Using LP Cycle Counts for Predictive Analytics Part 2 – Why Adjusting Store Inventory is a Bad Idea

In Part 1 of LP Cycle Counts I described a robust program and the related benefits.  The cornerstone of the LP program is cycle counts of all units in a Product Category and comparison to the units per the perpetual inventory system.  Over the years since program implementation and despite the success, several operational or financial managers have asked why we do not support making adjustments to inventory based on this program.  There are many reasons why inventory adjustments cannot be recorded based on the LP program and why implementing a program with the rigor to support inventory adjustments is not operationally or cost beneficial.

 

Using LP Cycle Counts for Predictive Analytics

Using LP Cycle Counts for Predictive Analytics

The LP Cycle Counts should take about 30 minutes to complete and should certainly not take more than one hour.  Store teams and their direct management are accepting of a program that is quick and easy to perform.  If the program included a goal to adjust inventory for missing units (CCA program), counting and comparison to the inventory system at the item/SKU level is required, which significantly increases the time required to complete the count.  For example, the effort required to count men’s shirts hanging on a “rounder” (circular rack) located on the sales floor in a retail store.  For an LP count, the employee simply marks a starting point and then can count how many hangers with product are on the rounder.  This should take maybe 2 minutes for a rack w/ 100 shirts.  For a CCA program, the employee will need to scan (if appropriate equipment is available) or write down the item/SKU for each shirt.  The style and size of each unit is critical for a CCA program whereas this is not important for an LP cycle count.  If a scanner is used, the store must have software that supports cycle counting.  Assuming scanning, this rounder should take maybe 6 minutes to complete.  The potential adjustments will also require review and posting which will take more time.  Optimistically, the CCA program will take three to four times longer.

The accuracy of the count is a concern for either type of cycle count program.  For an LP count, an error that leads to an indication of high shrink will lead to more time spent on follow-up and possibly a loss prevention investigation.  Typically, the first step is a recount which will identify that an error was made rather quickly.  In any case, the count in the LP program is an analytic intended to identify outliers but does not affect the inventory records.  A recount for a CCA program will take much more time but is far more critical given that the inventory will be adjusted.  Errant adjustments may trigger automatic re-orders of product the store does not need.  The tolerance for error is rightly much lower for the CCA program which leads to a greater investment of time.

There are two schools of thought related to permitting store personnel to adjust inventory.  For a “big-box” retailer or store where the store management does all of the ordering, it makes sense to allow these personnel to adjust inventory.  Essentially, the personnel recruited will have much more operational experience, are being held accountable for all aspects of profitability and are highly vested in store success.  For the vast majority of retail stores which are based in malls, downtowns and other locations w/ relatively small square footage, it probably does not make sense to allow these personnel to adjust inventory.  The personnel recruited are typically much more sales and product focused and less operationally savvy.  The purchasing is typically performed by merchants/planners at corporate and the product is “pushed” out to the store.  In either case, permitting such adjustments is permitting employees that have ready access to the inventory to adjust the records which is a classic segregation of duties problem.  For a “big-box” store there is typically a security team on site so this is less of an issue because bag checks and other procedures for protecting inventory are in place.  For a smaller store there typically is no security or perhaps one non-employee security guard.  The inventory has far fewer protections in place.

The most substantial challenge to performing inventory in most retail stores is that the inventory is not assigned to a location like at a distribution center (DC).  A CCA program is absolutely recommended for a DC.  I recommended and helped two publicly-held corporations implement such a program yielding numerous operational benefits including no longer having to shut down to perform a physical count…ever.  A retail store is not an environment that supports a CCA program and frankly, there is no cost benefit.   A good counting company overseen by your store teams with a solid testing plan can generally inventory an entire small store in three to six hours for a 3rd-party cost of $400-$1,000.  It is much better to perform LP counts, and then if a large discrepancy is confirmed, launch an investigation and, if the loss is significant, schedule an interim inventory for only that location and thereby adjust all of the inventory at that location to actual.

The most important reason to favor an LP program over a CCA program is that the majority of your stores will have no significant inventory issues.  The LP program is adequate to identify the outliers for investigation but is a minor time investment at the majority of stores that have no issues.  The CCA program is the opposite.  All your store personnel are burdened with an investment of significantly more time to confirm that most have no inventory issues.  Far better to implement an LP program, follow-up on the outliers, investigate and address the cause of loss, and then perform an interim inventory if deemed necessary.  An analytics approach is the superior solution.

Implementing a cycle count program to check store inventory balances in between physical inventories is an important part of an asset protection/loss prevention program.  An LP program is far less burdensome, less costly, more targeted, and more accepted by the store teams than a CCA program.  The analytics approach provided by the LP program is the best way to leverage compliance.

About the Author

Glenn Murphy, the co-founder of BestGRC and founder of GRC Management Consulting, primarily focuses on empowering entities to leverage their compliance activities through the BestGRC “cloud” software, his consulting work, publications and the “Leverage Compliance” blog.  Find Glenn’s full profile at http://www.linkedin.com/in/glenntmurphy/ , follow him @GlennMurphyGRC and subscribe to the Leverage Compliance blog at http://www.bestgrc.com/blog/