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How do I talk to my employees about shrink?

There’s no single dichotomy in the industry more misunderstood and complex to explain than the term, “shrink.”

On one hand, an overage of products indicates that customer demand was completely optimized with no one turned away.

On the other hand, a plummeting P&L at the end of the quarter resonates all the way up to the C-level with indications that we “gave away the farm” — and someone’s got some ‘splainin’ to do!

Here are five easy steps to educate employees on shrink:

faq Step 1: Where should I start when educating employees about shrink? SALES, of course!

Always above everything else, there’s nothing more important than sales dollars. The foundation of all financials is based off of sales dollars, and a weak sales trajectory will make it very difficult for the rest of the financial lines to thrive. As a result, 90 percent of the actions around the management of financials should be centered on driving sales. As daily decisions are being made, be sure to always ask, “How will this drive additional sales above and beyond the sales we already have?” While there’s a time to worry about two cents less cost on a sleeve, and five cents less cost on a bouquet… top-line sales will likely suffer if those decisions, alone, become the first line of defense. Think of sales as the trunk of the tree. Your financials can’t live without it!

Step 2:  So, what is shrink?

Shrink simply means a loss of inventory and is calculated as a percent of sales. Here’s how to calculate shrink: Lost inventory dollars for the period divided by sales dollars for the same period = Shrink Percent.

Step 3:  Don’t compare floral shrink with other departments.

Floral shrink percent should never be compared to shrink in other departments. The business model in floral is quite different from the non-perishable, higher-volume departments. However, shrink averages and other financial components in the floral department are normally very similar to other specialty department such as deli, bakery and seafood. Generally speaking, floral shrink averages 10 percent when calculated as cost of goods.

Step 4:  Not ALL shrink is bad — say WHAT?

There are actually two kinds of shrink:

• Necessary shrink: Losses which are required to rotate product and keep it fresh for the customer. When a floral or plant product is dead, it should be thrown away. When a product is outdated, it should be thrown away. This type of shrink is ‘necessary’ in order to provide customers with the best experience and the freshest product.  

• Unnecessary shrink: Losses caused by over-ordering, poor product maintenance, poor pricing disciplines, theft and even incorrect inventory counts. This is the shrink that must be trained, monitored and reduced and should not be confused with the ‘necessary shrink’ needed to maintain fresh floral departments and satisfied customers. Necessary shrink and unnecessary shrink are polar opposites even though they both share the terminology of the word, “shrink.”

Step 5:  Sales and shrink work in tandem...

Think of it as rowing a boat forward, where rowing the left oar represents sales and the rowing the right oar represents shrink. What happens to the trajectory of the boat if we row stronger on the ‘shrink oar’ than we row on the ‘sales oar?’ That’s right! The boat will go around in circles! Even and steady rowing on both sides will get the boat to its final destination!    

Shrink is one factor of a successful financial operation, but it never replaces the importance of sales growth. In fact, an over-emphasis on shrink alone can cause inexperienced floral managers to “quit ordering so much,” instead of looking at the many other unnecessary shrink factors that could be happening in their shop. Using the tree analogy, think of shrink as insects on a tree. There are good insects and there are bad insects. The key is first defining them, and then taking proper actions to eliminate the bad ones!