boxes stacked in a room what is inventory shrinkage

You’ve got inventory management down to a science. You gather data and analyze the trends, but inventory shrinkage always seems to be an obstacle. So, what is it about inventory shrink that confounds your efforts? For starters, most of shrink is caused by theft—many types of theft—and retailers hate it.

Defining Inventory Shrink

Shrink cost the retail industry $46.8 billion last year. Of this, 66% is due to theft by shoplifting, employees, and vendor fraud. It’s hard enough these days for specialty retailers to compete with national chains and big box stores. Adding inventory shrink to the mix just creates another layer that takes away from your sales and affects your bottom line.

Inventory shrinkage is a general term, one that touches upon many aspects of your business:

Inventory Shrinkage

The loss of inventory due to theft, damage, recording errors, and obsolescence. Shrinkage is often discovered after a physical count of products has been conducted. The amount is the difference between the physical counts and the ones on the books.

Another way to calculate retail shrinkage is through this basic formula:

Retail Shrink = Optimal value of merchandise – Income from merchandise

Using this formula is easier to perform on a regular basis. Plus, it will point out some glaring changes with your inventory loss if the shrink is significant. Just be aware that this formula is too general, covering all of your inventory, and does not find the culprits. It just tells you that there is one.

Discovering exactly what causes your inventory shrinkage is a complicated task. Once it’s found, you’ll need to do some investigating.

Time to Investigate

You need to follow the trail of lost goods to understand what’s causing it. Again, this starts with a physical count of your inventory. Once the problem items are found, you need to go deeper into the evidence, like a good detective, and answer the following questions:

  • Does this product sell?
  • Where is it located in the warehouse and store?
  • Who handled stocking the product?
  • Which vendor did it come from?
  • Is all of the information properly entered in the point of sale?
  • Was it recorded in the “Damage Log?”

The answers to these questions should give you a clearer idea of what’s happening and why. For example, if a product isn’t selling, then it needs to go. Or, if the product is near the entrance of the store and has no damage reported, then there’s a good chance it’s shoplifting.

Employee theft also accounts for 1/3 of inventory shrink. This one is hard to find, unless you catch them in the act. You need to be able to trust your employees, so it’s also one of the toughest to address.

Almost 20% of all inventory shrinkage is due to administrative errors. Surprisingly, errors still occur even with automated point of sale and inventory management systems in place. If you have a manual system, then you may find that more than 20% of your inventory shrink is due to errors.

Prevention Is the Key

When inventory shrinkage cuts significantly into your sales, you need a plan on how you’re going to prevent it. Investing in store surveillance equipment can be expensive, but it may give you a chance to spot any thieves. This goes for employees, too. The goal is to take a long look at how you can manage your inventory to minimize shrinkage and reduce your losses.

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