Inventory Shrinkage: Definition, Causes & How to Prevent It

Inventory shrinkage is a loss of the value in inventory that occurs when sales don’t cover the cost of stock. This happens for many reasons, including poor forecasting and misjudgments about demand or market conditions. Inventory shrinkage can contribute to your bottom line, but it’s also easy to prevent with proper planning and accountability.

Inventory shrinkage is the reduction in inventory levels. It can happen for many reasons and it’s important to know what causes it so that you can prevent it.

The gap between a product’s reported stock count and the quantity physically on hand is known as inventory shrinkage. “Shrink” refers to the difference between these two figures. This is known as retail shrink in the retail industry. It signifies the same thing in each case: you’re lacking merchandise that you believed you possessed.

Theft, inventory control difficulties such as receiving errors, unreported damages, cashier blunders, and misplaced products may all lead to stock shrinkage or loss. Shrinkage is an inherent element of the retail industry. However, to avoid wasting money and effort, you should try to avoid shrinking wherever feasible.

How can you figure out how much your inventory has shrunk?

You must monitor your inventory levels in order to acquire an accurate count of your inventory and its shrinkage. You may develop a system that works for you by using our Inventory Management Workbook. In addition, the book contains an inventory shrinkage calculator to assist with automation.

By comparing your reported inventory to your actual count, you may compute inventory decrease.

Inventory shrinkage is calculated as follows: Inventory that has been recorded – Actual Inventory.

Your Inventory that has been recorded comes from either an integrated POS system like Lightspeed, which tracks and reports on your inventory automatically, or a manual count that you conduct yourself.

The actual quantity of inventory you lost, represented in units, will be your inventory shrinkage in this situation.

Assume you operate a gift store and recorded 500 units of ornaments in your inventory management records at the start of the tourist season. Your ornaments are gone at the end of the season, but you only sold 477 of them. In this instance:

Inventory shrinkage is calculated as follows: Inventory that has been recorded – Actual Inventory. Inventory Shrinkage = 500 – 477 Inventory Shrinkage = 23 units of ornaments

The inventory shrinkage rate may also be used to monitor inventory shrinkage. The proportion of products lost between what you recorded and what you actually sold is your inventory shrinkage rate.

Your inventory shrinkage rate is stated as a percentage, unlike inventory shrinkage.

Returning to the same example. This formula would be used to calculate the rate of inventory shrinkage for your ornaments:

Rate of Inventory Shrinkage = 4.6%

The inventory shrinkage rate in this scenario is 4.6 percent, which means that 4.6 percent of the ornament inventory at your gift store is going missing. If nothing is done, you should expect to lose 4.6 percent of your decorations to shrinking in the future.

The national average shrink rate for retailers is 1.6 percent. However, more than 15% of merchants have shrink rates of 3% or more.

Inventory Shrinkage Causes

Shrinkage is usually attributed to either shoplifting or recordkeeping mistakes. We’ll look at the most common causes of inventory shrinkage so you can detect (and prevent) them in your firm.

Shoplifting & Customer Theft

A considerable portion of retail inventory loss is due to shoplifting and other kinds of non-Theft by Employees. (Image courtesy of BigStock)

According to the 2020 National Retail Security Survey, theft incidences are at an all-time high, costing the sector $61.7 billion and accounting for 1.62 percent of a retailer’s Conclusion. This is startling, but when you look at it on a case-by-case basis, you can see how stealing might affect your business.

What if I told you that

The average amount of stuff stolen in a shoplifting incidence is $461.86.

Shoplifters take advantage of your store’s weak and undetected places. A few perfect areas to perform their dirty job include the gaps between aisles, racks, and dressing rooms.

Shoplifters often target businesses that offer high-value, high-demand goods. When I supervised retail spas, for example, aestheticians were required to put things away after completing treatments and before leaving the room. Customers used to put skincare goods into their handbags or pockets while redressing after a treatment before we began doing that.

Tag switching is another common kind of retail shrink that has a direct impact on inventory counts and earnings. Tag-swappers put the tag from a lower-priced item on a higher-priced one and then complete the transaction. This approach initially conceals the theft, but it skews inventory counts for both commodities. Unfortunately, most merchants only notice this after the fact, during stock counts.

Other forms of client theft, such as coupon frauds or online fraud, have an impact on your earnings and Conclusion but aren’t often visible as lost units. Examining sales numbers and discount reports might help you discover this sort of loss—this is where having a good POS system comes in helpful.

Theft by Employees

Despite the fact that employee or internal theft is the uncommon rather than the rule, the average cost of one dishonest employee is $1,551.66.

Internal theft, however, is difficult to detect and prevent. Untrustworthy workers might steal things beneath the radar since they have access to more sections of the shop and are familiar with sales and inventory management systems. Internal theft takes several forms, including marking sellable products as broken, stock receipt miscounts, slipping things to pals at checkout, and applying excessive discounts.

Later, we will look at some of the ways you can deter Theft by Employees, from making a pleasant work environment to installing access controls.

Clerical Errors or Stock Control

Avoiding stock management issues can help you get a better understanding of your inventory and minimize erroneous shrinkage. (Image courtesy of Multichannel Merchant)

Other prominent causes of retail decline include stock control and clerical mistakes. Some errors are as basic as counting mistakes and do not indicate physical losses. Others, such as marking all of the products in a supplier shipment as “received in whole” when certain things were missing, may be expensive.

Clerical mistakes may potentially mislead you about inventory loss by giving you an erroneous image of your real inventory counts. For example, if you believed you had 120 units of a garment and recorded it as such, but only had 100 units and lost none, you would mistakenly assume your shrinkage rate was about 17%.

We’ll go over this in more depth later, but the best approach to avoid recording mistakes is to use a POS system to automate your inventory management wherever feasible.

Inventory Shrinkage Prevention Tips

While you most likely will face some amount of shrinkage in your retail business, you can take steps to mitigate issues like theft and clerical errors to minimize your retail shrink. Here we will look at strategies and technologies that you can use to prevent customer theft, Theft by Employees, and reporting errors.

Customer Theft and Shoplifting Prevention

As we previously said, theft may have a significant impact on your Conclusion; with over 400 million occurrences of stealing each year, it’s a major problem that you need to prepare for. We’ll look at some of the ways you may prepare your company for shoplifters and stop them from stealing your merchandise in this article.

Place your check-out at the entrance.

Keeping your cash wrap at the entrance makes it more difficult for burglars to steal your belongings. (Photo credit: Pinterest)

When arranging the layout of your retail shop, place the checkout at the entrance so that you and your employees are near the exit. This will allow colleagues to easily observe everyone who walks in and out, preventing both grab-and-run crooks and more clever shoplifters.

Tip: Teach your employees to welcome each client as they arrive so that would-be criminals are aware that they’ve been spotted and may be identified by police.

If you can’t put your checkout counter near the entrance, make sure your cash wrap has a clear line of sight to the exit. Mirrors or cameras, as we’ll see later, may also be useful. My store, for example, was a long rectangular room with a little area in the centre extending out to one side. My cash wrap was in this jutted-out spot, but I still had a clear line of sight to the exit, and there were mirrors to assist me keep an eye on the store’s more difficult-to-see regions.

Throughout the store, place visible mirrors, signage, and cameras.

Staff may use security mirrors to keep an eye on parts of your business that are tough to view. Premiere Workplace Solutions (source)

Don’t be scared to inform clients that you’re keeping an eye on them. Honest consumers won’t mind, and crooks will be cautious of the precaution. Security mirrors and video cameras may be carefully positioned to keep an eye on locations that are difficult to view from the checkout and other manned areas. Put up a few signs to let folks know they’re being observed.

Video footage may also be given to authorities and utilized for insurance claims and staff training if you suspect a theft. When someone stole from one of our boutique locations, all managers received a snapshot of the offender from the surveillance video, along with instructions on what to do if they came back.

Expensive items should be displayed in secure cases or areas.

Higher-end items are not only more appealing to thieves, but their loss will also be more costly to your company. Extra precautions should be taken to preserve your valuable items, such as using lockable cases or keeping them near to vigilant eyes. Merchandise your most valued things near your register or other spots where staff members are constantly present.

Here are a few solid examples of circumstances when high-value things should be displayed:

Display casing for the end cap. (Image courtesy of Handy Store Fixtures)

A display enclosure for a register. (Image courtesy of Display Cases)

Customers are assisted by employees working within a U-shaped exhibit. (Image courtesy of Storey Jewelers)

Wall in-lay displays and small display tables (Photo courtesy of Shoe Display Shelving)

Consider installing a security system.

According to the National Retail Security Survey, seven out of ten merchants claimed they will invest in technology solutions to combat theft and the accompanying shrinkage concerns in 2020. This is reasonable. Not only does the presence of a camera discourage robbery, but security systems also enable you to monitor your shop, sound alarms, and get warnings if anything goes wrong.

SimpliSafe is a security system that we suggest if you want to give it a try. SimpliSafe is a cost-effective choice that includes 24/7 monitoring, configurable program options, app-based controls, and a track record of saving organizations money.

SimpliSafe is a fantastic security package that enables you to keep an eye on your company from anywhere. (Image courtesy of Security.org)

Staff should be trained on how to recognize theft warning signs.

Train your employees to be on the lookout for any strange conduct and to report it immediately. Allow them to assist consumers entering and departing dressing rooms and keep track of what goes in and out. You may also instruct your clerks to double-check that bought bags are empty and that tags match the products appropriately during checkout. Also, remind your employees to make sure consumers depart wearing the same clothes they came in with, not anything off your racks.

Remember that although you want your employees to do all they can to avoid theft, you should never push them to do anything that puts their safety in jeopardy. Although deterrent measures such as those listed above are effective, instruct your employees not to attempt to stop a fleeing thief or approach someone forcefully.

Theft by Employees Prevention

Theft by Employees is a frustrating topic and often uncomfortable to broach. However, every retail store owner eventually comes across a less-than-honest employee. And even otherwise loyal staff sometimes push the limits by stacking discounts or giving employee discounts to friends.

Here are six techniques to defend your company against dishonest employees:

Implement a thorough hiring process for new hires.

The best way to prevent Theft by Employees is to hire honest staff in the first place. Retailers are proactively taking steps to find better candidates and identify red flags during the hiring phase. Increased employee screening has been adopted by more than a quarter of retailers to help fight inventory shrinkage from internal theft.

To build a solid team, do background checks (such as those provided by GoodHire), follow up with references, and reward employee recommendations.

Screening potential workers will assist you in preventing theft in the first place. (Paycor is the source.)

Use a POS system that allows employees to log in.

A POS system that supports unique staff logins gives business owners a powerful tool to prevent Theft by Employees-related inventory shrinkage. Assigning each staff member a unique ID makes it easy to track every transaction they make. POS systems let you see detailed reports, and see which staff member handles receipts, sales, inventory adjustment, returns, and even applied coupons to sales. If you uncover shrink, like a stock receipt that doesn’t match the vendor’s bill, you can see who logged the receipt and investigate the issue.

On our website, you can learn more about POS systems, and if you want to test one out for yourself, we suggest Lightspeed.

Staff logins may also be used to restrict access to just the systems and places that they need to do their tasks. You may provide particular rights to staff IDs in a POS system, allowing or disallowing tasks like as stock modifications, pricing changes, discount creation, and purchase order receipts. Only staff you trust will have access to shrink-sensitive information this way.

Lightspeed allows you to generate employee login credentials in order to track down wrongdoers. (Photo courtesy of Lightspeed)

Conduct audits on a regular basis.

An audit is when you gather sales statistics, look into your inventory, and take inventory of your physical shop in order to analyze the overall health of your products and brand. Audits are fantastic for spotting shrinkage since you won’t be drowning in reports if you conduct them on a regular basis, making it easier to trace down the source of any inconsistencies.

Audits not only keep you on top of things and help you trace down the cause of retail shrinkage, but they also dissuade staff from stealing and make it more difficult to get away with it. For example, suppose a coworker gave her a 10% employee discount on her whole purchase. You’d see this in the audit, and with your sales records, you’d be able to figure out who dialed the transaction and look into it further.

Install surveillance cameras in the stockroom and behind the cash register.

Use video cameras in your store’s backroom, break, storage, and reception areas without hesitation. Employees have access to several off-the-beaten-path locations in your shop, which is where most theft happens. Regularly review film to verify that employees are not abusing their employee benefits.

Use a system of checks and balances among your employees.

Dishonest employees might disguise theft in inventory adjustments and stock receipts by performing stock counts and receiving chores. A two-person stock check and receiving method increases accountability and makes it more difficult for dishonest personnel to steal.

If you’re concerned that your employees are conspiring to steal, step in and double-check the statistics. As we’ll see later, precise stock counts are critical, so make sure you double-check everything and designate two-person teams to ensure that your stock records are accurate.

Make Your Workplace a Happy Place to Be

Your team is made up of people, and people need to be happy and motivated in order to work well. Creating a pleasant work atmosphere is one aspect of this. Employees that appreciate you and your company are less likely to attempt to take advantage of you.

Pay your employees fairly, provide bonuses and incentives, and treat them with respect. Remember that you want your staff to be trustworthy and representatives for your company both on and off the clock.

Preventing Clerical Errors

Accurate stock counts are critical for immediately detecting theft-related loss. Despite being the simplest inventory loss problem to fix, clerical mistakes happen all the time. Fixing your receiving, counting, and recording methods, as well as automating your operations, is usually all that is required.

You may take the following actions to reduce clerical errors:

Set up a system and procedures for inventory management.

The first step in reducing inventory loss due to clerical and stock control mistakes is to establish a strong inventory management system. Creating a set of inventory management methods can assist you in precisely ordering, counting, and receiving your products, allowing you to know exactly how much you have.

When we received shipments at my shop, for example, we would count and split the merchandise across our many boutique locations to verify that the quantities we expected were met. We seldom allowed shrinkage concerns slip by and kept an exact count thanks to the counting mechanism we had in place.

You may monitor your inventory manually after the first count, but we suggest using an integrated POS system like Lightspeed to track your items and provide sales data. This will not only help you keep your stock counts accurate, but it will also save you time and make it simpler to notice shrinkage.

Count your cycles on a regular basis.

Cycle counts are periodic partial stock counts used to detect retail shrink and other stock management concerns such as missing or mistagged inventory. If you operate a general shop, for example, you may count all of your tools in a weekly cycle and then all of your vehicle equipment in a three-month cycle.

In a perfect world, you would cycle count all of your items every day, but as a general guideline, you should cycle count each product at least once every quarter. Most frequent cycle counts can help you keep a closer check on your more costly products. After all, a $300 HDTV would be a greater loss than a $1.99 soft drink.

To Avoid Scanning Errors, Use Barcode Labels.

Another technique to avoid clerical mistakes is to mark your products using scannable barcode labels and SKU numbers. This will speed up your checkout process by reducing associate entry mistakes. Scannable barcodes and SKU numbers will also keep your sales and inventory counts correct if you utilize an integrated POS like Lightspeed.

FIFO (First-In, First-Out) Inventory Management is a good option.

FIFO, or first-in, first-out inventory management, posits that your oldest things are sold first. Businesses that sell items that deteriorate or have expiry dates, such as food, personal care, and cosmetics, often employ this inventory management system. When it comes to inventory management, promoting FIFO often entails placing older things in front of newer ones and conducting discounts on older items. Because you’re looking a little closer while shelving, you’re more likely to detect missed things and keep your inventory under control.

Quickly and accurately receive and record stock shipments

Receiving stock shipments on time and in the proper manner helps to avoid inventory loss. Companies should receive and unpack all boxes in the same place, count each box, and compare the things received to the original purchase orders in order to receive inventory accurately.

Only keep track of your inventory numbers after thoroughly evaluating them. Inaccurate figures, missing inventory, and payments to suppliers for items not received are all consequences of sloppy receipts.

To prevent a shrinkage headache, make sure you precisely document your stock when you get it. (Image courtesy of DEAR Systems)

Damaged items should be removed from the stock count.

In the retail industry, damaged items are unavoidable. It’s inevitable that inbound merchandise will be damaged in transportation, and that in-store consumers may damage and reshelve things to avoid having to pay—it simply occurs. When you detect damage, it’s critical to modify your stock count as soon as possible and then dispose of the item. If you don’t, your counts will be incorrect, and the missing unit will be mistakenly attributed to shrinking after you’ve forgotten about the damaged products.

Make this a shop policy, and train your employees on how to properly dispose of and record damaged merchandise.

Wherever possible, automate

What if I told you that

According to the 2020 National Retail Security Survey, POS analytics is still the most popular loss prevention strategy, with 56.5 percent of merchants using it; just 20% of businesses polled have no intentions to use it.

If software solutions can help you automate your procedures, do so whenever feasible. This will not only improve the accuracy of your inventory counts, but it will also speed up all of your inventory procedures, enable you to obtain retail analytics data, make budgeting simpler, provide insights into your income stream, and allow you to understand more about your customer base. The possibilities are unlimited, and you should take use of them whenever possible.

Conclusion

Inventory shrinkage may be devastating to your organization and result in significant losses. Inventory shrinkage is a part of retail, whether it’s due to theft or clerical mistakes, but that doesn’t mean you shouldn’t strive to avoid it. We looked at how to assess inventory shrinkage, the factors that often cause shrinkage, and strategies for preventing shrinking in the future.

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Inventory shrinkage is the process of reducing the amount of inventory that a company has on hand. This can be caused by many different things, but in order to prevent it, companies should make sure that they have good control over their inventory and not let it get too large. Reference: how to prevent inventory shrinkage.

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