All about Inventory Shrinkage Prevention
November 20, 2023
Inventory shrinkage is a crucial KPI for inventory management that quantifies the amount of products that a brand should have but is unable to physically account for. This results in a brand being unable to sell a product that it does not have in stock, which may cause orders to be delayed and customers to be dissatisfied. Inventory shrinkage Prevention can be caused by discounts, damage, fraud, or theft.
Inventory shrinkage formula: To find the inventory shrinkage rate, divide your inventory losses by the amount of inventory you should have. Multiply your inventory shrinkage rate by 100 to convert it into a percentage.
Importance of Inventory Shrinkage Prevention
Lost revenue is represented by each item of inventory that is listed on a brand’s book but is not physically located. When a customer purchases the missing stock online or through a marketplace, the inventory loss situation deteriorates. Customers may become extremely dissatisfied if the warehouse is unable to fulfil an order, even though the storefront may be able to sell the product. How lean a business can be with inventory levels can also be impacted by significant inventory shrinkage. Accurate inventory item visibility enables brands to reorder at the right moment, preventing stockouts and saving money on excess storage.
The loss of raw materials can be thought of as a different kind of it. Think about this inventory shrinkage example: when baking food, the baker will encounter it because of ingredients that are left behind with the utensils and because of evaporation.
Causes of Inventory Shrinkage
Employee theft, shoplifting, cashier error, supplier fraud, and administrative errors are the causes of it. Over 75% of inventory shrinkage in retail is attributed to employee theft and shoplifting, whereas vendor fraud and administrative errors account for approximately 20% of the total, according to SheerID.
All of a brand’s products are readily accessible to employees, and employee theft may arise from inadequate inventory counts, warehouse management, and security measures. For e-commerce companies without a physical store, employee theft may be a greater worry because it discourages shoplifting.
| Causes of Inventory Shrinkage | Description | Contribution to Shrinkage |
| Shoplifting | Most retailers associate shrinkage with shoplifting, including straightforward theft. Price tag swapping, where a shoplifter pays less due to SKU manipulation, is also common. Organized retail crime, involving multiple people stealing for resale, falls under this category. | The biggest source of shrink according to NRF’s 2022 Retail Security Survey. |
| Employee Theft | Internal theft, encompassing theft, fraudulent returns, and employees neglecting to scan items for friends or family, is a significant contributor to it. | Accounts for 28.5% of inventory shrinkage in retail, the second-highest after shoplifting (external theft). |
| Human Entry Error | Poor inventory management, misclassification, typos, double scanning, or incorrect data entry after a cycle count can result in it. Corrections may lead to lost profit. | Administrative errors impact inventory records, potentially causing forecasting and revenue miscalculations. |
| Vendor Error and Theft | Vendors, like retailers, can make administrative errors that contribute to it. Some dishonest vendors may steal by not delivering a complete order. | While vendor theft is not very common, it can contribute to it. Utilizing online B2B platforms can mitigate the risk of human entry error. |
How to Prevent Inventory Shrinkage
Here are some ways that provide information about how to reduce inventory shrinkage:
Keep a Track
Keeping track of things is simple and can assist you in determining whether an item of inventory vanished from the store or the warehouse. For instance, inkblot tag systems have proven to be very successful for fashion retailers. Even if they leave the area around their parking lot, grocery stores can lock their carts. To cut down on the time required, you can do this in cycles, but inventory management and tracking are crucial. Using technology that can update inventory counts in real-time is preferable to using Excel, which is static and not synchronised with anything.
Identify discrepancies
Employees who are stealing from you have time to get ready if they are aware that audits are imminent. When wondering about how to reduce inventory shrinkage, you can identify discrepancies in your inventory counts faster and without having to ask employees if you conduct a surprise inventory audit.
Increase Security
It could be beneficial to install security cameras and other equipment in your shop or inventory storage system if you operate a single brick-and-mortar store. To make sure nobody is putting trash in a bag they take for themselves while pretending it’s trash, you can also use clear garbage bags.
Using Stock management techniques
However, frequent cycle counting procedures will help you stay ahead of inventory shrinkage. Use good stock management techniques instead. The process of continuously counting a small portion of your inventory is known as cycle counting. For example, you could count 10 different SKUs every week, or you could count 20 specific SKUs every week for a month to track changes in the stock levels of those products.
Anti-shoplifting measures
Investing in anti-shoplifting measures is worthwhile because shoplifting is a significant cause of it. A key deterrent against shoplifting is your sales staff. While they should never put themselves in danger, welcoming each customer and demonstrating that staff members are on guard can deter would-be shoplifters.
Automation
Eliminating the human entry component is one of the best strategies to reduce human entry errors. You won’t have to worry as much about inconsistent numbers if your inventory management and point-of-sale systems are integrated. Making decisions about it is also made easier with an integrated system because you have easy access to a wealth of information.
Task assignment
One worker might be inclined to fabricate the reports if they have access to the recording and processing of receipts. To mitigate this, assign different staff members to record and process receipts, if only for quality control.
Communicate the effects with staff members
Staff members may be unaware of the effects of inventory shrinkage. Take this as a chance to explain to them the direct and indirect effects of it, such as how it lowers employee profit shares, salaries, promotions, and other benefits.
FAQs
How to prevent inventory shrinkage?
It can be prevented by various practices such as open communication, automation, anti-shoplifting implementation, stock management, and inventory.
What increases as a result of inventory shrinkage?
It increases the cost of goods sold.
How is inventory shrinkage recorded?
It is recorded as an expense in the financial year in which it occurred.
How inventory shrinkage is tracked?
It can be tracked through regular audits of the inventory.
What is an acceptable inventory shrinkage?
The acceptable rate is 1-2%.
