inventory shrinkage in retail

Simply defined as the loss of physical inventory, shrinkage affects revenue in every business—especially in retail. Your company’s inventory shrink is the difference between your accounting records, typically from receipts and purchase orders, and physical inventory. According to the 2015 National Retail Security Survey, retailers lost $44 billion due to shrink. The loss of inventory equals the loss of profit and potential income. An excellent way to tighten up your bottom line and increase profitability is to address your inventory shrink.

How does inventory shrinkage in retail companies occur? Over 70% of all shrink was from theft by employees or customers. Other areas of loss are due to paperwork errors, multiple inventory management systems, obsolete product, and damage. Severe occurrences of inventory shrink can result in decreased bonuses for employees and changes in business operations. Preventing the loss of inventory is manageable and doesn’t need a large capital investment.


Reducing inventory shrink requires action and input from every employee—from the stock room clerks to the accountants. Mistakes will happen and acknowledging them means you’re ready to implement a plan for continuous improvement. As a team, every aspect of your business can be scrutinized for areas of concern. Here are 4 ways you can prevent inventory shrink:

1. Train Your Employees

Another way to prevent theft is to train your employees. Theft can account for an overwhelming majority of your losses. Employee theft comprises 43% of inventory shrink. Forbes Magazine describes how you can spot employees stealing from inventory (read our article on theft prevention).

Very few small companies talk about shoplifting prevention or have guidelines in place to handle thieves. An open and honest discussion about shoplifting may open their eyes to the issues regarding shoplifters. You can teach them to how recognize shoplifting techniques and close the gaps in your security.

Also, placement of product within your store, such as keeping expensive items locked in a case or toward the back of the store, prevents the quick grab-and-run. These easy and cost-effective steps can avoid the installation of a large scale security system or hiring a team of security guards.

2. Implement a System of Double-Checks

Inaccuracies within your inventory management may come from mistakes during the receiving process or through using multiple systems to manage your inventory. Implementing a system of double-checks when accepting inventory is a good way to prevent mistakes. Also, using a single automated system can reduce mistakes in transferring data from one system to the next.

3. Rotate Products

Learn how to rotate products that quickly become out-of-date. A robust inventory tracking system can give you alerts on shelf-life. It can also analyze which products are selling and the ones that are not. Adjust your sales tactics to prevent loss of product freshness.

4. Improve Receiving and Stocking Processes

Prevent damaging new product through improvements to your receiving and stocking processes. Train your employees on how to handle and store products in the warehouse or backroom. Smart product placement on store shelves is another way to prevent damage. Make it easy and safe for employees and customers to reach their items and place bigger items on the bottom of shelves.

If you have a warehouse or storage facility, make scheduled inspections of the exterior, including the roof, so repairs can be made in a timely fashion without experiencing product losses. Fire detection and prevention systems are also important anywhere product is stored.

Make a Plan-Of-Action

With these tools, you can sit down and create a plan-of-action to prevent inventory shrink. Something to think about is good hiring practices, which promotes employees with integrity. Once you have good employees, train them on shoplifting prevention, safe and reliable receiving processes, and how to properly use your upgraded inventory management system. Inventory shrinkage in retail companies is impossible to eliminate entirely, but you can minimize the damaging effects with a great plan.

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