For most businesses, inventory is your most valuable asset, so discrepancies can lead to challenges as your team tries to reconcile inventory via a physical inventory count.
As a result, preventing inventory shrinkage can be rewarding. Read more to learn what inventory shrinkage is, how you can reduce your shrinkage rate, and what that can do to improve your bottom line.
What is inventory shrinkage?
Inventory shrinkage is when the recorded inventory amount you have doesn’t match the actual inventory count of the physical product. So, for example, if you have 1,000,000 units of item X, but then you count your inventory and only have 950,000 units, you have an inventory shrinkage of 50,000 units, and your inventory shrinkage rate is 5%.
Inventory Shrinkage Rate Formula
The inventory shrinkage formula is the number of recorded units minus the number of actual, on-hand units divided by the recorded units. You then multiply that number by 100 to get a percentage.
EXAMPLE:
1,000,000 - 950,000 / 1,000,000 = 0.05 * 100 = 5%
According to an industry study by the National Retail Federation (NRF), the industry average shrink rate is 1.4%
Causes of inventory shrinkage
According to the most recent National Retail Security Survey, here are the three most common causes of inventory shrinkage.
- Customer Theft (including ORC)
- Employee Theft
- Process/Control Error
Customer Theft and Organized Retail Crime (ORC)
The biggest culprit of inventory shrinkage is shoplifting. This includes individual shoppers in your retail locations and more sophisticated ORC rings. Per the survey, 37% of all inventory shrinkage is caused by customer theft.
Organized retail crime refers to groups of individuals that work together in a region to steal from retail businesses. These individuals typically work in teams so that someone can distract a store employee while another person steals the merchandise. Most often, the stolen merchandise is either sold for a profit or fraudulently returned to the retailer for cash or store credit.
Employee Theft
According to the survey, employee theft makes up 28.5% of all inventory shrinkage. Employees often have the easiest path to steal inventory because they know your operation well. Employee theft can occur at a retail store, but it often occurs in warehouses or storage facilities that ecommerce businesses use to store their products.
Process/Control Failures
In more simple terms, this refers to clerical errors. Approximately 25.7% of all shrinkage is from some type of process error. These errors can range from inaccurate entries on spreadsheets to missing a barcode inventory scan when inventory is received in the warehouse. They are most often administrative errors caused by human error due to miscounting or general paperwork errors.
The impact of inventory shrinkage on your business
The biggest impact of inventory shrinkage is lost revenue. By not having the inventory that you expected, it cannot be sold to customers. If inventory numbers in your inventory management software don’t match the amount of physical products you have, this can lead to overselling items and disappointing customers when you have to cancel their order.
Another impact of inventory shrinkage can lead to positive change. When retail shrinkage is identified, employees can be trained to spot signs of ORC and shoplifting and serve as your company’s first line of defense in preventing shrinkage.
High shrinkage rates with your warehouse inventory tracking can lead to better security measures and give you and your teams more control over how your inventory is managed.
Lastly, a positive impact of inventory shrinkage is the ability to adopt better tools to track and manage your inventory. QuickBooks Enterprise can help to mitigate your shrinkage losses and keep your shrink rate low.
How to prevent inventory shrinkage in your business
There are a handful of ways you can prevent inventory shrinkage in your business, here are a few of the best
Improved training & support
Your retail teams are your best asset for curtailing and stopping in-store loss through shoplifting or organized retail crime. Loss prevention training on identifying suspicious behavior and what to do if you suspect a customer is a shoplifter is a great place to start. You can also improve in-store policies, like ensuring that two retail sales associates are always on the floor together, so that ORC distraction techniques have a reduced chance of working.
Improved security
Updating and improving your security systems is a critical component of reducing shrink. Installing better cameras, providing more tracking for employees leaving or entering your facilities, and increasing awareness are all ways your security can minimize shrinkage.
Implementing loss prevention and asset protection teams
If you have the budget, hiring dedicated loss prevention and asset protection teams is a game changer regarding inventory shrinkage. Their sole job will be to focus on inventory loss and preventing loss from happening. This type of focus will lead to positive results.
Improving your inventory management software
While it’s hard to completely stop inventory shrinkage, having the right tools in your warehouse and at your retail locations is the first step in combating the problem. With more than a quarter of all inventory shrinkage coming from process or inventory control failures, you can quickly eliminate a large portion of shrink just by utilizing the right software.
How QuickBooks Enterprise helps businesses reduce inventory shrinkage
QuickBooks understands how valuable inventory is to a business, so QuickBooks Enterprise updates your inventory in real-time with cycle count, allowing you to take inventory without shutting down your warehouse and easily find and fix discrepancies in your count.
With automated inventory forecasting, you can see how many items are on hand at each location, your reorder points, and generate purchase orders with one click.
Final thoughts
With supply chain challenges still lingering, inventory loss can result in more delays, stockouts, and unhappy customers. You can substantially reduce your inventory shrink rate by training your teams to spot and identify signs of shoplifting, updating your security systems, and eliminating human error and miscounting. Adding the functionality of QuickBooks Enterprise to your business management arsenal allows you to spot inventory irregularities with real-time tracking to keep your most valuable assets in your control.
