What Is Inventory Shrinkage in Retail?

Many small businesses do not track inventory or they use a manual method that can be insufficient for today’s market. Acceptable levels of inventory shrinkage vary by industry and by individual businesses. Some businesses decide to increase the price of their products to make up for profit lost to shrinkage. In other words, they’re passing on their costs to the next stop in the supply chain. This can be a risky move, however, if it prompts customers to take their business elsewhere. Calculating inventory shrinkage is just a matter of subtracting physically counted inventory from the amount of inventory you should have.

This is a pretty common form of vendor fraud, but checking your inventory reports can help you catch it before it grows into a bigger problem. Conduct regular training sessions on what to do in the case of a robbery or other emergency situations, as well as whistleblowing and procedures around reporting internal theft. Increase training around what to do if you think someone is acting suspiciously, or suspected of shoplifting or fraud. The US National Retail Federation (NRF), who collect global shrinkage data, have collected 2020’s shrink data, and identified the most commonly reported reasons for shrink from the previous year. The INFORM Consumers Act requires e-commerce sites to verify and disclose information about their high-volume third-party sellers.

Shrinkage Statistics

It is often expressed as a percentage and represents the difference between the recorded inventory and the actual inventory in a retail or warehouse setting. 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.

• Warehouses, logistics centers, and shipping companies represent major sources of shrink in most value chains.
• Solink’s video surveillance software connects your security camera footage with your POS data and creates a dashboard of analytics and searchable moments.
• Unhappy and under-trained employees are risk factors for theft.

For example, some businesses might choose to invest in surveillance equipment and security guards to combat shoplifting. To reduce employee theft, retailers must look beyond loss prevention measures put in place for customer shoplifting. In some cases, employees can take product before it reaches the sales floor.

Human error/accidents:

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 Inventory Shrinkage in Retail but actually putting inventory in a bag that they take for themselves. The most obvious problem is that inventory gets lost and can’t be retrieved. Since many products don’t have GPS trackers on them, you won’t know where they end up.

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.

How Should Retailers Focus On Shrinkage?

However, when you have a stock audit tool like GoSure, stock counting during business hours becomes perfectly possible! Perpetual audits can be done with peace by planning for audits during daily employee lean hours seamlessly. You can identify and correct the discrepancies all in a single click.

Forecast demand, set low stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more. As you can tell from the word choice, inventory shrinkage can’t be eradicated. If a prospective employee demonstrates a long history of improper conduct, the company should probably not hire them. Hired employees should undergo rigorous training on how to handle inventory appropriately and carry out stock-taking. Smart businesses factor in shrinkage as part of their costs and plan accordingly.

Book inventory uses the dollar value to track the exact amount of inventory that should be on hand for a retailer. When a retailer receives a product to sell, it records the dollar value of the inventory on its balance sheet as a current asset. In this example, shrinkage was calculated using the cost value of the items. However, there are retailers that choose to calculate and report shrinkage based on the retail price and not the cost. As your ecommerce business grows and inventory becomes too expensive or challenging to manage in-house, consider using an expert ecommerce fulfillment company to help you. Employees may not be aware of how inventory shrinkage affects them.

Brigitte is a retail specialist and staff writer with brick-and-mortar management experience. Before joining FSB, she managed a storefront for several years, working in everything from merchandising, to buying, to sales analysis. Brigitte also has a background in writing, research, and publishing with an undergraduate degree in writing. An electronic article surveillance (EAS) system can help you follow inventory throughout your store and make sure that it only leaves through a legitimate purchase. An EAS system is a great way to keep track of all of your inventory, but especially the smaller and higher-value items. These manual inventory counts can also reduce the risk of accidental orders or unnecessarily large purchases that may lead to excess wastage.

External Theft

Simply accepting shrinkage as a given and trying to make up for the loss in other areas can be a huge mistake. One factor causing an unnecessary loss for suppliers and retailers is shrinkage. While shrinkage is usually unpredictable, it can be controlled when appropriate safeguards are put in place. Every business is making monthly decisions based on Profit and Loss statements. One of the easiest ways to grow the numbers in the Profit column is to take action on factors contributing to the Loss column.

You can teach them to how recognize shoplifting techniques and close the gaps in your security. Walmart’s chief financial officer, John David Rainey, said shrink had increased «a bit» this year, and it also increased last year. «It’s uneven across the country — it’s not in every market,» he added. An integrated system makes decisions about what to do about shrinkage easier, too, because you have a lot of the information you need on hand for easy reference.

Shoplifting

Inaccuracies within your inventory management may come from mistakes during the receiving process or through using multiple systems to manage your inventory. Implementing a system of double-checks when accepting inventory is a good way to prevent mistakes. Also, using a single automated system can reduce mistakes in transferring data from one system to the next. «We’ve got a variety of businesses, so it’s not necessarily the same answer as maybe some of the others that are in the news about shrink.»

• Often that means teaching them to interact with inventory management software and that software’s recommendations and analyses.
• You probably have security cameras in your store, but do you have a complete business security camera system?
• Use this as an opportunity to let them know how shrinkage affects them directly and indirectly, including how it decreases promotions, paychecks, employee profit shares, and more.
• To combat significant inventory shrinkage, you must familiarize yourself with what it is, why it happens, and the preventative actions you can take.

Use this as an opportunity to let them know how shrinkage affects them directly and indirectly, including how it decreases promotions, paychecks, employee profit shares, and more. By following proper inventory usage protocols, like FIFO, product damage or spoilage can be one of the easiest forms of inventory shrinkage to prevent. External theft, like shoplifting, is one of the largest causes of shrinkage reported by retailers, accounting for 37% of all shrinkage.

And even otherwise loyal staff sometimes push the limits by stacking discounts or giving employee discounts to friends. To see where Solink can reduce your inventory shrinkage, sign up for a demo today. Inventory shrinkage is the difference between what your inventory value should be based on ordering and sales data and its actual value. Effective loss prevention starts at the top and flows down and out throughout the organization.

Relaxed law enforcement guidelines and decreased penalties have caused an increase in ORC activity, according to the NRF 2020 Organized Retail Crime survey. Good employees want to prevent inventory losses, but it’s your job to give them the tools and training they need to make it happen. Employee training to identify and stop shoplifting can make a big difference in your shrinkage. If you have errors in your inventory counts when manually taking inventory, that screws up your shrinkage rate. To take any action on shrinkage, you need accurate information. Waste and spoilage have far a greater impact on the food service industry and retail food sellers.

This is why it is important for businesses to track their shrinkage rates over time, to determine what is typical. It’s also important to factor for shrinkage when deciding how much inventory to order. Shrinkage, sometimes referred to as “shrink,” is a cost of doing business that can be easily overlooked because it tends to occur in small increments over time. For example, much vendor fraud happens when outside vendors deliver product directly to the store and also come in to stock it on the shelves. All merchandise is checked in, monitored, and stocked by the supplier. Supplier fraud occurs when the person stocking does not provide as many items as the retailer was invoiced or steals other products.

A dedicated inventory management software program will help reduce manual handling of stock and cut down on inventory shrinkage. This is especially negative in retail environments, where businesses operate on low margins and high volumes, meaning that retailers have to sell a large amount of product to make a profit. However, due to shrinkage, your actual inventory value is $63,000. Use the inventory shrinkage rate to find out how much value you lost. With these two values in hand, you’re ready to calculate your inventory shrinkage, which is your recorded inventory minus your actual inventory.

Something to think about is good hiring practices, which promotes employees with integrity. Once you have good employees, train them on shoplifting prevention, safe and reliable receiving processes, and how to properly use your upgraded inventory management system. Inventory shrinkage in retail companies is impossible to eliminate entirely, but you can minimize the damaging effects with a great plan. Retail accounting, on the other hand, values inventory based on retail price.