capgemini -21 ste centuryshrinkprogram

8/6/2019 Capgemini -21 ste CenturyShrinkProgram

1/20

The 21st Century Shrink

Program:

Analytics, Reporting and the

High-Response Protocol

Collaborating with Retailers toCreate World-Class Execution

Retail the way we see it


2/20

1. The Opportunity 3

2. Profit Recovery Program Evolution 5

3. The Analytics 6

3.1 Data Collection & Validation 6

3.2 Correlation Analysis 6

3.3 Regression Analysis 7

3.4 Critical Success Factors 8

4. The Scorecard 9

4.1 Exception Reports 9

4.2 Why Scorecards? 9

4.3 Development 9

4.4 Implementation 10


5. The High-Response Protocol 12

5.1 Design 12

5.2 Execution 12


6. Why Do I Need to Change? 14

6.1 Profit Recovery ROI 14

6.2 21st Century Retail Operating Environment 15

7. Our Approach 16

About Capgemini 18

Appendix 19

Endnotes 19

Acronyms 19

Table of Contents

Prepared by:

Capgemini U.S. LLC

Date:

June 2008


3/20


includes not only inventory loss butalso controllable losses in cost, price

and recoverable merchandise. AtCapgemini we refer to this opportunityas profit recovery (see figure 1).

Capgemini has routinely identified50-100 basis points of profit recoveryas a result of analytics and reportingprograms and returned 12-15 timesof implementation investment innumerous retail environmentsincluding grocery, chain drug, massand specialty. Capgemini has saved

retailers more than $5 million forevery $1 billion in sales per year.Even more telling, our experienceshows that, on average, properlyimplemented profit recovery reportingprojects have returned 10-20% ofthese savings within the first year.

How do we do it? We work togetherin putting the pieces of the puzzletogether so we can see the wholepicture. A three-pronged approach isemployed:

1.Data analytics

2.Robust reporting platform

3.Targeted, high-response action plan(Figure 2)

What if you could wade through thevast amount of collected retail data to

determine truly actionable elements?What if you could get your organizationfocused on the true indicators ofshrink? What if you could respond toalarming trends as they are occurring?

With a properly implemented shrinkanalytics and reporting program, thesescenarios have become reality formany retailers.

Sifting through all the data collectedat the average retailer, trying to pick

out relevant information is similar toputting together a jigsaw puzzle withan ever-growing number of pieces.This is especially true when searchingfor gross profit recovery opportunities.Most retail store operators are notcued in to store and enterprise widechallenges until months after theyhave occurred. Many retailers onlymeasure shrink on a quarterly oreven yearly basis as part of a physicalinventory. By the time the shrinknumbers have been reported, monthsof loss have already been carried outthe company doors.

Retailers do not all measure shrinkconsistently. For this reason, the onlyway to truly measure loss is to look attotal gross profit leakage which

The 21st Century Shrink Program:Analytics, Reporting and the High-Response Protocol 3

1. The Opportunity

Capgemini has saved

retailers more than

$5 million for every

$1 billion in sales per

year as a result of

properly implemented

profit recovery reporting

programs

Figure 1: Profit Recovery: The True Measure of Company Loss

Other Lost Gross ProfitShrink

Inventory Loss (Store Reported) Physical Inventory (Adjustment) Damage Return / Customer Service Donation Close-out Shipping Error

Warehouse Loss / Swell Void Loss

$

$$$Profit Recovery

$$

Cash Over / Short Check Loss Credit / Debit Card Loss Price Change / Exit Strategy Employee Purchase Discount RTV / Vendor Credit Loss A/P-A/R Losses

Coupon Abuse Other Store Discounting

Source: Capgemini


4/20

The first piece of the puzzle is todetermine the retailers true indicatorsof gross profit loss. With as muchdata that is possibly available, the datais merged together into an integrateddatabase. Correlations are run witheach data element against eachstores shrink numbers. With yearsof experience on hand, the data ismined in innovative ways to find truerelationships. The effect that multipleindicators can exert when appliedsimultaneously is analyzed and

conclusions are developed. The endgoal is to mirror the retailers actualoperating environment - wheremultiple factors work togetherincrease profit loss.

The second piece of the puzzle is touse the output of the analysis to create

a resource allocation tool. Everycompany strives to do more with less.To facilitate this goal, the strongestindicators of profit loss is determinedbased on statistical analysis.Exception reports are developedwhich give quick views into greatestprofit recovery opportunities and alertretailers to performance challenginglocations. (These reports can typicallybe set up in a short amount of timeand require little technology to

support.) The exception reportsthen feed a series of one-page shrinkscorecards. These scorecardshighlight predefined metrics whichcue in decision-makers toextraordinary trends occurring atparticular locations. Shrink is mostclearly visible at the operations levelof the business, however, ourexperiences indicate there are rootcauses in all business areas (seefigure 3 for our view of a successfulprofit recovery program). Therefore,scorecards are developed for alldepartments, with clear emphasison: store and regional operations, lossprevention, corporate and fieldmerchandising, other supply chainactivities and vendors.

The final piece of the puzzle is highresponse protocol as profit recoverycan only be induced as a result ofdirect action. Data and tools bythemselves do not reduce profit loss.

Capgemini layers industry-leadingpractice on top of own experiencesand direct observations to create anaction plan that allows the organizationto take the appropriate steps at theright time. The action plan is tailoredto key profit loss drivers for particularretailers and compiled into an easy toreference format so that expectationsand predictable response methods canbe clearly established.

With the puzzle solved, the retailerwill be able to effectively increaseprofit recovery and save tens ofmillions of dollars in the process.

4

Figure 2: Future State Shrink Reporting Program

e e 1 6 (T ra i l i m o t h s r i t o t a l s e c e p t e i r o m e t a l r i s - a s s e s s e a a l l s e l f - a i t - b i a a l l ) tore core 8.81 toreistrictank

K $ % G oa l S co re R a nk V al ue G o al S c or e R an k V al ue G o al S c or e Ra nkCurrQtrF/EShrink 70.00 3.70 2.50 0.17 10 Non- Aut hRetur ns 0. 05 - 0.12 7 V oi ds 2 .8 7 2.00 0.24 14Cur r Qt r RX S hr ink 23. 00 1.08 0.50 0.24 14 Dam age Ret urns 0. 15 0.10 0.17 10 R ef un ds 1 .9 8 1.00 0.36 21Cur r Qt r S hrink 93. 0 3.26 2.00 0.25 15 S hopl i f t ing Los s 0. 10 0.10 0.19 11 D i sc o un t s 1 . 12 1.00 0.22 13T 4 Q S h ri n k 3 7 2. 0 2.89 2.00 0.22 13 Non- Ret ur nLos s 0. 05 0.05 0.08 5 Rain Chec ks 0. 70 1.00 0.07 4V a ri a nc e ( 2 3. 0 0) (0.37) 0.20 0.29 17 T o ta l R e tu r ns 0 . 30 0.25 0.15 9 T o ta l SR A 6 . 67 5.00 0.32 19

K $ % V a ri an ce S co re R a nk V al ue G o al S c or e R an k V al ue G o al S c or e Ra nkF /E S a le s 1 ,8 92 47% 4. 86% 0. 07 4 C ur re nt 9 4. 00 98.00 0.17 10 C u rr e nt 9 7 .2 0 98.00 0.05 3R XS al es 2 ,1 30 53% 1. 41% 0. 10 6 P re vi ou s 9 3. 20 98.00 0.20 12 P r ev i ou s 9 5 .0 0 98.00 0.14 8T o ta l S al e s 4 , 02 2 100% 3. 03% 0. 07 4 V ar ia nc e 0 .8 0 - 0.10 6 V a ri a nc e 2 . 20 - 0.02 1

K $ # D ay s G o al S co re R an k V al ue G o a l S co re R a n k V al ue G o al S co re R a n kS a le s fl o or 3 6 8. 6 33.00 30.00 0.25 15 Out-of-stock % sales 0.50 0.50 0.10 6 C u st o me r 3 , 77 0 3,700 0.10 6Increase/(Reduction) 29.0 2.60 - 0.32 19 S ca n Ra te 9 8. 00 98.00 0.12 7 PrevQtr 3,890 3,700 0.07 4B ac k Ro om 8 9. 4 8.00 5.00 0.31 18 LP Cases 2 - 0.07 4 V a ri a nc e ( 1 20 ) - 0.14 8Increase/(Reduction) 8.9 0.80 - 0.24 14 S cr ip t 7 00 0.12 7RX 189.9 17.00 10.00 0.24 14 P re v Qt r 7 00 0.12 7Increase/(Reduction) 4.5 0.40 - 0.20 12 V ar ia nc e - - 0.14 8To ta l 6 47 .9 58.00 45.00 0.32 19 K $ G o al S c or e R a n kIncrease/(Reduction) 42.4 3.80 - 0.36 21 V ar ia nc e 1 2. 00 - 0.31 18

$ % G oa l S co re R a nk V al ue G o al S c or e R an k V al ue G o al S c or e R an kRegular Non-RX 519 12.90 12.70 0.12 7 P ar t- ti me 6 8. 00 60.00 0.03 2 W e ek l y Av g 9 . 10 9.00 0.05 3R eg ul ar RX 5 63 14.00 14.00 0.14 8 PrevQtr 67.00 60.00 0.07 4 P r ev Week A v g 8. 80 9.00 0.08 5O ve rt im e 2 01 5.00 3.00 0.17 10 V ar ia nc e 1 .0 0 - 0.07 4 V a ri a nc e 0 . 30 - 0.03 2D ou bl e Ti me - - - 0.02 1 F ul l- ti me 3 2. 00 40.00 0.03 2 Q t r -t o- dat e 8. 70 9.00 0.08 5

PrevQtr 33.00 40.00 0.07 4 PrevQtr-to-date 8.50 9.00 0.14 8V ar ia nc e ( 1. 00 ) - 0.07 4 V a ri a nc e 0 . 20 - 0.05 3

V alueS c or eRankR is k ra ti ng 9 .2 0 0.08 5

Store Shrink & Profit RecoveryScorecard Example

Shrink

Sales

K n o w n L o ss ( % o f s a les ) S a le s R e d u c in g Ac t iv ity ( % of s ale s )

S el f- Au d it S co re s D M Au di t Sc or es

Environment

MoneyOrder/MoneyGram

HoursScheduled

CountsI nv en to ry Da ys O th er Sh ri n k I nd i ca to rs

Wages (% of total w ages) Customer Service Scores

Shrink Indicators

0.32

0.32

0.31

0.27

0.25

0.23

0.23

0.21

0.20

0.0 0 0.0 5 0. 10 0. 15 0 .20 0. 25 0 .3 0 0 .3 5

Inventory

Returns -Damage, Plano, etc.

Sales ReducingActivity

C ashSal es

CashRefunds

Demographic Risk Enhancers

UnderperformingStores

#Year s Stor eH as BeenOpen

Markdowns

Correlation to Shrink

R2 = 50%

0.0075

0.0150

0.0225

0.0300

0.0375

0.0450

-0.01 0.01 0.03 0.05

Trailing 4-QTR Shrink

FittedValues

Correlation &

Regression Analysis

Scorecards

High-Response

Protocol What do you do when a

store begins showingalarming trends? Excess coupon use? Excess inventory? Etc.?

Add

Leading

Practices

Shrink

ReductionShrink

Database

External Data Demographics

Outside auditscores

Industry trends

Internal Data Inventory Returns POS data

Exception Reports

Source: Capgemini

Figure 3: The Capgemini Profit Recovery Program Wheel

Supply Chain &

Merchandising

LP, Accounting

& HR

Store

Operations &

DSD

POS &

Transaction

Monitoring

Minimized

Gross Profit

Leakage

Analytics &

Reporting

Source: Capgemini

Our experiences indicate

that there are root causes

in all business areas.

Therefore, scorecards are

developed for all

departments, with clear

emphasis on: store and

regional operations, loss

prevention, corporate and

field merchandising, other

supply chain activities andvendors.


5/20



Clear, consistent roles andresponsibilities must be assigned

when it comes to shrink and profitrecovery.

The transition to a holistic view ofprofit recovery takes time. Profit lossis everywhere and touches everydepartment. As such, it is essential tobring cross-functional teams togetherto address the issue and to raiseawareness and visibility of the trueglobal nature of profit loss.

Finally, as the company movesalong the continuum toward a moreprofitable organization, the toolsetmay need to be adjusted as well. AsCapgemini has experienced, exceptionreports initially crafted in Excel cangive quick visibility to poorperformance until enterprise-wide,balanced scorecards are implemented.For example, Capgemini helped a500 store chain drug retailer take100 basis points of shrink out of itsoperation through basic analysis,exception reporting in Excel andfocused action.

The path toward a 21st century profitrecovery analytics and reporting

organization is an evolution. Manysteps are needed to bring about thefull transformation and it is necessaryto set the stage that will take retailersfrom current to leading state.

The goal is to transform the organizationfrom reactive to proactive (Figure 4).This transformation has broadorganizational impact though. Sofirst, the retailer needs to objectivelyassess whether its organization is

ready for such a change and, if it isnot, determine what it will take toget ready. The programs currentlyin place and the readiness of theorganization to accept a new way ofthinking will greatly influence thespeed and impact of any transformation.

The key components of any actionplan are specific accountability,organizational alignment, andappropriate incentives. For instance,it is easy to determine that lossprevention owns shoplifting, but whoowns excess inventory? Typically, theresponsibility for excess inventory isshared or negotiated, even though itaffects operations, merchandising andloss prevention in profound ways.

2. Profit Recovery Program Evolution

Profit loss is everywhere

and touches every

department. Lossprevention is not solely

responsible for loss. As

such, it is essential to

bring cross-functional

teams together to address

the issue and to raise

awareness and visibility of

the true global nature of

profit loss.

Figure 4: Shrink Analytics and Reporting Program Evolution

Basic Analysis

Basic Dashboard

Exception Reporting

Reactive Response

Reactive Proactive

Action

Toolset

More Advanced Analysis

High-Focus Scorecard

Exception Reporting

Robust Analysis

Balanced Scorecarding

Exception Reporting

Proactive Response

Predictive Analysis

Data Warehouse

MS Excel / Access

Siloed Databases

Business Intelligence

Canned Analytics

Integrated Databases

Time to Implement

Source: Capgemini


6/20

To solve the profit loss puzzle, retailersmust first understand its true causes.

A series of data collection andstatistical analysis techniques areemployed that mine vast amounts ofdata and discover pointed, action-oriented information. Based onperformance characteristics, the analysistells retailers which stores are performingwell versus others that remain achallenge in relation to profit loss.

For many retailers, shrink is reallyonly uncovered when a physical

inventory is taken. The only way tobecome more proactive is to identifythe drivers of profit loss and focus onthose indicators that are moreimmediately known and frequentlyreported. By creating controls basedon the leading conditions andbehaviors identified in the analysis,quick value can be attained.

3.1 Data Collection & ValidationThe first step is data collection. Sincespeed-to-value is always one of ourmain concerns at Capgemini, we askretailers for a data request wish list inadvance. An integrated database isbuilt with the information that is mostoften received from a myriad ofrepositories. Typically, two parallelwork streams with the integrateddatabase are maintained. We takeone-time, static data extracts while,at the same time, preparing the ITorganization to provide automateddata feeds for on-going analysis support.

Capgemini will analyze the data andin collaboration ask questions such as:

n Does the data make sense given ourexperience in the industry?

nWhat were the collectionmechanisms? Are they accurate andconsistent?

n Can the data integrity be trusted?

All data is validated. Only dataelements that are directionallyaccurate and representative of theretailers business proceed forward.For example, data that contained amisplaced decimal point and data

from a store that was located rightnext to corporate headquarters might

both be removed. Either couldmisconstrue an accurate picture of theretailers true operating environment.

The goal is to build a like-storesample set. The aim is to include atleast 50% of the companys stores andcompare only like variables withinthose stores. For example, wecompare only stores open in the sametimeframe (trailing four quarters isgenerally preferable). Additionally we:

n Ensure that the data contains arepresentative cross-section of stores

n Remove any outlier variables orvariables that contain extraordinaryevents that would skew the results

n Exclude irrelevant variables

n Control for seasonality

n Control the data set for any bias inthe data collection or receipt process

3.2 Correlation Analysis

Once the sample set has been createdand store-level shrink numbersreceived, the potential indicators ofshrink are correlated to the storesactual shrink number.

To gain the best insight into the data,a number of data manipulations areperformed. For example, we will lagsome variables one time period. Wehave found, for instance, that somedata, like employee turnover, contributesto profit loss in future periods.

Capgemini will check for whatstatisticians refer to as multicollinearity.Sounding complex but simply put,this means that a particular variablemay not, by itself, be an indicator ormitigator of profit loss even thoughthe analysis shows a high correlation.For example, security guard expensemay show up as a high correlation.In reality though, security guardexpense is highly correlated to crime

in the surrounding area. Crime is thetrue indicator of profit loss notsecurity guard expense.

6

3. The Analytics

Based on performance

characteristics, the

analysis tells retailerswhich stores are

performing well versus

others that remain a

challenge in relation to

profit loss.


7/20


means that the model can explain at

least 50% of the cause of store loss).An adjusted R2 of .5 translates into acorrelation greater than .7 which isrepresentative of a reasonableexplanation of store loss (Figure 7).

As the regression analysis proceeds,we continue to check all variables forreasonableness and validate againstexperience and direct observation.

By combining the variables discoveredin the regression analysis with the

highest single-variable correlationelements, the retailer will have anaccurate depiction of the true driversof profit loss.

We use statistical software to quickly

analyze the interrelationship amongall variables collected. This becomesa highly iterative process as relevantvariables are included/excluded tofind the best fit for explaining storeloss.

Model correctness is typically displayedas the square of the correlation value(or R2). We use a slightly differentmetric adjusted R2. A models R2can be inflated by simply adding morevariables to the model, thus skewing

the models information content.Adjusted R2 controls for this fact. Asa result, we do not consider the modelreasonable until we have achieved anadjusted R2 of at least .5 (which

Academia will often state that youdo not begin to see even a weak

correlation until you receive a magnitudeof .3 and a strong correlation doesntexist until .7. Capgemini will workwith retailers to interpret the magnitudeof the correlations. The reality is thatthe correlations found in the businessworld are far weaker. There are twogeneral reasons for this:

1.Profit loss is rarely caused by onesingle factor it is far morecommon that multiple drivers worktogether to bring about store loss

2.Data collection at most retailers isan imprecise process themeasurement process at most retailstore operations contains a lot oferror and noise.

Because of these two issues, thecorrelation order becomes moreimportant than the actual number.

Both profit loss indicators andmitigating factors are analyzed in

order to give an accurate picture ofwhat drove the entire shrink number(Figures 5 and 6).

Finally, all analysis is accompanied bya reasonableness check. Correlationsare compared against direct observation,industry experience and commonsense to make sure that we as a teamare making accurate inferences fromthe data.

3.3 Regression AnalysisOnce the correlation analysis iscomplete, Capgemini will then layeradditional complexity and realismonto the profit loss picture. A modelis built that looks at multiple variablesat the same time. Questions areanswered such as: what is the effecton profit loss when inventory increasesby 5% and the percentage of part-timelabor increases by 5% and the storemanager changes to a different store?Because this analysis looks at multiple

variables simultaneously, it eliminatesone of the chief shortcomings of thesingle variable analysis.


Figure 5: Sample Correlation Analysis Indicating Factors

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35

Shrink Indicators

Correlation to Shrink

0.32High Inventory

Cash Sales

Cash Refunds

Returns (Damage, Plano Change, etc.)

# Years Store has been open

# of Markdowns

Sales Reducing Activity (Coupons,Discounts, etc.)

Demographics Low Socioeconomic

Conditions

Underperforming Stores (Sales &Gross Profit)

0.32

0.31

0.27

0.25

0.21

0.20

0.23

0.23

Source: Capgemini

Figure 6: Sample Correlation Analysis Mitigating Factors

0.00 0.05 0.10 0.15 0.20 0.25 0.30

Shrink Mitigators

Negative Correlation to Shrink

Demographics High Socioeconomic

Conditions

Sales per Total Sqft.

Credit Card Sales

Check Sales

0.27

0.27

0.19

0.21

Source: Capgemini


8/20

due to the imprecision of the datacollection and the fact that pastperformance is not always indicativeof future performance

8

3.4 Critical Success Factorsn Full client participation during the

statistical analysis statistics can beeasily manipulated and, as a result,there can be a lot of debate

regarding their validitynAssigning a respected company

member to accompany theCapgemini analyst - view theanalysis first-hand and make astatement to its validity is anessential step

n Full IT and business support responsiveness to and completenessof the data request is essential

n Data availability the faster theclient can provide the data to

Capgemini and the moreencompassing the variety of data,the better the results of the analysis

nAutomating the data feeds IT willwant to collect the initial round ofdata with this in mind; this greatlyspeeds up implementation of thereporting platform

n Recognition that the correlationorder is much more important thanthe actual correlation number thisis a critical step to begin trusting the

wisdom of the analysisn Understand the directional nature of

the regression model this is notmeant to be a precise scientific tool,a margin of error is involved; this is

Figure 7: Sample Regression Output

0.0075

-0.01 0.01 0.03 0.05

R2 = 50%

Trailing 4-QTR Shrink

FiltedV

alues

0.0150

0.0225

0.0300

0.0375

0.0450

Source: Capgemini

Capgemini does not

consider the model

reasonable until we haveachieved an adjusted R2 of

at least .5an adjusted R2

of .5 translates into a

correlation greater than .7

which is representative of

a reasonable explanation

of store shrink.


9/20


performance data (e.g., sales, grossprofit, overtime percentage). The

goal is that each store manager willuse his/her one-page store operationsscorecard as the basis forcommunication and performanceevaluation.

Profit loss is not limited to the store,however. Merchandising and buyerscorecards are created in conjunctionwith store-based cards. It is realizedthat employees will want to seedifferent views of the data based on

area of responsibility. So typicallystore-level, district-level and region-level scorecards are created, reducingthe level of detail as the view levelgoes higher. For example, a region-level card may have only the 5-7 mostcritical key performance indicators(KPIs), while the store-level card mayhave 20-25 KPIs.

The most important rule of scorecarddevelopment is that the scorecardmust be simple to interpret. Theentire focus of the analytics andreporting program is to equip theretailer with pointed, relevant, action-oriented information. We buildscorecards that are easy to read andthat highlight out-of-tolerance KPIs,allowing the managers eye toimmediately jump to his or her areasof concern (Figure 8).

The variables included on thescorecard are driven by the correlation

and regression analysis along with anyother key performance-related variables.Great care should be taken to ensurethat only the truly important elementsare included. Trouble can often occurwhen a retailer tries to include toomany variables. Ease of interpretationmust always be the goal.

Another key to scorecard developmentis to include all important stakeholdersin the scorecard creation process, but

avoid the temptation to makedevelopment a consensus decision.Driving for consensus only extendsthe implementation timeline and theincremental benefit is often not worth

Now that the drivers of profit losshave been discovered, the next step

is to determine how best to attack theproblem and infuse this newlydetermined information into theorganization. Scorecards serve as avaluable tool in this process. Theyallow managers to deploy limitedresources in an optimal manner to thegreatest profit recovery opportunitiesallowing the retailer to see the greatestreturn on initial time invested.

4.1 Exception Reports

Before beginning a scorecard discussion,it is necessary to talk briefly about areporting tool that typically precedesthe scorecard. Simple, often Excel-based, exception reports provide amethod to quickly add value.Constructed with just the criticaldrivers of loss, they provide decision-makers with a quick way to identifyperformance challenging locations andto begin taking action. They can alsobe used as a tool to raise profit lossawareness and start the organizationon a path to thinking differently aboutprofit loss. These reports are usuallydiscontinued when scorecards areimplemented company-wide.

4.2 Why Scorecards?The term scorecard is often confusedwith dashboard or workbench.Capgemini defines scorecard as amechanism for quantifying storeperformance against a preset target or

goal, determined by management.Dashboards and workbenches typically

just report performance; they do notgenerally show the difference betweena strong and a weak performance inrelation to a goal.

4.3 DevelopmentThe first step in a successfulscorecard program is properscorecard development. Capgeminiunderstands that a profit recovery

program must be fully integrated intothe retailers overall operations program.As such, we broaden the scope of ourscorecards to include not just shrink-specific data, but all pertinent


4. The Scorecard

The most important rule of

scorecard development is

that the scorecard must besimple to interpret. The

entire focus of the

analytics and reporting

program is to equip the

retailer with pointed,

relevant, action-oriented

information


10/20

the scorecard must be put throughsensitivity analysis. This willdetermine how overall scoringresponds to changes in the variables.The scorecard must be stable. Small

variations in the data should not causewide scoring changes.

4.4 ImplementationOnce the scorecard has beendeveloped, the next step is properexecution, which starts with thedesign process. Implementationbecomes much easier with properdesign and buy-in up front. However,proper design must also be managedwith proper implementation. It isessential that the scorecard be

implemented in conjunction withprocess changes in order to leverage

new information and properorganizational change management.

It is important that the rewards andorganization align and enable theinitiative. Retailers often seechallenges in execution whenscorecards are simply built and set upwith regular distribution, assumingthat mere visibility of the issues willresult in change.

The organizational change managementmust be managed and included in theprogram as its own work stream.Depending on the scope of changeassociated with the profit recoveryprogram implementation, a brandedawareness campaign may make themost sense to heighten visibility of theissues and mobilize action. A clear,concise, consistent message isessential and strong executive supportis crucial. It is recommended toappoint a senior-level executive tobe the face of the initiative and anexecutive-level profit loss steeringcommittee with all importantfunctional groups represented toapprove all important programrecommendations.

At Capgemini, we manage eight broadelements as part of our changemanagement work stream (Figure 9):

the extra effort. The goal is not tomake the perfect decision, but tomake good decisions and get themimplemented quickly so that theorganization can begin realizing true

value.

A significant amount of effort inscorecard development typicallyrevolves around the scoring criteria.To stay on track, ask key questionssuch as:

nWhat type of information is mostimportant to decision-makers?

nWhat type of behavior are we tryingto encourage?

The answers to those questions willinfluence the scoring methodology.The three most common types are:

nAbsolute rank within a group (e.g.,district, region, buyer group)

n Some percentage level above orbelow a pre-defined goal set at thebeginning of the fiscal period (e.g.,gross profit .5% lower than goalreceives a lower score than a storethat meets or exceeds gross profittargets)

n Some combination of the above two(e.g., 50-50 blend of the two scores)

Finally, once the variables and scoringmethodology have been established,

10

Figure 8: Store-Level Scorecard Example

Week 12 3Q06 (Trailing 3 months running totals except environmental risk - assessed annually & self-audit - biannually) Store Score 8.81 Store District Rank 9

K $ % Goal Score Rank Value Goal Score Rank Value Goal Score RankCur r Qt r F/ E Sh rink 7 0. 00 3.70 2.50 0.17 10 Non-Auth Returns 0.05 - 0.12 7 Voids 2.87 2.00 0.24 14Cur r Q tr RX Sh rink 2 3. 00 1.08 0.50 0.24 14 Damage Returns 0.15 0.10 0.17 10 Refunds 1.98 1.00 0.36 21Curr Qtr Shrink 93.0 3.26 2.00 0.25 15 Shoplifting Loss 0.10 0.10 0.19 11 Discounts 1.12 1.00 0.22 13T4Q Shrink 372.0 2.89 2.00 0.22 13 Non-Return Loss 0.05 0.05 0.08 5 Rain Checks 0.70 1.00 0.07 4Variance (23.00) (0.37) 0.20 0.29 17 Total Returns 0.30 0.25 0.15 9 Total SRA 6.67 5.00 0.32 19

K $ % Variance Score Rank Value Goal Score Rank Value Goal Score RankF/E Sales 1,892 47% 4.86% 0.07 4 Current 94.00 98.00 0.17 10 Current 97.20 98.00 0.05 3RX Sales 2,130 53% 1.41% 0.10 6 Previous 93.20 98.00 0.20 12 Previous 95.00 98.00 0.14 8Total Sales 4,022 100% 3.03% 0.07 4 Variance 0.80 - 0.10 6 Variance 2.20 - 0.02 1

K $ # Days Goal Score Rank Value Goal Score Rank Value Goal Score RankSalesfloor 368.6 33.00 30.00 0.25 15 O ut -o f-st ock % sales 0 .5 0 0.50 0.10 6 Customer 3,770 3,700 0.10 6Increase/ (Reduction) 29.0 2.60 - 0.32 19 Scan Rate 98.00 98.00 0.12 7 Prev Qtr 3,890 3,700 0.07 4Back Room 89.4 8.00 5.00 0.31 18 LP Cases 2 - 0.07 4 Variance (120) - 0.14 8

I nc re ase/ (Red uc ti on ) 8 .9 0.80 - 0.24 14 Script 700 0.12 7RX 189.9 17.00 10.00 0.24 14 Prev Qtr 700 0.12 7

I nc re ase/ (Red uc ti on ) 4 .5 0.40 - 0.20 12 Variance - - 0.14 8

Total 647.9 58.00 45.00 0.32 19 K $ Goal Score RankIncrease/(Reduct ion) 42.4 3.80 - 0.36 21 Variance 12.00 - 0.31 18

$ % Goal Score Rank Value Goal Score Rank Value Goal Score RankRegular Non-RX 519 12.90 12.70 0.12 7 Part-time 68.00 60.00 0.03 2 Weekly Avg 9.10 9.00 0.05 3Regular RX 563 14.00 14.00 0.14 8 Prev Qtr 67.00 60.00 0.07 4 P re v W eek Avg 8 .80 9.00 0.08 5Overtime 201 5.00 3.00 0.17 10 Variance 1.00 - 0.07 4 Variance 0.30 - 0.03 2Double Time - - - 0.02 1 Full-time 32.00 40.00 0.03 2 Qtr-to-date 8.70 9.00 0.08 5

Prev Qtr 33.00 40.00 0.07 4 Prev Qtr-to -date 8.50 9.00 0.14 8Variance (1.00) - 0.07 4 Variance 0.20 - 0.05 3

Value Score RankRisk rating 9.20 0.08 5

Store Shrink & Profit Recovery Scorecard Example

Shrink

Sales

Known Loss (% of sales) Sales Reducing Activity (% of sales)

Self-Audit Scores DM Audit Scores

Environment

Money Order/Money Gram

Hours Scheduled

CountsInventory Days Other Shrink Indicators

Wages (% of total wages) Customer Service Scores

Source: Capgemini

Figure 9: Capgeminis Change Management Framework

Manage to

Deliver

Outcomes

VisionClarity

AffirmPowerful

Business Case

Develop ChangeLeadership &

Accountability

AlignPerformance &

Culture

IntegratePlanning &

Teams

Increase ChangeCapacity

Enlist

StakeholderCommitment

Change Specific

Communication


11/20


n Gain organizational buy-in thoseresponsible for implementing the

scorecards can hinder itseffectiveness if they do not see thelogic and vision behind it

n Make the scorecard easy to interpretand act upon this is an essentialstep to wide-spread adoption

n Make the scorecard the central focusof store performance combine theprofit loss data with overallperformance data

n Intentionally manage the changemanagement associated with theinitiative this element cannot beoverstated; flawless design must beaccompanied with properimplementation so that the rewardsand the organization areaccommodating the initiative

n Make the scorecard easy to maintain automatically compile anddistribute the information

n Tie the output to variablecompensation our experience

shows that this is the singlegreatest way to inject quickand meaningful change


Objectives, activities and outcomesmust be clearly defined and backed by

senior management. Communicationmust be frequent and consistent.Training must be developed andimplemented for all participatingparties.

Properly executed, the scorecardshould be the single, central point ofstore performance within the company.

When a store manager is visited by adistrict manager or when a categorymanger receives a performance

appraisal, their one-page scorecardshould be the basis for discussion.Capgemini recommends tying variablecompensation to scorecardperformance. For this reason alone,it becomes imperative that theorganization participate in and havefull understanding of the scorecardmechanics.

4.5 Critical Success FactorsnAppoint a senior manager as the face

of the initiative an effective leadercan galvanize support and speedvalue creation

n Establish an executive-level profitrecovery committee this needs tobe established at the beginning ofthe process so that it can give strong,continuous support to programinitiatives

Even flawless design must

be managed with proper

implementation. The

rewards and organization

must align to enable the

initiative the

organizational change

management must be

intentionally managed andincluded in the program as

its own work stream


12/20

This final piece of the profit recoveryanalytics and reporting puzzle helps

retailers make use of all their newlyrevealed information. The high-response protocol instructs managersexactly how to act in response tohighlighted trends.

5.1 DesignThe content of the protocol is acompilation of leading practiceknowledge acquired by working withour retail clients and what has beendiscovered while working as store

operations professionals. As with thescorecards, strong executive sponsorshipand organizational buy-in areessential, but there must also beclearly defined accountability,benchmarks and format to easilysearch and act against.

Initially, it is important to understandthat each retailer is different and, assuch, each response protocol mustspecifically tailored. Each retailer hasa unique set of competitive pressuresand corporate strategy. As with everyprogram within the company, theprofit recovery program must be fullycompliant with the retailers overallstrategic objectives.

Next, someone must be accountablefor each out-of-tolerance metric.Specific responsibility must be assignedfor each and every important profitloss element. For example, theregional loss prevention head might

be responsible for discounting abusewhile a specific buyer might beresponsible for too much inventoryin a specific commodity group.Capgemini recommends buildingRACI (responsible, accountable,consulted, informed) charts alongwith process charts when designingthe response processes.

Baseline targets or benchmarks mustalso be clearly defined. It is important

to know exactly when an elevatedaction should commence and exactlywhen it should cease. Clear targetsmust be set for each. Specific servicelevel agreements (SLAs) must be

explicitly determined. Responsibleparties must be given reasonable

deadlines to complete prescribedactions for out-of-tolerance conditions.

Finally, the action plan must be easyto use and to act against. We typicallyorganize the protocol to read like areference manual. The content isdivided into scenario-driven situationswhich detail the response appropriateto that scenario. For example, profitloss caused by data integrity cases willelicit a specific set of responses from

the organization, excess inventory willcall for another set of responses whileproblems with overall store shrinkmay require a combination of severaldifferent responses. Data integrityexception reports, for example, mayreveal differences between two non-integrated systems. This exceptionalert may inform managers to a lack ofsystem or process controls and theresponse protocol could then call for asystem audit that may uncoverinstances of paper shrink and helpinform operators how to use systemscorrectly.

We also recommend embedding theaction plan within the scorecard. Bycreating an on-line reporting andaction plan tool, managers can bealerted of out-of-tolerance conditionsand click-through to the tailoredresponse plan based on the specificexception. Workflow can also beintegrated into the tool to alert

managers via email of exceptions ormissed SLAs.

5.2 ExecutionProper response execution is the keyto success for the entire profit recoveryanalytics and reporting program. Ifthe retailer cannot effectively act onthe response plan, all the analysis,reporting and program design workwill have been completely wasted. Toensure success, the program must

have clear overall ownership,uncompromised executive supportand consistent action.

12

5. The High-Response Protocol

Each retailer has a unique

set of competitive

pressures and corporatestrategy the profit loss

program must be fully

compliant with the

retailers overall strategic

objectives.

If the retailer cannot

effectively act on the

response plan, all the

analysis, reporting andprogram design work will

have been completely

wasted.


13/20

5.3 Critical Success Factorsn Executive sponsorship

n Organizational buy-in

n Clear definition of accountabilityand recommended response

n Make the actions simple, targetedand effective

n Clear definition of benchmarks(what level of performance isrequired before the elevated actionplan is met) and SLAs

Intentionally manage the change

management associated with theinitiative it is impossible tooverstated this; flawless design willfail if the processes, the rewards andthe organization have not beenchanged to enable the initiative


First, there must be clear ownershipof the overall program. For some

retailers, the domain for the protocolwill probably reside within storeoperations. Within others, the lossprevention department is a morelikely home. Whoever is designated,that group must truly own theprogram and execute against it.

Full executive support for the activitiesis also essential. All response tasksdocumented in the action plan mustbe fulfilled without interference from

superiors. As mentioned earlier,various causes of profit loss existwithin every functional department.

As such, response to profit loss driverswill necessarily cut across functionalreporting lines and must be effectivelymanaged across these lines. Strongexecutive support is the best methodto ensure the proper execution.

In addition, all appropriate changemanagement considerations must betaken into account. The changemanagement work stream (outlined insection 4.4) must be extended to theimplementation of the high-responseprotocol as well.

Finally, every effort should be takento avoid treating any one store ordistribution center as unique. Theplan needs to be flexible enough sothat true exceptions can beaccommodated, but not at theexpense of consistency. For example,

a flagship store might carry moremerchandise and run morepromotions than the average store,but that probably does not make itunique enough to warrant a differentset of operating standards. It isimportant, however, to test the actionsinitially on a small pilot group ofstores so that the action plan can beadjusted for different operatingconditions before a complete rollouttakes place.



14/20

6.1 Profit Recovery ROIInitiatives focused on shrink reduction

and gross profit recovery bring someof the best returns for the investmentdollar in the retail industry today.They usually call for relatively littlecapital spending, improve all-important operating margins, providea tangible, quantifiable benefit andcan even work to boost sales.

First, programs focused on improvinggross profit recovery require littlecapital or operating expenditure given

the potential opportunity. Capgeminiprograms usually yield 40 to 70 quickhit recommendations that require noor little capital outlay and minimalorganizational change. An average of10 to 15 strategic initiatives build onthe benefits produced by the quickhits and typically yield, if properlyimplemented, 50-100 basis points ofprofit recovery and return 12-15 timesany consulting fees. Even better, ourexperience shows that, on average,properly implemented shrink reportingprojects have returned 10-20% of thisbenefit within the first year.

For example, Capgemini helped a 150store regional grocer recover over $25million in profit loss in 17 months ontotal project expenses of less than $3million by instituting robust exceptionreporting, preventative data integritycontrols, focused profit loss actionplans, standardized DSD practices andright-sizing excess inventory. Through

an appropriate change managementprogram, this benefit has become anannuity, realized annually over theirprior operating state.

The next benefit of enhanced profitloss performance is improved operatingmargins. Wall Street is increasinglyfocused on Earnings Before Interestand Taxes (EBIT). This is exactlywhere the primary benefit from profitrecovery initiatives shows itself. As

profit loss and fraudulent coupon/discounting abuse decrease, loweringoverall expense, gross profit dollarsincrease.

Gross profit recovery programs alsoyield hard, quantifiable benefits. If

the program is set up with a focusgroup of stores that receive theupdated tools and processes and acontrol group that operates underbusiness-as-usual conditions, thentrue program benefits can beaccurately measured independent ofexogenous influences.

Finally, our experience shows thatprofit loss improvement can actuallyboosts sales. Since out-of-stocks are

less common, customers can morereadily find and purchase desiredproducts.

14

6. Why Do I Need to Change?

Our shrink program

typically yields, if properly

implemented, 50-100 basispoints of profit recovery

and returns 12-15 times

any consulting fees.


15/20


transaction monitoring. Through theefforts of these early adopters, theobstacles and pitfalls have beenidentified and, as a result, increasedgross profit recovery has become thestandard all retail operators mustattain to stay competitive.

6.2 21st Century RetailOperating Environment

For most grocery stores today it isdifficult to know the true scope of losseven with a properly implementedperpetual inventory system (seeCapgemini whitepaper, Computer-

Assisted Ordering: Focus on RetailGrocery1). Most retailers can not giveyou their Stock Keeping Unit (SKU)-level shrink numbers on a regularbasis without going through extensivemanual processes. The only timemost retailers have an accurate picture

of their true profit loss is whenperiodic physical inventories aretaken. Even then, the information isusually only available at the categorylevel, in an aggregate dollar amount.

A leading drug retailer, among otherretailers, has extended the limits oftheir profit loss program to drive morethan 100 net basis points out ofoperating expense. With companieslike these leading the way, profit lossnumbers have fallen across the entireretail industry (Figure 10). This sortof assault means that, in order tosurvive, all retailers will need to becompetitive and perform at lower andlower levels of acceptable loss.

Operating environment changes areputting additional pressure on U.S.retailers. Retailer formats are convergingand labor costs are climbing. Thecombination of these two factors isleading to eroding profit margins.

Driving down labor cost has been thestrategy most retailers use to preservethe bottom line, but this strategy hasits limits and many retailers are fastapproaching them.

There have already been numerousearly adopters of 21st century profitrecovery control programs in the U.S.and Europe. Together with Capgemini,these companies have defined theroadmap. For example, Capgemini

assisted a large U.S. grocery companyto take more than 50 basis points ofshrink out of their operation throughpredictive shrink analytics andreporting and instituting DSD


Figure 10: Year-Over-Year Average Retail Shrink (Percentage of Total Revenue)

0.0 0.5 1.0 1.5 2.0

2001

2002

2003

2004

1.70

1.80

1.54

1.65

Source: University of Florida2


16/20

Depending upon the number of storesin the scope, a typical profit recovery

program implementation can takefrom 18 to 24 months for Tier 1retailers. Our profit recovery projectstypically begin with an eight- to ten-week diagnostic divided into fivebroad areas, covering the entire retailorganization (Figures 3 and 11).

The diagnostic typically yields 40-70quick hits and 10-15 strategicinitiatives from which value is derived

as soon as possible. Often quick hitsare identified before the end of the

diagnostic.

The diagnostic phase is typicallyfollowed by an Accelerated SolutionsEnvironment (ASE) session designedto validate, quantify and consolidatestrategic transformation opportunitiesinto an integrated program and gainorganizational alignment on allstrategic initiatives.

16

7. Our Approach

Figure 11: The Capgemini Shrink Point-of-View (A Holistic Approach)

Audit & Supervision Supply Chain Category Management

Scorecard compliance auditStore/department classification

for improvement priorityField Support/supervision

resources

Market segmentation, core itemselection and movement tracking

Category/SKU net profit analysisand periodic SKU rationalization

Logistics Warehouse Buyer

Security

Damage preventionand delivery integrity

Quality inspection &

receiving integrityInventory management

Forecasting &

inventory integrityPerformance tracking

Parameter

settings/manager

intervention

POS Receiving Inventory Backstage People Physical Perishables

Receiving

verification

Order

replenishment

Shrink measure

integrity and

reporting

Physical

inventory

integrity

Performance

scorecards

Store and SKU

risk analysis/

reporting

Price integrity

Pre-screening/

background

Shrink org and

loss prevention

staffingHiring

effectiveness

Technology

enabled

workforce

optimization

Awareness and

training platform

Retention

strategies

Overall asset

control platform

beyond CC

TV/EAS

Centralized

monitoring

Physical

security

Production

planning

Order

replenishment

Known loss

tracking/mark-

down controls

Tare weight and

portion controls

Shelf life

standards

Shrink trend

reporting

Known loss

tracking/mark-

down controls

Idle or dead

inventory

disposition

Product exit

strategy

Damage

reduction

DSD system

functionality

Vendor payment

process

KPI shrink trend

reporting

Store level

standards and

processes

Centralized

transaction

monitoring

KPI* Mgt

transaction

monitoring

Policy-payment/

credit controls

Information Flow


17/20


After the diagnostic and the ASE session,we finish implementing quick hit

recommendations while simultaneouslybeginning the pilot phase for selectedstrategic initiatives. During the pilotphase, we recommend establishing afocus and control group of stores toproperly measure the programs impact.

Careful consideration must be givenwhen choosing pilot stores. It isimportant to choose stores that arerepresentative of the larger businessbut not mission critical in terms of

organizational risk.

Following the pilot (Phase 2), ourimplementation approach is fine-tuned to incorporate the lessonslearned. Phase 3, termed theLearning Center, follows with arollout to a larger subset of stores.Our approach is further refined andthen full rollout (Phase 4) begins onan enterprise-wide level (Figure 12).


Accelerated Solutions Environment (ASE): The Art of Collaboration

What if...n you could get all of your stakeholders to work together to discuss your business

strategy, technology architecture and next business improvement initiative?

n you could unleash the full potential and creativity of your staff, your leadership team,

key suppliers, customers, and subject matter specialists all at once - and agree on a

common vision and transformation roadmap?

n you could accelerate all phases of your system development projects reducing months

to weeks and weeks to days?

n your team could identify tens of millions of dollars in cost savings, develop a detailed

action plan to realize the benefits, and then commit to each other to go for it?

In the Accelerated Solutions Environment (ASE), we combine our world-class

facilitation team, patented, decision-making process, global knowledge bases and

innovative workspaces to enable organizations to make better, faster business decisions.

We have conducted thousands of successful ASE DesignEvents for leading

organizations around the world.

The Bottom Line

The value of an ASE is realized through:

nAcceleration: The process dramatically reduces cycle times for solution delivery and

results. Sponsors often say that they have accomplished three, six, or nine months of

work in three days.

n Commitment: The rapid alignment and mobilization of a large team occurs in several

days. Change agents make the decisions and commit to the successful implementation

of the solution.

n Reduced Risk: Higher quality solutions are developed through creative collaboration in

a knowledge-rich environment. Better, more comprehensive solutions yield superior

operating results.

Capgemini is dedicated to the art of collaboration, acceleration and delivering

measurable and enduring value. The greatest testimony of our value is our list of repeat

clients.

Figure 12: Typical Shrink Program Timeline

Shrink Improvement Effort

Phase 1

10 weeks Phase 3Phase 2 Phase 4

Diagnostic

(Design)

Development Learning Center Roll-Out

Multiple Store Trial

(test, measure, refine)Roll-Out

1/3 stores

Roll-Out

2/3 stores

Roll-Out

Certify

Corporate/Support

Initiatives

Implement Change

(test, measure, refine)

Continuous

Improvement

Pilot Store

Source: Capgemini

The ASE delivers in a 3-day

DesignEvent whattypically takes 3-6 months

worth of work using

traditional methods


18/20

For more information on shrink analytics, reporting and high-response protocolas well as Capgeminis entire shrink offering set, please contact:

18

Capgemini, one of theworlds foremost providers

of Consulting, Technology andOutsourcing services, has a unique wayof working with its clients, called the

Collaborative Business Experience.

Backed by over four decades of industry

and service experience, the CollaborativeBusiness Experience is designed to helpour clients achieve better, faster, more

sustainable results through seamlessaccess to our network of world-leadingtechnology partners and collaboration-

focused methods and tools.

Through commitment to mutual successand the achievement of tangible value,

we help businesses implement growthstrategies, leverage technology, and thrivethrough the power of collaboration.

Capgemini employs over 84,000 peopleworldwide and reported 2007 global

revenue of greater than $11 billion.

More information about our services,

offices and research is available atwww.capgemini.com.

About Capgemini and the

Collaborative Business Experience

Brian Cederborg

+1 707 712 9409

[email protected]

Craig Moyer

+1 610 392 3407

[email protected]


19/20


Endnotes1 Computer-Assisted Ordering: Focus on Retail Grocery, Capgemini, January 2006

2 2004 National Retail Security Survey, University of Florida

AcronymsASE Accelerated Solutions Environment

DSD Direct Store Delivery

EBIT Earnings Before Interest and Taxes

HR Human Resources

KPI Key Performance Indicator

LP Loss Prevention

POS Point of Sale

RACI Responsible, Accountable, Consulted, Informed

ROI Return on Investment

SKU Stock Keeping Unit

SLAs Service level Agreements


Appendix


20/20

www.capgemini.com

capgemini -21 ste centuryshrinkprogram

Documents