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Inventory Shrinkage Can Break Your Business. Here’s How To Stop It:

Inventory Shrinkage

Regardless of the products you sell or who your customers are, if you run a store, you’ve more than likely suffered from inventory shrinkage. In fact, we’ll argue that it’s a certainty. It doesn’t have to be a lot, or even happen that often. But you’ll have experienced it and you’ll know the damage it can do to your business.

What is inventory shrinkage?

Also known as shrinkage or shrink, it’s not difficult to understand or define inventory shrinkage. In the context of retail, it refers to any goods that have either gone missing or are damaged between the time that they left the manufacturers floor and arrived at your checkout counter in the hands of your customers.

That means there are a few different reasons for it happening, all of which we’ll delve into a bit later on in this piece. For now, it’s worth pointing out that the fault doesn’t always lie with you, as the retailer. Or, with your suppliers, for that matter. In fact, there are some instances where it’s no one’s fault. Instead, it’s an accident or mistake.

The fact remains, regardless of its cause, it can do damage to your business and needs to be stopped. Or, at least, managed carefully. Consider the 2017 National Retail Security Survey conducted by the National Retail Federation. The survey, which canvassed various retail industry loss prevention and asset protection professionals, found that nearly half (48.8%) said that shrinkage had increased.

“Those reporting the highest levels of shrink - 2% or greater - continues to tick upward: In 2015, only 17.1% of respondents reported that level of shrink; in the 2017 report, 23.1% said their losses were that high,” the survey found. Meanwhile, those reporting retail shrinkage of less than a percent grew to 42.3%.

That means that there is never really a moment where you don’t have to worry about it. The moment you don’t think you need to worry is precisely when you’ll lose complete control of your inventory. As for finding an answer to the question of what is an acceptable amount of shrink for business and what’s unacceptable, it’s tricky. That’s because no two retail businesses are the same.

For example, if you’re a speciality store with inventory that is primarily composed of high-risk products, a shrinkage of 1% could spell immediate danger. Meanwhile, for another retailer, 1% might be an average that they could live with so long as they keep control of it.

That said, if all correct measures are in place, there should be no reason why a store should have a shrinkage of higher than 1%.

How to combat inventory shrinkage

Before we continue, it’s worth explaining how you can calculate your inventory shrinkage. In short, your shrinkage rate is your listed inventory minus the actual good to go amount of stock you have on hand, expressed as a percentage.

For example, let’s assume that you have $2 000 000 of inventory listed on your books. After conducting a mandatory inventory count, you find that your actual undamaged amount of stock on hand is $1 970 000. Your retail shrinkage is thus $30 000. You’d then divide $30 000 by $2 000 000 and multiply the answer by 100 to arrive at your shrinkage percentage. In this case, your retail shrinkage is 1.5%.

Book a one-on-one consultation with an Account Advisor to hear how DotActiv can help you manage your inventory efficiently

If your stock on hand decreases further and following the next stock count, you’re down by $50 000 or more, which would equate to 2% and upwards. You need to put a stop to it.

Of course, before you can look to handle it, you first need to understand why it happens. As a caveat, while the below reasons play a part, they are not all-encompassing. There are also other reasons for stock loss, which are unknown.

          1. Customer and staff theft

The most common reason for inventory shrinkage is, without a doubt, theft. Be that by your customers (shoplifting) or your staff. In fact, if you go back and re-read the National Retail Security Survey that we quoted in this piece, you’ll find that theft (customer and staff combined) accounts for 66.5% of all stock loss.

And that is only according to this survey. That percentage could indeed increase (or decrease) if you were to canvas more retailers, all of who offer various product assortments and cater for different target markets.

As for ways to combat theft in your store, there are many measures you can take.

If you stock high-end products, the safest way to prevent shoplifting is to attach security devices to your products. For example, you can place a ‘spider’ - a large security device strapped around the box of the product with cables - which you can only remove with help from a specific machine at the checkout counter.

You could also consider placing the most commonly stolen products in a locked display cabinet so that they’d need to ask a staff member for access. Or, place a dummy display model on your store floor with the real product in your stockroom.

On the other hand, you also need to consider safeguarding your store against staff theft.

A camera stationed at each of your till points as well as at your loading zone is the obvious solution in this instance. Besides that, you should also look to identify any security loopholes and then establish systems and checks to proactively reduce employee theft. For example, research your future employees and monitor everyone for any unusual behaviour or sudden change in lifestyle.

Of course, building a trusting environment with a motivated workforce is the ideal starting point. If your employees are motivated, paid fairly and empowered, they are less likely to feel compelled to steal.

          2. Vendor fraud or in-transit stock loss

Besides theft, another reason for your store suffering from shrinkage is vendor fraud. In truth, it’s another form of theft, this time involving your supplier working with someone at your store.

Of course, getting this right would be complicated. It could require someone at the vendor putting more stock into the delivery truck than is needed and then the delivery person giving that excess stock to someone else on their way to your store, before arriving with the correct amount according to the paperwork. Or, having an agreement with one of your employees so that they state that X amount was delivered to the store when in truth, the amount was higher.

In that case, the paperwork would be adjusted to reflect the correct amount so that excess stock could be taken and sold off to someone else.

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There are two ways you can prevent vendor fraud.

Firstly, use vendors with a sound history, who have a large support base, and follow strict measures when it comes to stock control. That means that should anything go wrong on the way to your store; there is a paper trail to follow. It’s also worth using vendors who have strict security measures in place to prevent in-transit stock loss.

In the case of in-transit stock loss, we’re referring specifically to robberies.

Secondly, you should have a paper trail of your own to ensure you know what stock comes in and goes out. For example, ensure that your receiving manager brings in the stock, checks the relevant quantities according to the order sheet, signs it with the delivery staff and has a security guard or staff member co-sign. The order sheet would then go to the relevant person, such as the store manager, who would check the delivery note against what has been supplied.

While this is a long process, it’s necessary, especially so if the products you stock are primarily high-end.

          3. Administrative or clerical errors

Employing a robust POS system that monitors what goes in and out at your store is one of the most important aspects of running your business. You could argue that it is the most crucial part.

That’s because not only is it the system that interacts with your client the most, but it is also what determines how your business runs in the first place. After all, if you have no idea of what is selling, how are you expected to know how much money you're making? More importantly, how are you supposed to make an informed decision around what products to stock in the future?

Just to note, this is over and above the system that you’d have at your receiving bay that we mentioned in our previous point.

Let’s take the example of a store that operates on a pen and paper invoice system instead of using a POS system. By having a manual system in place, you’re opening yourself up to human error. A staff member could quite easily lose the paper or write down an incorrect barcode. Do this often enough, and your shrinkage will, quite obviously, sky rocket.

The solution is to implement an automatic system that tracks everything in your store. Of course, that doesn’t mean it’s perfect. Things can go wrong.

For example, a customer walks in, wanting a printer, but without the ink cartridge, and you work out a deal with them. However, after agreeing to the deal, you find that the one printer you have left in stock has a cartridge pre-installed, which increases its overall price. Because you’ve concluded the deal, you’re forced to sell it at the reduced price, cartridge included.

Book a one-on-one consultation with an Account Advisor to hear how DotActiv drives inventory replenishment

Cycle counting your inventory can also have a huge and positive impact. You can uncover many errors in your POS system with this practice before your stock is sold and it becomes shrinkage.

          4. Product damage

The last, but certainly not least reason why retail shrinkage happens is because of product damage. In this instance, the damage done isn’t always your fault. Accidents and mistakes happen.

However, that doesn’t mean that you can’t take precautions to ensure that product damage is minimal. If mistakes happen on a regular basis in-store, you could hold your staff accountable.

In combating this, the old adage of “too many cooks spoil the broth” comes to mind. In other words, the fewer people who are involved in the receiving area and working with your stock upon arrival, the easier it is to manage. When too many people are rushing to get things done, the possibility of product damage invariably occurs.

Other than that, the basic rules around stocking products in your storeroom as well as on your shelf applies. For example, don’t place heavy or large objects above a certain height. Don’t attempt to stack items on top of each other if they can’t be stacked without falling. Glass bottles are the perfect example here. Also, keep items that are easily broken behind some form of barrier.

While it can be difficult to manage shrink when its related to other situations, in this instance, where you can control it without too much hard work, there aren’t any excuses.

Darren Gilbert

With over 10 years of writing and marketing experience, Darren joined DotActiv in 2017 as a content writer where he was responsible for producing blogs, Ebooks and more. He has since worked himself up to the role of content manager, where he oversees all and any content produced by the company.

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