What is Inventory Shrinkage?

Inventory shrinkage or simply shrinkage, in simple terms, is when the number of items in stock is less than what is indicated in the inventory list. This is an undesirable situation that may result in profit losses. Moreover, it can lead to you, as the business owner, to pass the cost of shrinkage to your customers by increasing prices. The problem is that this move may turn off some buyers who are looking for more affordable options.

This is why it’s important to know the main causes behind shrinkage:

  • Internal Theft
  • External Theft
  • Control Errors

Internal Theft

Internal theft is classified as unauthorized appropriation of inventory goods by your staff. They can outright steal products, mark goods as defective or damaged, or apply excessive discounts to their friends or family.

External Theft

External theft is something simpler but no less than unwanted, like shoplifting.

Control Errors

Control Errors are things like miscounts, mistagging, or errors in recording shipments.

Once you know and understand the reasons behind shrinkage, it’s easier to develop preventative measures. Here are a few ways to do it.

How to control inventory shrinkage?

Fix the major causes behind inventory mismanagement

Control errors are actually the easiest problems to fix when it comes to shrinkage. The first step is to improve your inventory management system to help streamline processes and minimize errors. Switch to an online system so everything can be tracked and updated in real time. If you have an online platform, you can further improve inventory management through efficient e-commerce fulfillment. With an optimized system, you can worry less about your stock, orders, and storage needs, and it can allow you to focus on increasing sales instead.

In relation, you should also enforce the first-in, first-out (FIFO) principle. This simply means that older stocks should be sold first. This is imperative for perishable goods like food and cosmetics. However, FIFO is still applicable even if you’re not selling goods with expiration dates.

For example, older products will likely have packaging with faded colors or old logos, which customers may pass over newer ones. Dispose of older stocks ASAP to prevent this kind of loss.

Install Security Cameras and Visible Warnings

For business owners with physical stores, installing security cameras and mirrors is an easy way to tell your customers, “I’m watching you!” They may not entirely stop craftier thieves, but they can be powerful tools to dissuade them. What’s more, video footage can be used when you decide to prosecute and even support your insurance claims. Don’t worry about turning off customers with visible cameras. In fact, they won’t even care if they’re honest shoppers and may even feel safer while inside your store.

You should also install security cameras in areas frequented by your staff like the storage rooms and receiving areas where internal theft usually happens. If you can, personally review the footage and logs to spot any discrepancies. In this case, it’s better to spend some time monitoring your employees than suffer losses that can affect more people. Your loyal staff may even see it as your own way of protecting them and their source of livelihood.

Train Your Employees

It won’t do if you’re the only one who can identify suspicious behavior. It’s better if your staff also knows how to do it and reports it to you. One simple way to do this is to pay attention to what the customers are wearing when they come in and to always check that bags and similar items are empty when getting checked out.

On the tech side of things, your staff should also be well-trained in using your inventory management system and your POS tools. Proper and efficient usage of these features can help minimize clerical and checkout errors. Moreover, your staff should also be able to spot discrepancies with the most basic data.

Conduct Audits and Cycle Counts Regularly

Pull data from your POS and inventory management systems to review sales data, stock movement, discounts, and other relevant information. If there are any discrepancies, analyze further and determine if they’re in any way connected to internal or external theft. You should also remove damaged goods immediately from your stock so that they don’t get mistakenly marked as sellable and result in an erroneous shrinkage report. In addition, you should also update your stock list only when the stock shipments are properly received and fully vetted.

Meanwhile, a cycle count is essentially a spot check for your stock. This helps you catch discrepancies earlier, instead of letting them pile up for discovery during semi-annual or annual inventory checks.

Lock Important Items and Data

High-value items on display should always be kept under lock and key. Coupled with security cameras, the extra effort in fiddling with locks will help discourage thieves. You may even want to display replicas or mock-ups instead. Back in the storage room, hand the keys only to trusted employees. You should also limit the number of people with access to critical areas.

When it comes to data, assign unique usernames to individuals with access to the systems for easier activity tracking. This helps both in monitoring fraudulent activity and control errors. In addition, access to all of the data should be restricted to as few people as possible. 

It may seem like a huge undertaking, but in the end, preventing inventory shrinkage is very much worth it.


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