In accounting, inventory shrinkage (sometimes shortened to shrinkage or shrink) occurs when a retailer has fewer items in stock than what is represented on their financial balance sheet. This difference in the physical count and the expected inventory is the shrinkage. This discrepancy may be due to procedural errors, goods being damaged, lost, or stolen. Shrinkage directly affects profits and ultimately can impact the success or failure of a business.
The 2020 National Retail Security Survey finds shrink at an all-time high, accounting for 1.62% of a retailer’s bottom line — costing the industry $61.7 billion. If your optical is producing $1 million each year in sales then that is $16,200 off the bottom line. Many estimate that optical is on the higher end of the averages and may be as much as 7% which translates to $70,000.
So, do you have shrinkage? The answer is likely - Yes! The real question is how much shrinkage do you have and how can you lower that amount bringing more money to your bottom line.
Where does shrinkage happen?
By defining where shrinkage happens we can look at how to solve or reduce the instances. For example, if we know shrinkage is happening due to external theft then security cameras would be a deterrent. RFID tags with doorway portals can also help prevent external theft. The tags will alarm as they pass through the doorway. Internal signage alerting your customers to your security system might make them think twice.
This is a terrible story but I’m going to tell it anyway. Once a year where my husband practices, a group of highly organized and professional thieves show up in the optical. They come in with a crowd. A couple of them have lots of questions and tie up all of the employee’s attention while the others are putting frames in sweatshirt pockets and large purses. The whole encounter takes less than 10 minutes and they are gone and on to their next target. I think the most they have gotten is 20 frames. They target the higher priced items so this is a $1500 or more event.It happens once a year because this is a travelling group that moves from city to city. The staff are aware of it and watch for them but are still unable to prevent it.
Most external theft isn’t this blatant or organized. It’s 2 or 3 frames dropped in a pocket or purse. If this happens only once a month, that is still a loss of 24 or more frames per year!
Let’s talk a minute about stale inventory. Stale inventory is on the verge of becoming shrinkage and therefore a loss to your business. I bring this up because so many of our Wave RFID clients have struggled. In more than 50% of our installs our clients have FOUND frames. Where you ask? Under counters in boxes, in the back room, in the lab… you get the idea. Why were they tucked away in these hidden places? In some cases they weren’t selling so they got pulled from the board and others were REP RETURNS never sent back. I’ll be following up with another blog on stale inventory, how to prevent it and how to manage it.
How can you reduce external shrinkage? Here are some ideas...
Internal shrinkage is something no one likes to talk about. In my role as consultant I have been contacted to discuss many sad stories. It’s hard to believe that the people that we share so much of our lives with would do something that hurts us or our businesses. My best advice is always the same - put systems in place that keep people honest. The honest people won’t mind.
Some thoughts on how to reduce internal shrinkage
The bottom line is that without an active inventory process, you are hurting YOUR bottom line.
The lack of inventory management can kill your business. You need it to make money, but if you don’t control it, it will devour your profits. Most businesses don’t control their inventory well because it’s too hard. It takes too long. Too many processes require manual steps and endless hours with spreadsheets.
I love solving problems. A few years after launching Destinations Consulting I was ready to solve problems on a larger scale. Solving problems one practice at a time is rewarding but I needed to create something that has a larger impact for more people.
My other secret LOVE is technology. It puts me at the GEEK table at parties but I can’t help myself. I’m always interested in the latest tech toys.
Now that I have clued you into how I think you can probably see my thoughts like bubbles above my head - I love big problems. Inventory is a big problem that doesn't have good solutions. I'm a geek - Is there something new that I could use to better solve this long term painful issue. RFID. Wait. WHAT?!? Ooooo. That could work!
The WAVE RFID project did not happen overnight. Doug Johnson and I spent a lot of time on research. We looked at various inventory and asset management systems and put together a list of what we thought those products did right. We also researched RFID technology and how and where it was being used successfully. At first the RFID equipment vendors told us the same thing - RFID is hard, are you sure you want to do this? Why don’t you find someone else to do that for you?
This leads to my next personality reveal - I am STUBBORN! We chose not to take their advice and to go it alone. Doug got RFID certification and I can proudly say these are our products. We wrote the applications for the readers and the cloud inventory management software from the ground up.
So, to answer the question - why inventory? Inventory management is critical to profits and ignored by most practices and software vendors. There is cool technology, like RFID, that can make the process easier. No one else is offering a good solution because it is a challenge to design and implement. This sounds fun to me! Let’s do it!
“How many frames SHOULD I have in my inventory?” is one of the most common but also most important questions an optical manager should ask and answer. It is a close sister to a more basic question - “How many frames DO we have in our inventory?” If you are one of the many, the busy and the stressed you might struggle to answer.
Inventory is like dollar bills hanging on your frame boards. You bought it and now you own it. The management of this asset is directly related to your bottom line profits, so… what should you do?
Start by gathering the following information
Calculations are your best friend
Your next step will be to do some calculations. The most critical is TURN RATE. Turn rate is a ratio and is defined as the number of frames you sold in a 12 month period divided by the number of frames you stock in your inventory. For example, if you have 1000 frames on your frame boards and you sold 3200 frames last year then your turn rate is 3.2. Any number over 3 is a good number. A turn ratio of 4 is a great number.
Knowing your global turn rate number is critical but you also want to do these same calculations by brand. Let’s say for example you have 50 frame board spaces for Coach but only sell 100 Coach frames per year. That means your turn rate for Coach is 2. Maybe you have 50 pieces of L.A. Eyeworks but you sell 250 pieces of L.A. Eyeworks each year. That would be a turn rate of 5. It might be a good idea to drop the number of Coach frames and increase the L.A. Eyeworks frames.
You can apply this same thought process to your price points. Look at what your staff sells in relation to what is on your boards. You may LOVE high end frames and so you have filled 50% of your spaces with frames that retail for more than $400. Looking at these numbers you may find that only 10% of what you sell is over $400. This is a common and costly mistake. In our scenario above of 1000 frames, that means 500 frames cost approximately $200 or greater. That portion of your inventory now is representative of $100,000 of your resources. Dropping that price point to a number closer to actual sales (let’s say 20%, instead of 50%) and moving 30% of the inventory to a lower cost point ($100) will drop your inventory by $30,000.
Make adjustments and evaluate regularly
Once you have the information you can make changes. Your efforts may produce the following new targets and recommendations.
What I see and what happens too often is that changes are decided, they are published and discussed. A month later they are forgotten and the physical inventory is back at 1500. The key is to hold everyone involved in inventory purchasing and management accountable. Make sure you are reviewing the numbers monthly (weekly is even better) and are making improvement decisions based on new information quarterly. Inventory management is an art and it is never finished.