Most retailers will encounter the issue of inventory shrinkage at one point or another. But, this can be a big issue as inventory records will need to be altered accordingly, and profits may also drop as a result.

In this article, we will detail how you can prevent inventory shrinkage, with a complete account of what it is, to ensure that you completely understand the definition of this and know how to deal with it if it occurs.

What is Inventory Shrinkage?

Inventory shrinkage occurs when actual inventory levels are lower than the records state. For example, if your company’s inventory records state you have 200 items, but you actually have 180. If this occurs, you can assume that a miscalculation or something more serious may have caused this shrinkage, such as theft.

When physical inventory hasn’t been included in a business’s accounting records, the company is creating a loss for themselves and losing profit as a result. Therefore, it is in the best interest of a business’s cash flow to prevent inventory shrinkage, and it is essential to report all physical inventory accurately.

Calculate Inventory Shrinkage

If a business owner suspects that inventory shrinkage has occurred, they can calculate inventory using a specific method. In this method, the business will need to conduct a physical inventory count and determine the value of this stock. Once this value has been calculated, the company needs to subtract this figure from the total inventory cost initially noted in the accounting records.

Once this sum has been calculated, the business will have accurately found its inventory shrinkage percentage. Here is an example of this sum being used to help you gain a more thorough understanding of how to conduct this calculation yourself;

Business XYZ has calculated that its physical inventory has a value of $10,000. But, their accounting records stated that their total inventory cost was $15,000. So, to calculate inventory shrinkage, they will need to subtract $10,000 from $15,000. This leaves the number of stock shrinkage at $5,000. So, to determine the inventory shrinkage percentage, you would divide 5000 by 10,000, which gives 0.5. You then multiply this number by 100, which provides you with the answer of 50%.

Why Does Inventory Shrinkage Occur?

There are a few causes of inventory shrinkage that businesses should be aware of to reduce inventory shrinkage happening frequently or at all. A well-rounded understanding of the causes of inventory shrinkage is the best way to prevent inventory shrinkage. Here are some of the reasons it can happen;

Shoplifting

If a customer leaves a store with items they didn’t pay for, this counts as shoplifting. However, as the items never got accounted for by the cashier or order notes, there is no way that accounting records would pick this up. Therefore, this item will still be under the recorded inventory and won’t be found as a loss until physical inventory counts are pursued.

It is estimated that shoplifting accounts for around 38% of inventory shrinkage and is the leading cause. Therefore, businesses must be incredibly vigilant in recognising the signs that shoplifting threats are arising and how to overcome these circumstances.

Employee Theft

Another primary cause of inventory shrinkage is employee theft. The trouble with this situation is that it can be hard to determine if employee theft occurred. Employees often put these losses down to misplacements or unpacking errors during shipping. This means employees can usually get away with inventory theft if managers don’t implement efficient measures.

An excellent way to overcome this is by having CCTV and activity logs for stock room entrants. This ensures that employees are more aware of who is entering the inventory storage point at certain times, making it easier to find when and where an inventory loss may have occurred.

Damage

Of course, an inevitable part of inventory management is overseeing losses due to damages. When damage to inventory occurs, these goods can no longer be sold to customers. This accounts for losses as the company will have paid fees for this product and make no returns, and if records aren’t updated accordingly, this will be a factor in inventory shrinkage.

Administrative Errors

As with all business processes, human error will always be a factor that can go wrong. This is why businesses need to put good strategies in place regarding the administrative process. These errors could include incorrect pricing lists, missing zeros, incorrect numbers and reorders.

All administrative errors can be prevented by conducting a physical inventory count to determine the amount of stored inventory. This data should be recorded clearly and can be translated to digital means easily without errors occurring.

4 Steps To Prevent Inventory Shrinkage

Now that we have covered all aspects of inventory shrinkage, from the reasons it can occur to how to calculate inventory shrinkage efficiently, we will take you through the top 5 ways to prevent inventory shrinkage from occurring;

Double Check System

Human error will occur more frequently when only one employee is included in the inventory process. Inventory management has different elements, from signing invoices to conducting physical counts and accepting orders.

Having a second opinion is always a good idea, and a double-check system will help to validate the data from one employee by another. In addition, doing this will help prevent inventory shrinkage as inaccuracies will become less frequent due to the robust system, meaning inventory records should have the most accurate data that won’t need to be vetted later.

Knuckle Down On Dishonest Employees

Of course, every business hopes that its employees are genuine and honest people with the company’s best interests in their mind. But unfortunately, this isn’t always the case, and employee theft is a significant cause of inventory shrinkage.

To prevent untrustworthy employees from working for a company, it is advisable to do a background check on them if they have applied for a specific role regarding inventory to ensure they have had no previous experiences with stealing.

Implement Inventory Management Software

Keeping track of inventory without efficient software is impossible and will lead to multiple losses due to inaccurate tracking. In addition, inventory management software will give businesses increased awareness of every step of the process, putting names to who was responsible for placing an order and who supplied the data for the actual inventory on site.

This helps to lower the chances of employee theft, as login details will be required and will show who had access to inventory at specific times. On the other hand, the inventory’s journey will be tracked from the time it is shipped to the point of sale.

Track Inventory Shrinkage

The chances of an inventory shrinkage occurring at least once is quite likely, so it would be wise for a business to track inventory shrinkage to monitor if the shrinkage rate is increasing or decreasing.

Again, this helps with awareness of inventory shrinkage and can give a real insight into how well the business manages its inventory. And, in the worst case, if inventory continues to shrink, the company can analyse this and determine which measures need to be reworked.

Final Thoughts

To conclude our article on inventory shrinkage, it is clear that this is an aspect of running a retail business that shouldn’t be looked over lightly. Instead, inventory shrinkage should be managed and monitored similarly to other inventory tracking systems to ensure losses don’t occur as frequently.

Having trustworthy staff members that operate in a double check system and inventory management software that can actively track inventory are the best ways to counteract the threat of inventory shrinkage and decrease any shrinkage rate a business may have.

Frequently Asked Questions

How do you prevent inventory shrinkage?

Implementing a good employee training regime along with suitable background checks will help to guarantee that you have a trustworthy team handling your inventory. Pairing this with s double-check system and inventory software will help employers monitor and oversee the process.

What are 3 causes of inventory shrinkage?

The leading three causes of inventory shrinkage are shoplifting, employee theft and administrative errors. However, there are many ways that these threats can be overcome by implementing efficient background checks and software.

How do you control shrinkage in a warehouse?

Implementing warehouse management strategies can help to reduce inventory shrinkage rate dramatically, with employee vetting and training becoming one of the most essential strategies on the list.