FEATURE

PARTNERING SCIENCE,
DATA, AND ASSET
PROTECTION TO
TACKLE RETAIL SHRINK
RILA STUDENT MENTOR PROGRAM INTEGRATES
THE SKILLS AND INSIGHTS OF RETAIL,
SOLUTION PROVIDERS, AND ACADEMIA
By Clarissa Franklin, Rajat Malhotra, Dani Diehl, and Raksha Pai
 PARTNERING SCIENCE, DATA, AND ASSET PROTECTION TO TACKLE RETAIL SHRINK
O
ver the course of the past half
year, we have been working
closely with The Kroger Co.
and the asset protection team utilizing
analytics to drive insights from data that
lead to better overall understanding and
decisions regarding a problem common
to the entire retail industry—retail
shrinkage, or shrink.
The produce department, in
particular, is susceptible to loss and
represents a disproportionate amount
of shrink relative to the entire Kroger
enterprise. Addressing shrinkage
within the produce department will
help Kroger reduce costs and improve
profitability. The goal of this capstone
project is to utilize data science and
analytics to better understand the
relationship between inventory, sales,
produce freshness, customer satisfaction,
and shrink.
Exploratory Data Analysis
Our first step was to better
understand the business and determine
the need. Due to the lack of bar codes,
the variety of products and vendors, and
the perishable nature of the products,
produce department data can be
extremely problematic. We needed to
understand the departmental structure
at Kroger, financial data, how Kroger
measures and records produce inventory,
and how to calculate shrinkage at a
granular level. This information played
a crucial role in understanding which
questions to ask next, which direction to
take the analysis, and ultimately which
recommendations to provide.
Good practice dictates exploratory
data analysis (EDA) when starting any
analytics project to better understand
your data. As a first step in our data
analysis we decided to analyze data at
the overall store level, focusing on the
big picture and looking at trends that
affected each location as a whole. Our
questions included:
■■ Which stores were performing the best
and worst in terms of shrink results?
■■ Do these stores have any clear
physical relationship?
■■ How do average shrink results
vary depending on store type,
40
SEPTEMBER–OCTOBER
produce square footage, number Digging Deeper
of deliveries per week, and Our next step was to analyze
seasonal considerations? more granular data based upon
■■ Are there correlations between sales, inventory, and cost factors for
produce freshness and wastage? item-level data. We uploaded over 300
This analysis resulted in some item-level data files, calculated shrink
interesting takeaways. First, stores at the item-level based on the given
that carry more value-based items had information, and calculated aggregate
shrink results higher than more upscale statistics at the subcommodity level.
stores. On average, stores that received As an enterprise, Kroger anticipates
six to seven deliveries per week had which commodities and subcommodities
better shrink results than those with result in the most waste based on
fewer deliveries. Perhaps these stores the experience and expertise of the
order less per delivery and carry less employees. Some store managers claim
on the floor anticipating that another there are items that are restocked
delivery will be made soon. solely to throw away again. Through
Further, on a seasonal basis, shrink data analysis we can provide greater
as a percentage to sales tends to be accuracy regarding the wastefulness
lowest in February through May. This of each product and use quantitative
may be due to a difference in product analysis to support employee experience
mix or other seasonal effects. and expertise.
However, while the results of the Where is Kroger’s shrink in the
preliminary analysis may display produce department coming from? Our
general patterns of shrink performance first objective was to determine which
by varying characteristics, the purpose commodities contributed the most to
of the exploratory data analysis was Kroger’s total shrink.
simply to uncover major trends and The dashboard created will then
answer relevant questions rather than allow Kroger to mine deeper into each
determine causal relationships. commodity to see the true problem
Dashboard:
Which commodities contributed the most to Kroger’s total shrink?
Commodity 001
Commodity 002
Commodity 003
Commodity 004
Commodity 005
Commodity 006
Commodity 007
Commodity 008
Commodity 009
Commodity 0010
Commodity 0011
Commodity 0012
Commodity 0013
Commodity 0014
Commodity 0015
Commodity 0016
Commodity 0017
Commodity 0018
Commodity 0019
Commodity 0020
Commodity 0021
Commodity 0022
Commodity 0023
Commodity 0024
Commodity 0025
Commodity 0026
Commodity 0027
Commodity 0028
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 PARTNERING SCIENCE, DATA, AND ASSET PROTECTION TO TACKLE RETAIL SHRINK

Dashboard: subcommodities and visually identify

Which products experience a high shrink percentage? strong performance and problem areas.
This dashboard allows for easy
Commodity 001
Commodity 002 comparison between stores and much
Commodity 003 faster identification of problems in the
Commodity 004 field, providing awareness and visibility
Commodity 005
Commodity 006
into performance at a granular level
Commodity 007 and offering high-value information
Commodity 008 to Kroger.
Commodity 009
Commodity 0010
Commodity 0011 Predictive Modeling
Commodity 0012 In addition to exploratory data
Commodity 0013 analysis, predictive models were
Commodity 0014
Commodity 0015
developed for the Kroger data to help
Commodity 0016 answer key questions and provide
Commodity 0017 additional visibility into Kroger
Commodity 0018 operations. While this analysis can show
Commodity 0019
Commodity 0020 what’s happened in the past, predictive
Commodity 0021 models will determine the average
Commodity 0022 expected result (shrink percentage) for
Commodity 0023
a given set of conditions. Additionally,
Commodity 0024
Commodity 0025 a well-fitted predictive model will
Commodity 0026 quantify the impact of a change in a
Commodity 0027 factor (such as moving a store from a
Commodity 0028
high-risk neighborhood to a low-risk
neighborhood) when all other conditions
subcommodity. By reviewing the results For example, upon determining that a remain equal.
for each commodity and subcommodity, large portion of a certain product goes to The first predictive model used
Kroger can better determine what waste, data mining was able to reveal the was a multilinear regression. We used
is happening in stores, investigate primary problem by narrowing it down multiple linear regression to model the
results that appear problematic, and to a few select items with extraordinarily relationship between several explanatory
make informed decisions based on the high shrink-to-sales ratios. This may lead variables (including store type, store area,
available data. to critical business decisions, including delivery schedule, customer satisfaction
We then addressed whether certain the possibility of adjusting delivery sizes scores, and more) and the desired
products were being restocked solely to or frequency for these products to better response variable—produce shrink.
be thrown away, as well as the shrink match inventory with demand and to The resulting regression describes
cost per commodity. As depicted in the reduce shrink. The Tableau dashboard how mean responses vary in response
Tableau visual above, we were able to can be a crucial tool allowing store to changes in the explanatory variables.
identify certain products that experience managers to visually observe trends in The model predicts whether shrink
a high shrink percentage in the produce their produce departments. will increase or decrease when a given
department. While clearly problematic, The final dashboard (see next variable changes and quantifies the
this insight creates a valuable business page) depicts a map of stores in expected magnitude of change. Further,
opportunity based on a data-driven a Kroger division, color coded by it can determine which variables impact
decision. Based on this analysis, Kroger shrink results with red representing shrink, allowing Kroger to better
has the opportunity to reconsider best the worst-performing stores and understand factors affecting shrink rates.
practices and improve results at every grey representing the best. Using We modeled shrink rate, expressed as
location where the product is available the dashboard, regional managers basis points rather than the monetary
and all new locations where the products will be able to visualize how the value of shrink, so conclusions would
will be stocked moving forward. division is performing and which be easier to translate from one store to
Similarly, we created a second areas need attention. Store managers the next.
dashboard representing the percent can compare performance to that of Explanatory variables included
of waste within each commodity and neighboring locations and immediately produce department square footage,
subcommodity allowing Kroger to identify problem commodities and store employee turnover rate, percentage
review and compare the performance of subcommodities. Employees can of produce department area relative to
each group of products. click on individual commodities or overall store area, number of produce
41
LP MAGAZINE | SEPTEMBER–OCTOBER 2018
 PARTNERING SCIENCE, DATA, AND ASSET PROTECTION TO TACKLE RETAIL SHRINK
Which stores in this division perform the best?
Commodity Category 1
Commodity Category 2
Commodity Category 3
Commodity Category 4
Commodity Category 5
Commodity Category 6
Commodity Category 7
Commodity Category 8
Commodity Category 9
Commodity Category 10
Commodity Category 11
Commodity Category 12
Commodity Category 13
Commodity Category 14
Commodity Category 15
Commodity Category 16
Commodity Category 17
Commodity Category 18
deliveries per week, the risk tier for the
store determined by the asset protection
team, store type, inventory, charges,
ratio of sales to inventory, net sales, and
customer satisfaction score.
The first four explanatory variables
were determined to have no significant
effect on the shrink percentage.
The following explanatory variables
were all found to be significant and
are discussed in more detail below. In
these relationships, the impact of these
variables is expressed “cetereis paribus,”
or when all other things are equal. Due
to the confidential nature of company
records, actual figures will be replaced
with X, Y, or Z. The actual value of X,
Y, and Z varies for each factor.
■■ Risk Tier. Based on various metrics at
the discretion of the asset protection
team, there are four risk tier
categories: low risk, medium risk, high
42
SEPTEMBER–OCTOBER
Dashboard:
risk, and max risk. Our model found
no significant differences between
shrink rates at low- and medium-risk
stores. High-risk stores are expected to
have X basis points more shrink, and
max-risk stores are expected to have Y
basis points more shrink, compared to
low- and medium-risk stores.
■■ Store Type. Our analysis included five
store types, categorized 1–5, where
store type 1 corresponded to the
most upscale stores, and store type
5 corresponded to the least upscale
stores. Transitioning from store type
1 to 5, each change in store type
corresponds to a reduction in shrink
by X basis points. For example,
consider a store that is type 1 and
has 600 basis points of shrink. If
all other explanatory variables (risk
tier, inventory, and so forth) are held
constant, but the store type changed
| LOSSPREVENTIONMEDIA.COM
Commodity Category 1a
Commodity Category 2 a
Commodity Category 3 a
Commodity Category 4 a
Commodity Category 5 a
Commodity Category 6 a
Commodity Category 7 a
Commodity Category 8 a
Commodity Category 9 a
Commodity Category 10 a
Commodity Category 11 a
Commodity Category 12 a
Commodity Category 13 a
Commodity Category 14 a
Commodity Category 15 a
Commodity Category 16 a
Commodity Category 17 a
Commodity Category 18 a
to type 2, the expected average shrink
would be (600-X) basis points. If the
store type changed to type 3, it would
be (600-2*X) basis points, and so on.
■■ Inventory, Net Sales, and Charges.
These explanatory variables are
expressed in thousands of dollars per
period. The shrink increases by X basis
points for each additional $1 million
inventory, decreases by Y basis points
for each additional $1 million net
sales, and increases by Z basis points
for each additional $1 million sales.
■■ Sales Per Inventory. Sales per inventory
is expressed as a ratio of sales during
a given period ($) to the value of the
inventory on display at the end of
the period ($). For example, if there
were $800 in sales during the period,
and $1,000 of inventory was on the
shelves, the sales per inventory figure
would be 0.8. For each unit increase
 PARTNERING SCIENCE, DATA, AND ASSET PROTECTION TO TACKLE RETAIL SHRINK

in sales per inventory, the average Decision Tree:

shrink is expected to decline by X How do variables interact with one another to
basis points. classify a store into various levels of shrink?
■■ Customer Satisfaction. The produce
freshness score from customer Rules From DT Shrink
feedback was used as a proxy for
Sales/Inventory Turnover > $ per SQFT < Customer Ratings Store Inventory < Zone
customer satisfaction. For each 1
Ratio < Average Average Average + 15D < Average inventory by 30%
High
1 percent increase in the average
customer satisfaction score, the Store Type = 1, 2 High

average shrink decreases by X

basis points. Sales/Inventory Turnover > Store Inventory < Zone inventory by 65% High
2
Ratio < Average Average + 15D Store Type =

Decision Tree Model 3, 4, 5 Store Inventory

< Zone inventory $/I Ratio > Avg - 25D High
The second predictive model used within 65%
was a decision tree. We used decision Customer >
trees to understand the relationship GM% < Average Customer Ratings < Average + 15D Low
Average
between various factors like shrink,
sales, and inventory, and produce Sales/Inventory
Customer Ratings > Average Low
3
freshness, customer ratings, and Ratio > Average
GM% > Store Inventory > Zone
produce per square foot. Store-level Average
$/FT > Average
inventory within 10%
Low
Customer Ratings
shrink (%) was divided into three < Average
categories namely low, medium, $/FT < Average Store Type = 1, 2, 3 Low

and high.
Turnover < Average Low
A decision tree with shrink 4 Sales/Inventory GM% > Aver-
categories as the target variable Ratio > Average age Turnover >
$/FT > Average Low
Average
was plotted to understand how

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LP MAGAZINE | SEPTEMBER–OCTOBER 2018
 PARTNERING SCIENCE, DATA, AND ASSET PROTECTION TO TACKLE RETAIL SHRINK
the variables interact with one
another to classify a store into
the various categories of shrink.
The decision rules were identified
leading to shrink categories,
which would help Kroger make
data-driven decisions.
Sell-through was revealed as
the most important factor when
categorizing shrink followed
by employee turnover rate and
customer ratings. For example, if a
store’s sell-through is below average
compared to other stores, employee
turnover is much higher than
average, and the store is a type 1
or type 2 location (upscale stores),
the store will likely experience
high shrink.  in business analytics. The master’s program produces data scientists and was
Recommendations
A dashboard was then created
to identify problem areas at the
individual store level, sorted in
high-to-low shrink order, with red
indicating poor performance and
yellow signifying good performance
for factors like sales, inventory,
customer ratings, and so forth.
Maintain good sell-through.
Introduce emplyoee benefits program,
which could decrease attrition.
Stores which have lower general manager
percentages need to concentrate
more on produce freshness.
Be mindful of the store inventory levels
with respect to peer stores.
Clearing at the right time is important.
The third decision tree shows
low-shrink stores that have
above-average performance across
the columns. This dashboard is
interactive, and one can click on
each store to find the problem
products and how they vary across
peer stores and peer commodities.
Limitations
Due to the nature of the retail
industry, accurate data collection
can be difficult and impractical
44
SEPTEMBER–OCTOBER
Collaborating with Tomorrow’s Industry Leaders
By Ed Tonkan, President, Zebra Retail Solutions
The annual Retail Industry Leaders Association (RILA) Asset Protection
Conference provides attendees with exceptional opportunities to connect with
peers on the most pressing issues facing the industry while exploring the
innovative technologies currently transforming asset protection. However, the
event also provides a unique opportunity to collaborate with tomorrow’s leaders
through an innovative program.
Founded under the guidance and direction of Lisa LaBruno, senior vice
president of retail operations, the RILA Student Mentor Program was established
to integrate the skills and insights of a prominent retail chain, a retail solution
provider, and academia as part of a semester-long project. Each year the program
focuses on a major area of interest for loss prevention professionals, with the
students presenting their findings at RILA’s annual Asset Protection Conference.
Participating students are selected from The University of Texas at Austin,
McCombs School of Business, where they are pursuing their master’s degrees
recently ranked second of its kind globally. Michael Hasler, PhD, director of the
program at McCombs, has supported the RILA Student Mentor Program for the
entirety of the collaboration and has developed it into a capstone project for
his students.
Over the past seven years, retail participants have included JCPenney,
7-Eleven, The Home Depot, and most recently The Kroger Co. under the
leadership of Mike Lamb, LPC, vice president of asset protection. Aaron Medley,
the senior manager of asset protection analytics, was also very involved with the
students throughout the project as they applied their advanced analytical skills to
over 25 million rows of data.
Along with the respective retailers, I’ve had the privilege of serving as
comentor for the program each year and have seen it become a valuable
opportunity for all involved. In addition to presenting at the conference, students
have the opportunity to become fully immersed in this top retail loss prevention
event, engaging with both retailers and solution providers at the show. The
retailer also receives key insights from these data scientists that it can leverage
to improve business operations. I’m personally inspired by the results of RILA’s
college student program as the students work with industry mentors to complete
these research projects.
Pictured left to right are Ed Tonkon of Zebra Retail Solutions; Rajat Malhotra, Raksha Pai,
Dani Diehl, and Clarissa Franklin of The University of Texas; and Aaron Medley of Kroger.
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 PARTNERING SCIENCE, DATA, AND ASSET PROTECTION TO TACKLE RETAIL SHRINK

Decision Tree:
What are the problem areas at the individual store level?
Store Mask Store Type Shrink Sales Inventory Ratings Turnover GM% $/Produce SQFT
00145 1
00162 1
00086 5
00063 1
00132 2
00011 1
00091 5
00127 2
00136 3
00110 5
00126 2
00179 5
00004 3
00101 5
00117 5
00133 4
00147 1
00002 1
00166 5
00055 3

Inventory Category | Ratings Category | Turnover Category | Shrink Category | Sales Category
Above Average Average Below Average

when considering the bottom line. effective considering the benefit of of vendors delivering the product. There
For example, determining the precise having such detailed records. may be five different vendors providing
quantity of gala apples present in each Produce in particular can present a strawberries, tracked by different SKUs.
store on each date may not be cost daunting task considering the multitude For other items such as potatoes, it’s

45
LP MAGAZINE | SEPTEMBER–OCTOBER 2018
 PARTNERING SCIENCE, DATA, AND ASSET PROTECTION TO TACKLE RETAIL SHRINK

Decision Tree:
Which low-shrink stores have above-average performance?
Store Mask Store Type Shrink Sales Inventory Ratings Turnover GM% $/Produce SQFT
????? 3
00033 3
00182 3
00070 3
00095 2
00093 3
00003 2
00104 3
00079 1
00008 5
00183 3
00165 4
00010 3
00094 4
00059 3
00102 3
00029 3
00078 2
00125 2
00124 3
00047 2
00056 3
00177 3
00184 3

Inventory Category | Ratings Category | Turnover Category | Shrink Category | Sales Category
Above Average Average Below Average

nearly impossible to determine the
original vendor once the product is on
display leading to overlap or confusion
between different items and different
vendors. Due to these and related issues,
the physical inventory conducted every
cycle faces similar limitations.
Another common issue with produce
is the exchange between different
categories. For example, a store may
order organic grapes but receive regular
grapes. This can lead to inconsistencies
in billing for inventory and sales. Further,
an item can be modified in some manner
leading to a different label when the
item is finally sold. For example, whole
pineapple is cut and sold as precut fruit
to customers. Similar issues happen with
juice bars, prepared foods, and the deli.
Kroger is aware of these issues and
makes corrections to their financial
records at the commodity level.
However, these corrections cannot
fully capture all the unique scenarios
that arise in produce retail and cause
noise in the data. Additionally, it’s not
uncommon to see negative inventory
figures as a result. To compensate
for these issues, we have rolled the
data up to higher levels, joining
items or subcommodities together, or
averaging over longer periods of time.
This reduces the noise and extracts
a stronger signal from the data but
also conservatively limits our analysis
and recommendations.
We elected to provide higher-level
analysis for the data at a level we are
comfortable with, rather than risk
overfitting our models to extremely
noisy item- or cycle-level data.
These decisions are supported by
cross-validation and out-of-sample
testing during our analysis.
Experience at the
RILA Conference
Our presentation was scheduled for
the afternoon of day one of the Retail
Industry Leaders Association (RILA)
conference in Orlando. As part of the
conference, we had the opportunity to
attend a plethora of events, ranging from depends on the quality of the data, and
talks given by distinguished speakers
from the retail industry, to networking
events where we could meet people and
exchange information regarding the
innovations in the retail industry.
We presented our findings to a
crowd filled with experts from the
retail industry. It was well received and
a proud moment for the team. The
conference also had an exhibition hall
with solution providers showcasing
their products. Donning different
caps for each event, we loved learning
something new from each and every
person we met. Overall, it was a great
learning experience and we enjoyed the
conference thoroughly.
Final Thoughts
Our project benefitted immensely
from a close partnership with the Kroger
team and their willingness to provide
support and in-depth information. Many
of the most rewarding aspects of our
work were only possible because Kroger
was willing to provide us with weekly
sales data for each item at every store.
The success of every analytics project
we were fortunate to have access to such
detailed records.
“We were delighted to support this
initiative, both for the benefit of the
continued on page 48

46
SEPTEMBER–OCTOBER | LOSSPREVENTIONMEDIA.COM
 PARTNERING SCIENCE, DATA, AND ASSET PROTECTION TO TACKLE RETAIL SHRINK
continued from page 46
students and the value we derived
from their efforts and expertise,” said
Mike Lamb, LPC, vice president of
asset protection with Kroger. “We
know that in order to stay ahead of
the ever-changing environment that
affects shrinkage and waste, the benefit
of analyzing our data in a meaningful
and thoughtful way allows us to take
a proactive versus reactive approach
in mitigating our shrink. This not only
serves to improve shareholder value
from a profitability point of view but
also enhances our in-stock position
and product freshness focus.”
Analytical, data-driven
investigations are important to the
entire retail industry. Shrink exists in
all sectors of retail, and this type of
project benefits the entire industry.
Through accurate root-cause analysis,
we can help individual stakeholders
identify different pain points and
achieve a level of detail that was not
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SEPTEMBER–OCTOBER
previously possible. In addition, these
methods provide tools that allow
greater visibility into the business,
making retail processes more efficient.
With the diversity of products
and vendors, seasonal variations,
and highly perishable goods, the
grocery industry can be extremely
complex. This project demonstrated
that signals can be found even in
this noisy produce data and reflects
how similar methods can be applied
to other retail sectors. Investing in
analytics can benefit retailers in many
different ways, whether in terms of
reducing losses, being better prepared
for future issues, understanding the
retail customer, and running more
efficiently as a whole.
Finally, we would like to thank
each and every person who helped in
this project, including our sponsors at
Kroger, Aaron Medley, Jason
McClure, and Mike Lamb—thank
you for supporting our team and
answering our endless questions
| LOSSPREVENTIONMEDIA.COM
regarding the data
and work at
Kroger. Ed
Tonkon, our
sponsor from
Zebra
Technologies—we
Mike Lamb appreciate your
time and thank
you for your ideas, feedback, and
comments. Our sponsor at RILA,
Ellen Jackson—thank you for
listening in on every call and
coordinating our trip to the
conference in Orlando. Finally, Dr.
Mike Hasler and Dr. Ramesh
Rajagopalan at The University of
Texas for guiding us through this
project, providing us with critical
feedback, and helping us provide the
most value through our work.
CLARISSA FRANKLIN, RAJAT MALHOTRA,
DANI DIEHL, and RAKSHA PAI are students
pursuing their master’s degrees in business
analytics in the McCombs School of
Business at The University of Texas at Austin.
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