How to Reduce Shrinkage in Inventory

Sometimes, inventory may disappear off the shelves and cannot be matched to any of the other causes of inventory shrinkage. Unknown causes represent about six percent of the total inventory shrinkage. In the world of inventory shrinkage there are acceptable levels and unacceptable levels. Clerical errors like this also lead to premature ordering and, eventually, sitting inventory that takes up shelf space. This type of shrinkage is especially hard to solve because any plan of attack is based on faulty information.

According to the 2016 survey, shoplifting and employee theft were the largest causes of inventory loss. In 2008, employee theft represented 42.7%, while shoplifting represented 35.6% of the total microsoft 365 vs adp workforce now comparisonage. The initial action that a business should take to prevent inventory shrinkage is to implement a double-check system. It should have more than one person assigned to important inventory management stages, such as signing invoices, recording stock, and accepting stock. Each time you take inventory is a chance to detect an inventory discrepancy. How to prevent shrinkage is an exercise in how often you’re taking inventory.

Restrict access to certain employees

To see how Solink can reduce inventory shrinkage across your enterprise, sign up for a demo today. Solink’s integrated VSaaS solution helps remove this uncertainty by connecting all of your data sources. The first step in eliminating inventory shrinkage is to find the sources. Solink helps you do this by giving you video footage of everything happening in your business without the need to manually search through the surveillance video.

As a result, maintaining stock levels and controlling inventory inflow and outflow becomes increasingly essential for the management. As a result, inventory shrinkage is $50,000 ($1,000,000 book cost minus $950,000 actual cost). The percentage of it is 5% ($50,000 shrinkage / $1,000,000 book cost).

How do you control shrinkage?

Here are answers to some of the most common questions about inventory shrinkage. Even more importantly, calculating inventory shrinkage is key to minimizing it in the future, as an accurate calculation could give you a hint as to the shrinkage’s cause. Smart businesses factor in shrinkage as part of their costs and plan accordingly. That means baking extra into their budgeting and product ordering processes to keep themselves covered. If a prospective employee demonstrates a long history of improper conduct, the company should probably not hire them.

• Employees may take some company stock to make up for any underpayment, under appreciation, or undervaluation they believe they are receiving.
• Damage refers to anything that causes the inventory to become unsellable.
• For accounting purposes, the business must create a journal entry that records the $5,000 loss as an expense.
• Periodic inventory checks allow a business to estimate the losses and expenses caused by the inventory.
• This is why it is important for businesses to track their shrinkage rates over time, to determine what is typical.

Water damage, breakage, cracking, etc. all factors fall under the category of damage. This forces the business to incur the loss caused from the company’s inventory accounts resulting in inventory shrinkage. The reality is that many inaccuracies in stock levels are due to human error.

Shrinkage at the Vendor

The inventory KPI for inventory shrinkage is the shrinkage rate, which measures the percentage of inventory loss as a result of shrinkage. It is an important metric to monitor and minimize to ensure efficient inventory management and profitability. In 2017, the NRSS reported that external theft or customer shoplifting were responsible for 37.5% of retail shrinkage. And 33.2% of retail shrinkage was caused by employee or internal theft.

Investing in inventory planning software makes facility management and inventory tracking much easier while ensuring customer service level expectations are met. Inventory shrinkage is calculated by first subtracting actual inventory from recorded inventory and then dividing it by recorded inventory. You can convert that into a percentage by multiplying the result by 100. How you choose to deal with inventory shrinkage will depend on your industry, budget, and the type of shrinkage affecting your business the most. This is why keeping track of your inventory and having a good understanding of what’s happening in your stores is so important. With your inventory shrinkage percentage, you now know the rate at which your inventory is being lost for reasons outside of sales.

Importance of inventory shrinkage in business

If it’s unrealistic to count, it’s unrealistic to verify that you got the right amount. When the vineyard sells the cases of wine, the vendor or wholesaler receives and sells the wine on an online marketplace. In restaurant kitchens, shrinkage refers to the difference between the amount of food you acquire from wholesale food distributors and the amount of food you sell to customers. As you can tell from the word choice, inventory shrinkage can’t be eradicated.

Here, we looked at how you can calculate your inventory shrinkage, the issues that typically cause shrinkage, and ways that you can mitigate shrinkage in the future. Stock control and clerical errors are other common causes of retail shrink. Some errors might be as simple as miscounts and do not reflect physical losses. Others can be costly, such as recording all of the goods in a supplier shipment as “received in full” when some items were actually missing from the shipment.

Throughout your warehouse and shop corridors, surveillance cameras should be put in place. Use a digital door lock and only allow people in control of inventory to enter the warehouse. If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee. Large airlines can’t afford to have even one crash, yet they make thousands of flights each day.

Nearly 30% of retailers reported that ecommerce crime has become a much higher priority over the last five years, followed by organized retail crime (ORC) (28%) and internal theft (20%). According to a study from the National Retail Foundation, retail businesses lost $62 billion from “shrink” in 2019, amounting to an average of 1.6% of sales. Despite the fact that the majority of businesses have transitioned to digital record-keeping, administrative and paperwork errors continue to be one of the leading causes of shrinkage.

Software will help reduce inventory shrinkage

It’s also important to split responsibilities among employees so one person is not responsible for both recording and processing receipts. One of the biggest threats in this category is organized retail crime (ORC), which are groups that steal large amounts of inventory to sell online. Numerous types of technology can help you effectively manage your inventory and reduce shrinkage. Second, your company should create a system for tracking inventory changes. This will help businesses to identify any discrepancies and take corrective action. At the end of the workday, your employees can be required to submit a report that holds them accountable for the tasks and checklists they’ve completed.

• Every piece of inventory that’s missing is essentially lost sales and money for your business, and should be considered an expense.
• To give you some perspective, the entire wine industry has a market value of 70.5 billion dollars.
• Throughout your warehouse and shop corridors, surveillance cameras should be put in place.
• The latter can learn from their more experienced colleagues how to properly track and inventory items to reduce mistakes.

Shrinkage occurs across all industries and at every point in the value chain. Sometimes it is normal shrinkage, which is planned and can only be minimized. Other times it is abnormal, and the goal should be to eliminate it. You may want to consider hiring a security consultant to determine how to protect expensive inventory without sacrificing productivity or access at your place of business. If one employee has access to recording and processing receipts, they could be tempted to falsify the reports. You can counteract this by letting different employees handle recording and processing receipts, or at least for quality assurance.

Calculating inventory shrinkage

Every piece of inventory that’s missing is essentially lost sales and money for your business, and should be considered an expense. Whenever a SKU’s inventory levels are less than they were recorded to be for accounting purposes, there has been inventory shrinkage. Like most other business losses, inventory shrinkage impacts your bottom line. In order to discover precisely how inventory shrinkage has affected your business, you’ll need to calculate, track, and monitor it over time. To combat significant inventory shrinkage, you must familiarize yourself with what it is, why it happens, and the preventative actions you can take.

Some companies lock high-value items behind closed doors, while others move the highest value items offsite altogether. If you’re a single brick-and-mortar store, it may be useful to install cameras and security systems in your shop or your inventory storage system. You can also make use of clear garbage bags to ensure no one is pretending something is trash but actually putting inventory in a bag that they take for themselves.