Question

Walmart Inventory Shrinkage (a GVV Case)

The facts of this case are from the Walmart shrinkage fraud discussed in an article in The Nation on June 11, 2014. “Literary license” has been exercised for the purpose of emphasizing important issues related to organizational ethics at Walmart. Any resemblance to actual people and events is coincidental. Shane O’Hara always tried to do the right thing. He was in touch with his values and always tried to act in accordance with them, even when the going got tough. But, nothing prepared him for the ordeal he would face as a Walmart veteran and the new store manager in Atomic City, Idaho. In 2013, Shane was contacted by Jeffrey Cook, the regional manager, and told he was being transferred to the Atomic City store in order to reduce the troubled store’s high rate of “shrinkage”—defined as the value of goods that are stolen or otherwise lost—to levels deemed acceptable by the company’s senior managers for the region. As a result of fierce competition, profit margins in retail can be razor thin, making shrinkage a potent—sometimes critical—factor in profitability. Historically, Walmart had a relatively low rate of about 0.8 percent of sales. The industry average was 1 percent. Prior to his arrival at the Atomic City store, Shane had heard the store had shrinkage losses as high as $2 million or more—a sizable hit to its bottom line. There had even been talk of closing the store altogether. He knew the pressure was on to keep the store open, save the jobs of 40 people, and cut losses so that the regional manager could earn a bonus. It didn’t hurt that he would qualify for a bonus as well, so long as the shrinkage rate was cut by more than two-thirds. Shane did what he could to tighten systems and controls. He managed to convince Cook to hire an “assetprotection manager” for the store. The asset-protection program handles shrink, safety, and security at each of its stores. The program worked. Not only did shrinkage decline but other forms of loss, including changing price tags on items of clothing, were significantly reduced. However, it didn’t seem to be enough to satisfy Cook and top management. During the last days of August 2013, Shane’s annual inventory audit showed a massive reduction in the store’s shrinkage rate that surprised even him: down to less than $80,000 from roughly $800,000 the previous year. He had no explanation for it, but was sure the numbers had been doctored in some way.

During the remainder of 2013, a number of high-level managers departed from the company. Cindy Rondel, the head of Walmart’s Idaho operations, retired; so did her superior, Larry Brooks. Walmart’s regional asset-protection manager for Idaho, who was intimately involved with inventory tracking in the state, was fired as well. Shane wondered if he was next. Shane decided to contact Cook to discuss his concerns. Cook explained why the shrinkage rate had shrunk so much by passing it off as improper accounting at the Atomic City store that had been corrected. He told Shane that an investigation would begin immediately and he was suspended with pay until it was completed. Shane was in shock. He knew the allegations weren’t true. He sensed he might become the fall guy for the fraud. Shane managed to discretely talk about his situation with another store manager in the Atomic City area. That manager said she had been the target of a similar investigation the year before. In her case, she had discovered how the fraud was carried out and the numbers were doctored, but she had told no one—until now. She explained to Shane that the fraud involved simply declaring that missing items were not in fact missing. She went on to say you could count clothing items in the store and if the on-hand count was off—as in, you were supposed to have 12 but you only had 10—you could explain that the other 2 were in a bin where clothing had been tried on by customers, not bought, and left in the dressing room often with creases that had to be cleaned before re-tagging the clothing for sale. So, even though some items may have been stolen, they were still counted as part of inventory. There was little or no shrinkage to account for.

At this point Shane did not know what his next step should be. He needed to protect his good name and reputation. But what steps should he take? That was the question.

Questions

1. Assume you are in Shane O’Hara’s position, what would you do next and why? Consider the following in crafting your response.

-- Who are the stakeholders in this case and what are the ethical issues?

-- What do you need to say, to whom, and in what sequence?

-- What are the reasons and rationalizations you are likely to hear in getting your point across?

-- What is your most powerful and persuasive response to these arguments? To whom should you make them? When and in what context?

Answer 1

1.The stakeholders in this case is Shane O’ Hara, Jeffery cook , the top management. The ethical issues faced by Shane was whether to speak against the doctoring of the numbers of shrinkage or pretended not to be aware and continue with his job to avoid being fired. Cook on the other is faced with doctoring the numbers to deceive investors and public that the company is doing well and still continue getting his bonus.The top management ethical issues was to see that shrinkage in the company is reduced by whatever means it takes for it be done.

2. In this case, the organisational culture at Walmart is unethical. From Shane conversation with another store manager, Walmart had been engaging in doctoring the numbers of its shrinkage inventory. As a result of lack of transparency in the company and fear for retaliation,employees were not encourage to be open and speak against the unethical behaviour in the company. Being in Shane’s position as someone who is of high ethical values, The organisational culture at Walmart would made me speak up against the unethical act and report to the appropriate authority.Before reporting to the higher authority, I would inform the regional manager Jeffery Cook of my concerns and made him understand that I would not be a part of the fraudulent act. If Cook refused to do anything about it, then I will take the case to the higher authority.

3. The reasons and rationalisations from Cook would be that it is just a One-time event. Another reason would also be to convince Shane to play along and get his bonus.

4. The other managers that Shane spoke to would try to convince him to be silent about the situation to avoid losing his job.In response to cook reason on being a one-time event, I would inform him that I have noticed that such fraud had once been committed in the company. I would also inform him of my ethical values and that my reputation is at stake. Lastly, I would convince the other manager to act ethically and that her integrity is also at stake if the fraud is discovered.

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