While loss prevention teams or security personnel may lead the efforts, employees at all levels contribute to minimizing shrinkage. Professional warehousing services can be used to help control shrinkage. Enlisting the help of a 3PL with robust warehouse services can be a game-changer in the fight against shrinkage. These providers offer expertise in areas critical to preventing loss, from just in time inventory management to comprehensive audits. Proper inventory management is key to minimizing losses from expired goods, a notable factor in overall shrinkage in retail environments. Inventory shrinkage can be caused by theft, shipping damage, miscounting, and vendor fraud, as well as other factors.
- This includes broken packaging, cracks, tears, water damage, product expiration, and more.
- For example, let’s say the products in the example above cost $10 each to manufacture and ship to your eCommerce fulfillment warehouse.
- Storing inventory in safe, dry spaces and using secure shelving units can minimize the risk of breakage.
- With these two values in hand, you’re ready to calculate your inventory shrinkage, which is your recorded inventory minus your actual inventory.
- Understanding and anticipating lost products is essential for realistic inventory management.
- To eliminate human error, you will require inventory management software.
If a supplier consistently fails to meet expectations, it may be time to reassess the relationship and explore alternative sources to protect your inventory from vendor-related shrinkage. Conducting stocktakes and comparing the results to your inventory records is the most reliable method of discovering inventory loss as this provides concrete evidence of discrepancies. Cycle counting refers to the practice of counting a small amount of your inventory on an ongoing basis. You might do a weekly count of 10 different SKUs, for example, or you might pick 20 particular SKUs to count weekly for a month to monitor stock level changes for those products. Some dishonest vendors can steal from you by not delivering a full order, though this is, by far, not the way the majority act. Vendor theft is not a very large contributor to shrinkage, and many retailers will not fall prey to it.
How to Prevent Inventory Shrinkage
If you have inventory that’s at particular risk for theft, such as batteries or low-cost accessories, consider focusing multiple cycle counts in a row on those SKUs. Unless you find a way to completely eliminate accidental damage, you’ll always have some inventory shrinkage over the course of your business’s lifetime. Vendors can be subject to the same administrative errors as retailers, which can contribute to shrinkage. Both you and your vendors can the risk of human entry error by using online B2B platforms like NuORDER. When you correct those records, you might end up with shrinkage. Theft, fraudulent returns and neglecting to scan items for friends and family lead to mismatches in your inventory levels and can add up to big losses for your business.
- Let’s say you sent 100 units of one SKU to your fulfillment warehouse.
- If you find they have knowledge gaps, institute a training program.
- Those 598 cases of wine are loaded onto a truck, driven to the wholesaler’s warehouse, and unloaded.
- If you’re using a POS system like Lightspeed, you can check your inventory levels and past cycle counts at a glance, making it simpler to monitor potential shrinkage rates.
A lot of inventory shrinkage comes from poor tracking processes. Sometimes all of your investigative work comes up with nothing, and you just chalk it up to “unknown” — which is the case 3.9% of the time. Inventory is complicated to manage, so it’s not surprising that units get lost in the shuffle. Some adjustment for inventory shrinkage is unavoidable, particularly in larger operations. However, improving your administrative processes should help prevent some products from disappearing. Administration errors mean the reason for the appearance of inventory shrinkage in the books is because of administrative fault.
Similarly, perishable goods may spoil if not stored or handled correctly. Proper storage facilities, secure shelving units, and appropriate packaging can help prevent breakage or spoilage-related inventory shrinkage. To properly calculate your cost of goods sold, you need to add your shrinkage factor. For example, let’s say the products in the example above cost $10 each to manufacture and ship to your eCommerce fulfillment warehouse. It’s important to understand your shrinkage rate because it affects your bottom line.
Secondly, errors in mispricing, inaccurate information input into the database, and so much more. Shrinkage is a phase in a business cycle when retailers notice fewer stocks available compared to their inventory list. Just beginning a type of business for the first time and lacking cash flow statement indirect method quality inventory managerial system and skills. Consider shopping around for commercial-grade security systems If you own a large retailer. Businesses experiencing a particularly high theft rate can also hire a team of security guards to patrol parking lots and entrances.
Breakage or Spoilage
For example, if a retailer accepts $1 million of product, then the inventory account increases by $1 million. Every time an item is sold, the inventory account is reduced by the cost of the product, and revenue is recorded for the amount of the sale. The initial action that a business should take to prevent inventory shrinkage is to implement a double-check system. It should have more than one person assigned to important inventory management stages, such as signing invoices, recording stock, and accepting stock.
Use an all-in-one system for less admin errors
Installing security cameras in employee-only areas, such as stockrooms and break rooms, can also decrease internal theft. Your vendor might also make errors when they supply you with inventory items. Miscounting, poor record keeping, and damage can also add to your shrink rate. For restaurants or other food industry businesses, this includes issues like spoilage. A better way to look at acceptable levels of retail inventory shrinkage is the median 2018 reported shrinkage.
Shrinkage is also common when customers shoplift from your business. Marking sellable goods as damaged, stock receipt miscounts, sliding items to friends during checkout, and applying excessive discounts are some of the ways internal theft takes form. Later, we will look at some of the ways you can deter employee theft, from making a pleasant work environment to installing access controls. Either someone external does it and it’s called shoplifting or external theft, or someone internal does it and it’s called employee theft or internal theft.
The theft may occur during transit from the supplier’s warehouse to the business premises or when loading and unloading the products. Deliveries should be counted every time they enter or leave the business premises and recorded appropriately. For example, assume that company ABC owns $100,000 of inventory recorded in its accounting books for a specific accounting period.