A Beginner’s Guide to Inventory Shrinkage

Unknown causes account for around 6% of total inventory shrinkage. Tag swapping is another pervasive form of retail shrink that affects inventory numbers and profits directly. Tag swappers place a lower-priced item’s tag on a higher-priced product and then complete the purchase. This strategy hides the theft initially, but it throws inventory numbers off for both goods. Unfortunately, most retailers detect this during stock counts―long after the fact.

Brands should familiarize themselves with what inventory shrinkage is, how to track it, and how to prevent it. It may be impossible to reduce inventory shrinkage completely, but with careful accounting records, honesty, and security measures, you can limit waste and theft. Statistics say employee theft holds 42% of the inventory shrinkage of the company or the business. The reason is, the employees are in the closest proximity of the inventory, and can find loopholes in the security (in the warehouses/stores).

How to reduce inventory shrinkage

Of that portion, 42.7% is attributed to employee (also known as internal) theft and 35.6% was due to external theft, known as shoplifting. A large amount of inventory shrinkage can also impact how lean a business can be with inventory levels. Having an accurate view of inventory items helps brands reorder at the right time to not have to pay to store excess products but avoid stockouts. Inventory shrinkage — whether it’s due to miscounts, damage, fraud, or theft — can cost a business both time and money.

If you have errors in your accounting records, inventory costing methods, payments, or invoices it will snowball into inaccurate shrinkage rates. No matter what industry you’re in, there are numerous software solutions for your business. Whether your products are all sold in bulk with an MOQ (what does MOQ mean?) in place or not, automation can help.

Types of Shrinkage

When it does happen, you need to understand how to make correcting entries in your books for proper inventory accounting. Because some shrinkage is inevitable, businesses will have to determine what they consider to be an acceptable amount of loss. The answer will vary by industry and from one business to the next.

Thankfully automation has gotten us pretty far in dealing with both of these problems and we’ll touch on that in a bit. Accurately calculating inventory KPI like average inventory, inventory days, and inventory carrying cost can all be automated. If the wine-bar in our example input 10 bottles of wine per case instead of 12, they would have recorded 60 bottles in their inventory instead of 72. Right there, that’s 12 bottles of wine that won’t be accounted for.

Tips for improving inventory accuracy and tracking

Even though that’s the average, it’s still pretty high because it equally weights even the highest inventory shrinkage rates. Like those at or above 3%, which account for almost 11% of retail businesses. To determine how much shrinkage your business has, calculate your inventory shrinkage rate. This rate is a percentage that represents how much inventory your business lost due to damage, theft, errors, etc. The lower your inventory shrinkage rate, the less inventory you lost. Employees have direct access to all a brand’s products, and poor inventory count, warehouse management and security can result in employee theft.

• The leading causes are theft by employees or customers, errors made by employees, and damaged or lost products.
• This will ensure in-depth bookkeeping of the inventory, resulting in tight security and a decrease in employee theft.
• Several businesses invest in goods with the purpose to sell and make a profit.
• Shrinkage is the loss of inventory or cash from a business due to factors such as theft, damage, or administrative errors.
• Proper product SKUs (stock keeping units)and UPCs (universal product code) are essential for ensuring that your stock levels are correctly documented thereby reducing inventory shrinkage.

If your actual inventory is smaller than your recorded inventory, you have shrinkage. Inventory shrinkage, the unexpected loss of inventory, is a big problem in retail. It accounted for roughly $100 billion in losses in 2022—up from about $90 billion in 2020. Ultimately, it takes a concerted effort from everyone in the organization to reduce inventory shrinkage – from top management down. By clarifying your policies and procedures, you can help to reduce inventory shrinkage and keep your business running smoothly. Additionally, you should communicate the consequences of employee theft.

Impact of inventory shrinkage on business operations and profitability

If your shrinkage rate suddenly increases, look into possible causes. This rate means that you lost 7.9% of your inventory value to shrinkage. Multiply your inventory shrinkage rate by 100 to convert it into a percentage. Flowspace’s inventory planning and forecasting software gives brands real-time insights and recommendations for inventory optimization. Having access to real-time data allows brands to perform those all-important surprise audits on physical inventory without alerting employees. Actionable inventory data can also help brands make informed safety stock decisions to avoid an out-of-stock situation.

Maybe someone is taking cash from a drawer or a bottle of liquor from behind the bar.

That means ringing in obsolete prices, applying discounts, or otherwise being creative with how things are rung in. According to the National Retail Security Survey 2020, the retail industry’s average shrink rate has risen to an all-time high recently, after years of holding steady. Learn how an accurate, well-structured inventory management system can help you increase turnover, reduce markdowns and improve customer service. Internal theft accounts for 28.5% of shrinkage, according to the National Retail Federation. This sort of shrink can come in the form of embezzlement, skimming, larceny, or more elaborate schemes. It may involve only one employee, or it could include a small group of workers.

Implement anti-shoplifting measures

This helps keep your employees vigilant and allows you to regularly stay on top of your overall inventory and any problem areas. Implementing daily checklists means your employees know and understand what needs to be done when they arrive at work and exactly how you want them to complete each task. In April, the New York Police Department released data showing a significant increase in shoplifting in the city, with a small group of retailers targeted again and again.

• Tag swappers place a lower-priced item’s tag on a higher-priced product and then complete the purchase.
• Brigitte also has a background in writing, research, and publishing with an undergraduate degree in writing.
• Although, it is wise to make sure you record as little inventory shrinkage rate as possible.
• Even a moderate amount of shrinkage can have a big impact on your business, which is why it’s important to get your shrinkage rates as low as possible.

For example, if your chef grabs the closest onions, even if an older shipment is sitting in inventory, those older onions might end up rotting before they can be used. One recent case that made headlines was a school food service director who stole $1.5 million worth 30 incredible employee retention statistics of food, mostly chicken wings, over a few years. The scam was uncovered during a routine mid-year audit, highlighting the importance of regular checkups. According to one study, 67% of asset protection managers reported a moderate to considerable increase in ORC.

What is inventory shrinkage?

Meet with employees responsible for tracking inventory and review the processes they follow. If you find they have knowledge gaps, institute a training program. TradeGecko’s inventory and order management software will help you automate your workflows so you can focus on growing your business.

And that also means you’ll clear up more shelf space for other, more profitable products. It’s actually right around average and speaks to an industry-standard amount of shrinkage control. The goal is to always be on top of your inventory reconciliation to catch shrinkage as it happens. If you have inventory that’s at particular risk for theft, such as batteries or low-cost accessories, consider focusing multiple cycle counts in a row on those SKUs.