s important for everybody to do that. But okay. So, personal. I think from a start perspective, I would need to say yes more often. So, whether it’s opening yourself up to new adventures, whether it’s family or vacations, I never got a chance to do that. I think, and especially at this part of my career, it’s like I take stock more and really saying, “Yes. Yeah, let’s go do that. That’d be fun.” So, I think that’s important, to keep an open mind and whatever’s in front.
Cathy Langley:
Yeah, that’s a good one. That’s a real good one.
Larry Foster:
Stopping. Yeah. I think stopping. When I got thinking a little bit about this, and spoiler alert, she told me that she was going to ask this, so stopping is the things that are negative. And there’s so many things these days in this world and we can all go sideways at times. Put down the darn phone. It’s a negative. It’s a distraction. And Cathy, we started off this conversation about controlling the controllables. Well, that’s this too, right?
Cathy Langley:
It’s true.
Larry Foster:
Stop being, whatever, swayed by the things that you really can’t control. So, put down the darn… Can I say damned? Put down the darn phone.
Cathy Langley:
You can say damned. I love that. And then continue.
Larry Foster:
Continue. Yeah. So, without being so philosophical, I’ll just pick some things. Continue on this journey. I do a lot of reading. I do not read nonfiction. I read a lot of fiction. I’m hoping that that’s all good. So, yeah, I do a lot of reading and I want to continue to do that. But certainly learning. I think without getting on the professional side too much. Things change so fast in our industry. If you don’t know about Udemy, I think that’s how you say it, it’s a great place to go and learn things. So, everyone’s doing data visualizations and all these things. But anyways, it’s just continuing to learn. I probably learn the most from my kids these days. I love listening to music. I finally got rid of all my hard music and put it all on Spotify, so I’m trying to-
Cathy Langley:
That’s funny.
Larry Foster:
… do things as much as digital as possible and get all that, “Oh yeah, I remember Motley Crew.” So, make sure that I have that ready for continuing. So, continuing reading, learning. We’d go on vacation, try to do that as much as possible. Long weekends, things of that nature to-
Cathy Langley:
Yeah. That’s some good stuff. It’s interesting, through everybody I’ve asked that question to, whether it’s on a podcast or not, when you try to ask people in the AP industry from a personal perspective, it always shifts. Because we are one person, right?
Larry Foster:
Yeah. For sure.
Cathy Langley:
And we love the industry we’re in. But I love your saying yes. And just a real quick personal story. My husband recently went on a cruise, just him and his sister. Some quality time. And I challenged them. I said, “I want you to pick one day of that cruise and say yes to everything.” Somebody’s like, “Oh, you want to do this?” “Yes.” Don’t think about it. Just say yes and just go, right?
Larry Foster:
Yeah.
Cathy Langley:
I mean, don’t-
Larry Foster:
Within reason.
Cathy Langley:
… do anything illegal, right?
Larry Foster:
Right.
Cathy Langley:
But just say yes.
Larry Foster:
You said yes. Put the bong down.
Cathy Langley:
Yes. You told me, Cathy.
Larry Foster:
You might want to edit that. Yeah.
Cathy Langley:
But no, I mean, it really is, we tend, especially as we get older, we tend to overthink everything. “Oh, well, yeah, but am I capable of doing that? What’s the weekend going to look like?” All of these things. Just go in and do it and experience it. We’ve been given this gift, right?
Larry Foster:
Yes.
Cathy Langley:
So, let’s enjoy it. So, really good start, stop, and continue. Thank you. I appreciate you-
Larry Foster:
Oh, you’re welcome. Thanks for asking.
Cathy Langley:
… being real with us.
Larry Foster:
Yeah, I try to.
Cathy Langley:
Larry, thank you so much for your time. It’s been a pleasure. Appreciate everything that The Stores Consulting Group does for our industry and Solink, and you are a really great partner. So, again, appreciate the partnership and friendship and best of luck to you. Thank you.
Larry Foster:
Yeah, Cathy, thank you so much for having me. Much appreciated.
