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Loss Prevention

Where the Rubber Meets the Road

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A bracing dose of workaday reality was delivered in a presentation entitled “CIO’s Top Priority: Enabling Long-Term Profitability.” The speakers, Abercrombie & Fitch senior vice president and CIO John Deane and Peter Haste, senior finance manager for profit recovery for U.K. grocer Wm Morrison Supermarkets, focused on the unglamorous-but-essential business of loss prevention and how it can be facilitated by careful use of business intelligence and analytics.

Though it already has 1,100 stores worldwide, the cornerstone of Abercrombie’s corporate strategy remains growth, both top-line and margin. “Key ways to get at that task,” said Deane, “are globalization, efficiency and the use of resources in ways that add to the top- and bottom-line measures.” As CIO, Deane has responsibility for the second and third items on that list.

In executing these responsibilities he faces some challenges, among them multiple sources for inventory, shrink/damage and other financial loss data; multiple, non-networked systems generating information; manual, Excel-based data consolidation; inefficient, multiple-spreadsheet-based analysis; and the fact that the company is reacting to aging historical data.
“In loss prevention,” he said, “we try to understand how to extract money out of not losing product. But we have struggled in getting all the information in one place and being able to make sense of it.”

This sounds like a classic case for data consolidation and applied business intelligence, which is what Abercrombie is doing. “We are implementing a fact-based margin improvement system to achieve data consolidation, mining, and analytics in one application,” Deane said.

Going where the problem is
The system’s capabilities include automated trend identification, monitoring and alerting; root-cause identification through granular data visibility; and what Deane referred to as the prioritization of greatest profitability opportunities. “It tells us,” he said, “where to send our loss prevention agents to make the most impact.”

Abercrombie sends data from all sources to a staging table that feeds into a predictive analytics engine, which looks for signs of trouble — out-of-tolerance returns, repeat players, out-of-line inventory shrink/damage, etc. From there, Deane said, the system generates tools that can be used by the corporate LP team or store management to prevent losses.

“The trick,” said Deane, “is getting from ‘I’m showing you the data’ to ‘I’m doing something with the data.’ This tool turns data into work plans.” Abercrombie is taking an action-based approach to the system, he said: The automatically generated work plans and diagnostic tools drive resource allocation efficiencies. Predictive analytics provide close monitoring of key performance indicators, early alerts and suggestions to focus the LP staff. The system is new, but the anticipated result is reduction of losses ranging from $7 million to $15 million over three years.

“The point,” Deane said, “is to attack these issues early in the process so as to minimize their cumulative effect. The quicker you get at them, the more money you save.”

A guiding thought, he said, is to focus on systemic cause and effect, not isolated incidents. “You find your losses at the store, but you may have to fix the source of those losses elsewhere in the business.”

Big chain, big ambitions
Wm Morrison Supermarkets works to differentiate itself from its competitors on several levels, one of which is the quality and variety of take-away food it offers at its 450 stores. According to Haste, the company has more in-store staff preparing food than the competition and it also does its own manufacturing, including a chain of bakeries.

“We’re big,” said Haste, “and we have big ambitions. We want to seize opportunities — we’re looking to go online and also to get into the convenience-store market.” To realize those ambitions the chain needs to have money to invest, and one of the ways it seeks to maximize its supply of investment capital is by minimizing the amount that wanders out the door. That’s where Haste comes in.

For 2011, Morrison management came up with a list of 10 new initiatives and priorities. No. 8 — “Excavate . . . dig deep,” focuses on profit recovery/loss prevention and reduced spending on goods not for resale, i.e. goods and services used to run the business itself.

The goods not for resale part of it is pretty straightforward; a company the size of Morrisons is in an excellent position to negotiate with its suppliers and generally tighten up its purchasing policies and procedures. Haste and his team are just now starting on loss prevention, beginning in the logical place, inventory movement.

The profit-recovery initiative covers four areas: promotions, payables, property and taxes. Haste’s team is running a total of 16 tests on the accounts payable records to see if there are instances in which they paid the same invoice twice. A chain this size owns a lot of property, a great deal of which is leased to tenants of one kind or another. A Morrisons team is making sure it’s actually collecting all the rent it has coming. As to taxes, any British retailer deals constantly with value-added tax and import duties. Morrisons wants to pay what it should, but not overpay.

The big action at the moment for Haste and his team is in supplier-funded promotions. “We have a team of 10 people internally auditing the past six years, and we have outsourced work to 90 other auditors,” he said. “What we want to know is, was there income we didn’t get that we should have got?”

The answer is clearly “yes.” The biggest claim Haste’s team has collected so far was £500,000 for a promotion two years ago, and they are continuing to dig. “We make about 5 percent net profit on sales,” Haste said. “My team’s first-year profit-recovery target is £25 million. That’s the equivalent of the profit on £500 million in sales, which is equivalent to 3 percent of total turnover. So here’s a question for you: What function in your company can deliver that kind of growth?