However, it may require a complete overhaul of your current inventory management processes. You’ll need to diagnose the problem before you solve it, so it’s important to approach the problem with care and deliberation. As per the stats, 42% of inventory shrinkage occurs because of employee theft. The employee recruited to the position will then should take thorough training.

  • Inventory loss refers to the decrease in the number of existing stocks from the list registered in your spreadsheet.
  • So, with money on the line, it’s obviously in your company’s best interest to identify and prevent shrinkage.
  • Smaller businesses bear a more significant impact on profitability compared to larger counterparts.
  • In a perfect world, it would be exactly the same as the recorded inventory listed in your general ledger.
  • Inventory shrinkage occurs when the actual inventory levels of a business are lower than the recorded inventory levels.

This rate means that you lost 7.9% of your inventory value to shrinkage. Multiply your inventory shrinkage rate by 100 to convert it into a percentage. Your vendor might also make errors when they supply you with inventory items. When staff is operating lockstep with standard operating procedures, it lowers shrinkage significantly. Train your staff on your inventory pipeline, their role in it, and how to work efficiently.

Accounting and tax miscalculations

Although most businesses have moved from paperwork to digital methods of record-keeping, administrative and paperwork errors are still among the leading causes of shrinkage. Administrative errors may include pricing mistakes, accidental reorders, missing or additional zeros, or left-out decimal points. To reduce such errors, inventory should be physically counted and re-counted even when the business relies on automated systems. However, inventory is often lost due to any number of reasons, causing a discrepancy between the book inventory and the physical inventory. Shrink encapsulates all forms of loss throughout the inventory-to-cash conversion process, occurring across the entire value chain–from freight and distribution to the store level.

Conduct inventory loss analysis at a forensic level with increased transparency in movement histories and stock counts. Plus, ensure you always have the right amount of stock without spoilage from over-ordering. Double-check systems
Improve your inventory accuracy by implementing daily or weekly stock checks and receiving counts. Ensure that your team alternates counting duties to deter mistakes or even dishonest employees from reporting false inventory records. Double-checking ensures that two workers conduct inventory counts simultaneously, then compare numbers to guarantee accurate results.

By following proper inventory usage protocols, like FIFO, product damage or spoilage can be one of the easiest forms of inventory shrinkage to prevent. While $100 may not seem like a lot in the grand scheme of things, it does represent 2% shrinkage, sanity saver homeschool planner which is above the 1.4% average shrink found in retail sales. If it continues long-term, say every month for 12 months, it could lead to a serious loss in profits. If your actual inventory is smaller than your recorded inventory, you have shrinkage.

Overview: What is inventory shrinkage?

You can use our shrinkage calculator below to determine the shrinkage your business is experiencing. And continue reading to learn how to calculate shrink by hand, review the causes and impacts of retail shrink, and explore ways that you can prevent loss in the future. Because of the preceding issues, a business might elect to invest in extra security for its inventory, including fencing, electronic surveillance, and security guards. If so, these are incremental costs that would not have been incurred if the firm had not suffered from persistent inventory shrinkage.

What Is Shrinkage: How to Calculate Inventory Shrinkage

Counting inventory often — using software that counts inventory in real life rather than a manually updated Excel spreadsheet — can help identify shrinkage before it becomes a large problem. Doing this on a regular basis in a pattern can cut down on the time it takes. Vendor or supplier fraud is less common — comprising 3.7% of inventory shrinkage cases — but it does happen.

Breakage or Spoilage

Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. “Far beyond the financial impact of these crimes, the violence and concerns over safety continue to be the priority for all retailers, regardless of size or category,” Johnston said. However, for your benefit, use the latest, easy-to-navigate, resourceful, and most efficient inventory management system, Vencru.

How Continuous Innovation Helps Manufacturers Make Great Products?

The manufacturing process itself generates waste, known as spoilage, which cannot be repurposed. Shrinkage may also occur due to factors like termite damage in wood storage, posing a significant threat to manufacturers, such as the furniture manufacturer mentioned earlier. Shrinkage, categorized as an inventory carrying cost, poses a threat to a business’s profitability, affecting various industries and stages along the supply chain.

The best fulfillment services companies will have low or no shrinkage allowances. So, when you outsource your fulfillment operations, you may be able to reduce your shrinkage rate. Placing your order fulfillment in the hands of professionals could actually save you money.

Having an accurate view of inventory items helps brands reorder at the right time to not have to pay to store excess products but avoid stockouts. If you believe that theft is an issue at your warehouse, a few security measures may be all that is necessary to slash your inventory shrinkage rate. New fencing to prevent intruders, better locks, security cameras, and other methods will make it more difficult for scofflaws to make off with your goods.

Inventory management software offers real-time tracking of inventory levels, automates inventory control tasks, and provides insights into inventory turnover. It streamlines the entire inventory management process, from creating purchase orders and receiving goods to tracking inventory movements and sales. By regularly auditing your inventory, you can uncover issues early, address root causes, and prevent shrinkage from escalating. Management errors such as miscounting, wrong units of measurement used, or any other type of human error that was a mistake can lead to inventory shrinkage. This is even possible when automation is used for inventory management. However, due to shrinkage, your actual inventory value is $63,000.

The Supply Chain Renaissance Has Begun

Shoplifting occurs when a customer exits a store with more than what they paid for at the cashier. Shoplifting accounts for 38% of inventory shrinkage, and it surpassed employee theft as the leading cause of shrinkage in the 2016 National Retail Security Survey. Even as stores increase security through the use of CCTV cameras, digital tags, and other means, some customers still manage to steal inventory. These increased prices are passed on to the consumer, who is required to bear the burden for theft and inefficiencies that might cause a loss of product. If a consumer is price sensitive, then shrinkage decreases a company’s consumer base, causing them to look elsewhere for similar goods. Include camera monitoring as part of your system to give you eyes on all areas of the warehouse at all times.

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