Using LP Cycle Counts for Predictive Analytics Part 3 – Follow-up

In parts 1 & 2 of LP Cycle Counts we outlined the components of a robust program and the advantages of an analytic-based LP cycle counts over a cycle count for inventory adjustment program.  A discipline of timely analysis and follow-up applied to the LP cycle count results is critical.  The whole point of the program is to take appropriate action for the few locations that have issues, and leave the others to continue their excellent work uninterrupted.  An effective program becomes a “lens” to focus your management and oversight resources on issues before they mushroom into huge losses.

Loss Prevention (LP) Cycle Counts

Loss Prevention (LP) Cycle Counts

“Timely” follow-up for “non-performance” of a cycle count from the direct supervisor (e.g., District Manager) should occur on the day of notification.  This follow-up should include a directive to perform the cycle count, even though past the deadline.  Directing the store to perform the count communicates that they cannot avoid performing a count by missing the deadline (you do not want to reward bad behavior) and also the importance of the count to the supervisor.  In many cases, this will be the only count of that product category to occur between physical inventories and therefore the one chance to identify a problem and take action to mitigate further loss.

“Timely” follow-up for poor results means within three days following the cycle count due date.  This follow-up can be from the direct supervisor but should also come from the function overseeing the cycle count program (CCO), typically asset protection/loss prevention, inventory control or store operations.  A robust program will have an on-line cycle count results entry form that will “flag” shortage/overage of greater than a pre-defined percentage and require the completion of certain reconciliation questions (i.e., typical errors) prior to submitting the results.  The form will calculate an adjusted shrink based on the units entered in response to these questions.  For example, a reconciliation question related to an overage will ask if a recent carton of goods was physically entered into the store inventory (stockroom or sales floor) but not received into the system.  Given the inclusion of such reconciliation questions in the cycle count submission form, a high +/- shrink percentage typically indicates a problem that requires further investigation.  Recall that shrink % = (units short/over) / (unit sales since last physical inventory).

For the overage example given above, the CCO should analyze shipments of items in the product category cycle counted.  They will look to identify cartons that should have been received prior to the cycle count but that remain open for receipt.  The carrier shipment tracking information is then used to determine if and when the carton was delivered.  If the carton was delivered prior to the cycle count, then the CCO works with the store to determine if the items were received and put into stock without processing through receiving.  If so, the store is instructed to process the receipt which updates the inventory on-hand and records the related accounting liability for the goods.  The CCO should then enter a new cycle count inclusive of these units so that accurate cycle count information is displayed on the management dashboard.  The CCO should enter this cycle count rather than the store so that it is easy to identify that the adjusted count resulted from an investigation.

An overage that is not reconciled by the process noted above is most likely the result of an error made during the prior physical inventory.  The items included in the overage were not counted, adjusted out of the inventory as a result of recording the physical count, but obviously remain in the store.  The merchant for that product category should be advised of this overage.  Typically, it is best to carry this overage until it is corrected by the next physical inventory.  This is an example of good reasons to invest the time to analyze physical inventory results.  This will be the topic of an upcoming blog.

Shortages identified by an LP cycle count are certainly a primary concern.  As noted in Part 1 of LP cycle counts, only product categories at risk of significant financial loss are cycle counted.  A shortage therefore implies a risk of potentially significant financial loss.  The CCO should follow-up with a phone call and go through the cycle count results submitted, including the reconciliation questions.  If all seems in order, then shortage is as reported and the follow-up should consider:

  1. Location – determine if the location of the items on the sales floor increases the risk of loss.  Location by the exit door, by the dressing rooms (if unsupervised), and in hard to see alcoves are examples of high risk locations.   Address this by moving the items or planning staffing to be in those areas.
  2. Protection – determine if the items are suitable for electronic article surveillance (EAS) tags and implement, place the items under lock and key, or place by the register are possible solutions to better protect the items.
  3. Access – determine if the inventory is typically under lock and key on the sales floor and/or in the stock room.  A shortage of such items is an indication of internal/employee theft.
  4. Delivery – perform a detailed analysis of the missing items and determine if the listing corresponds to a carton of “delivered” product.  If so, the likelihood is that the delivery personnel withheld the carton and the store receiver did not detect this shortage/theft.  Review CCTV of the delivery door if available for delivery to determine if the delivery was shorted.   Alternatively, implement procedures to detect the delivery personnel attempting to short a delivery.  Report issues to the carrier for their investigation and request remuneration for the stolen goods.
  5. Staffing – determine if there are times when there is only one employee on staff at the store.  If this is the case, inventory is highly vulnerable to internal theft during these times.  Strongly consider a loss prevention investigation with employee interviews.
    Inquire of store management if there are very busy times when there are not enough staff.  This leaves the store vulnerable to external theft/shoplifting.  Consider improving the scheduling of staff to match store traffic.  Also, develop a staffing location plan for an unexpected rush of customers and train the staff.
  6. Off hours – analyze the alarm logs to determine if there was a re-entry into the store in off-hours.  Determine if this was reported on an Incident Report w/ adequate explanation.  If no Incident Report, determine who entered the store and have them interviewed by loss prevention as this is an indicator of possible internal theft.  There will be more on analyzing alarm logs in a future blog.

The CCO or Loss Prevention should plan a store visit if significant reconfiguration of the sales floor is required or if there are indications of internal theft.  A revised protection plan to guard against external theft, a review of delivery personnel, or the identification and elimination of an internal thief are all appropriate actions based on the circumstances.  These actions must take place as soon as possible to reduce further losses.  Once actions are implemented, additional cycle counts of the problem product categories should be scheduled specifically for that store to establish that the actions taken are effectively reducing loss.  The additional counts also signal to the store that the CCO is staying involved to help them reduce loss.

Timely and effective follow-up is an essential requirement of an LP cycle count program.  The follow-up not only leads to actions that will reduce future loss, but also signals to the store personnel the importance of the program and the active involvement of the CCO and their management to help them succeed.  The partnership of the CCO, District Manager and store personnel is required for a robust LP cycle count program to effectively 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/