How to reduce inventory shrinkage?

Inventory Shrinkage

If you have your own retail business, you might have probably faced Theft, Shoplifting, or other forms of fraud, bringing unforeseen inventory losses. This unplanned inventory loss due to a myriad of factors is called Inventory Shrinkage.

To emphasize, a report shows that more than 40 billion was lost in the year 2016 due to inventory shrinkage alone. Hence, it is obvious for retailers to take steps in order to prevent this unwanted loss that brings down their profitability.

In this post, we will go through the reasons to calculate Inventory Shrinkage and factors that contribute to this cost. We will also look into measures to prevent loss, theft and overall inventory shrinkage costs.

What are the main reasons that contribute to Inventory Shrinkage?

There are a number of reasons that contribute to shrinkage. However, the top reasons are given as follows-

  1. Shoplifting
  2. Employee Theft
  3. Administrative and Paperwork Error
  4. Vendor Fraud or Error
  5. Others

Here is a breakup of these factors according to a report from NRSS-

Main factors for Inventory Shrinkage

Main factors for Inventory Shrinkage. Source-NRSS

Why calculating Inventory Shrinkage is important?

As a rule of thumb, it is a fact well known that physical inventory in retail business consumes a large share of working capital. In other words, inventory is money that is stashed in your warehouse. Hence, any type of theft or shoplifting that might be happening in your warehouse should be accounted and must be stopped.

Although, losing a few pieces or units of inventory due to physical damage can be normal, theft and shoplifting, on the other hand, can be worrisome. Consequently, it suggests that your workforce is not credible enough and they may have issues such as lack of motivation or workplace grievance as well.

Also, recurring Inventory Shrinkage may lead to a lot of complications in inventory control.

How to Calculate Inventory Shrinkage-

Inventory Shrinkage can be calculated by finding the total financial value of all inventory in the financial year/quarter and subtracting the total inventory as obtained after the cycle count.

Inventory Shrinkage = Booked inventory-Physically Counted inventory
Where Booked Inventory = Beginning Inventory + Purchase – (Sales+Adjustments)

How to prevent Inventory Shrinkage?

A combination of safety measures and employee engagement tactics should be put into use to bring down inventory shrinkage. Some of these include-

Safeguard the Expensive inventory-

This is by norm one of the most effective ways to bring down shrinkage. Understand that shrinkage is expressed in financial value. Hence, the expensive inventory must be safeguarded on priority. Any expensive inventory can be stored in a separate location which can be an enclosed room or a sealed off space.

In addition to that, employ separate employee(s) to handle that inventory and assign them special privileges. This will prevent shrinkage and in easy trackback of any item in the event of a theft.

Prevent Vendor/ Purchase order fraud-

Often times, a Purchase manager may inflate the demand making you pay more for the PO. The vendor may personally know your purchase manager and might be involved in a scam where both benefit each other.purchase order fraud

To solve that, follow up with vendors time to time. Make sure your purchase manager is not involved in any type of transactions with the vendors that are questionable or unethical in nature.

Also, double check on damaged goods that are filtered out of your PO. You must also go for an inventory management software that provides trackbacks and purchase order history, allowing you to tally all the historical transactions.

Eliminate loopholes and Improvise Process-

You will stumble upon loopholes upon closer inspection that your employees can exploit and bring about significant shrinkage in inventory. Tighten the process and eliminate all loopholes.

If you have not been double checking on damaged inventory start doing that from now on. If follow-ups are needed with vendors, implement that as well.

Go for employee integrity screening-

If you are dealing with high value/small size inventory such as truffles, caviar, gemstones, expensive electronic devices, that are easy to steal, you may go for an employee integrity screening. In order to accomplish that, you may check their-

  • Criminal History
  • Education Verification
  • Credit History
  • Past employment history etc.

Employee training and incentives-

warehouse training

It is important to train your employees on loss prevention. It can be accomplished in a number of cost-effective ways. You can-

  • Create educational videos
  • Impart work ethics and cultivate a culture to sustain that
  • Create communities and engage them in activities
  • Give them incentives on honesty and integrity
  • Surprise gifts on festivals

Invest in a security system-

A lot of hardware system with software support is available in the market to safeguard your inventory from being stolen. These systems may include CCTV cameras, intrusion detection, door auto lock systems, door access control and so many other features.

Alternatively, you can install a custom system according to your needs and budget in order to reduce theft and any unwanted access to your warehouse in order to bring down Inventory Shrinkage.

Finally, we all agree that inventory shrinkage is a significant issue that needs careful consideration of your business processes and identifying associated loopholes. Once they are identified, an optimal solution can be implemented to reduce inventory shrinkage

Arup Dey

Arup Dey

Arup works as Content Marketing Manager for Orderhive. Apart from running Orderhive's digital strategy, Arup likes to write deep and incisive articles on topics across a wide spectrum.

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