Aligning People, Processes and Technology to Drive Profitability in the Retail Sector

Abstract

A multi-billlion dollar discount retailer realized they had a problem with turnover, but they had no idea how much turnover was really costing them beyond the typical “HR Costs.” Deloitte was asked to help them in their efforts to understand its real impact to operations. Through the turnover analysis they learned there was a strong correlation between HR metrics such as turnover and store profitability, as well as shrink (any unplanned loss of margin).

The company was significantly underinvested in shrink resources, tools and prevention capabilities to combat internal and external theft in their stores. In fact, they became plagued with the reputation as a training ground for organized retail thieves. To become competitive and achieve a significant financial improvement, they asked Deloitte to help them in their efforts to identify selective investments in prevention capabilities to achieve competitive parity or advantage. They identified the following investments:

• An information and exception management system to drive shrink management and response activities
• Introduction of an integrity assessment for all applicants to develop a culture of honesty and integrity
• Realignment of the organization to more effectively focus and act on shrink and loss opportunities
• Refinement of the “shrink opportunity” to include other key profit leakages such as damages, cash shortages, sales reductions and discretionary markdowns
• Package shrink strategies and tactics into a comprehensive program that captures opportunities to compound benefits.

The Challenge

The company was looking to make HR relevant in a skeptical business environment, and looked to Deloitte to not only help them in their efforts to identify the greatest opportunities but also to help them quantify the impact of those opportunities. The effort required hard data to build
a case for top leadership that addressed any HR issues, and HR had to calculate the cost of turnover.
Upon analysis of the shrink issue, the greatest obstacle the company faced was the lack of technology in their stores – they did not have computers in their retail stores. Operating in a retail environment without even the basic technology, such as a computer or fax machine, continually created challenges in identifying solutions and recommendations as they could not rely on technology.
While their competitors invested more in shrink prevention, shrink had historically been a challenge for them as well, making this a target of opportunity. Industry shrink rates
had been trending down while their shrink rates were trending up. Historically, shrink was viewed as a store only problem, and the company approached shrink with a short-term mentality and no sustainable focus.

How We Helped

Deloitte helped the company take an alternative approach to investigating turnover by helping them analyze the cost of store and district manager turnover under the hypothesis that manager turnover could potentially impact store profitability. We helped them identify trends and correlations by analyzing all existing data about Store Manager and District Manager turnover and comparing it with key store performance metrics, like profitability and shrink. The analysis found that shrink percentage was consistently less in stores with lower turnover.

The foundation for an effective and sustainable shrink reduction program include components that address prevention, culture and infrastructure. To overcome the challenges identified, Deloitte helped the company create a three-point plan for attacking shrink through people, processes and technology. It included a technology plan that involved the roll out of computers in their stores, a software solution, organizational alignment at corporate and in the field and executive commitment.

Deloitte brought a new approach to managing shrink for the company to consider in the form of the Shrink Reduction and Profit Improvement methodology. This approach involves the integration of technology, organizational alignment and workforce to drive towards a more focused and results oriented shrink model. Specifically, the strategy combines the management of leading indicators of shrink at the store level with creation of a culture of honesty and internal re-organization around shrink.

Solution

Deloitte helped the company understand how analyzing Human Capital metrics in conjunction with financial performance data can show the true impact of employees on company financial performance. Deloitte helped the company achieve their stated objectives and identify the specific investments in prevention capabilities that enabled them to successfully combat shrink and turnover in the following three ways:

Organization Realignment

• Consolidated Shrink and Loss Prevention (LP) into one organization
• Increased field LP resources to improve store coverage and issue response time
• Created an executive level shrink governance group
• Created a dedicated analytical shrink support group (ACT) to engage the other organizational functions

Workforce Integrity & Talent Acquisition

• Incorporated integrity testing into the existing hiring & screening process to eliminate more dishonest applicants.
• Standardized and Improved talent acquisition processes for job families
• Incorporated Industry Esteem Database to check employee termination backgrounds
• Ran expanded statewide background checks for both new hires and recently promoted Store Managers and Assistant Managers
• Leveraged technology from application submission to on-boarding and training
• Increased the effectiveness of on-boarding and training programs

Exception Management

• Implemented an Exception Management system which provides action plans to handle all exception types e.g. refunds, voids, etc
• Reduced the number of reports and pieces of information that are currently used to manage the business
• Develop additional capabilities to increase the effectiveness of an integrated approach to shrink management and profit improvement
• Incorporated predictive modeling to provide insight into “issues” before they become “problems"
• Leveraged exception reporting to provide insight into other functional business areas (e.g., inventory, merchandising, finance, supply chain)

To date, the company has exceeded their shrink performance goals, and early indicators project a decline in shrink to 3.3 percent by the end of FY 2009 – a 50 basis point improvement over FY 2008’s 3.8 percent shrink rate. Currently, the company’s shrink rate has improved by 51 basis points due to heightened awareness throughout the organization. The client is ahead of schedule to achieve the targeted benefit of 150 basis points which translates to $150M in profit.

This analysis could be utilized at many other companies. Retail chains, banks, or any company where a large group of individuals are responsible for similar profit centers. In fact, Deloitte was involved with a similar analysis at a pharmaceutical company where the profit/loss of drug representative vacancies was calculated by the lost revenue/ profit when a territory was vacant.