Inventory shrinkage refers to the loss of stock between the time it is purchased from a supplier to when it is sold to your customers. Simply stated, you paid for the items, but they become unavailable for selling to your customers. Businesses often increase prices to cover the cost of lost inventory, but this can make their prices less competitive and hurt future sales.
Chronic inventory shrinkage is a serious inventory management problem. Identifying and “plugging up” the sources of this loss should be a top priority. Below are the common causes of inventory shrinkage:
#1 Inaccurate Records and Errors
When receiving shipments from suppliers, confirm that the quantity received agrees with the quantity ordered. Errors of this kind are often accidental, but when they’re consistent, you may be dealing with vendor fraud. Inventory shrinkage can also occur when too many items are shipped to customers. This happens as a result of picking and packing errors. Another type of error is when customers are given credit for returns that they didn’t actually make.
Mistakes can happen when inventory information is entered manually, causing differences between the actual stock and recorded figures. These errors can be due to human oversight, fatigue, or inadequate training. Incorrect product labeling makes it hard to track items because they can end up in the wrong place or be mistaken for something else.
#2 Damage
Damage to inventory can happen in a variety of ways. Inventory may get crushed or dropped in the shipping or receiving process. Even a simple roof leak can cause damage. Materials exposed to water can oxidise or suffer from mold infestation. Warehouse maintenance issues and poorly trained employees are common causes of high accidental damage rates.
#3 Theft
An unfortunate truth, but shoplifting and employee theft combined is the largest source of shrinkage for most businesses. Theft can also occur within the warehouse by employees. Frequent cycle counting of inventory will quickly alert you to theft before it gets too extensive and will act as a deterrent. Small high value items and inventory in secluded areas or near exits are likely candidates for theft. Limit inventory access to trusted employees whose job function requires their handling of the inventory. Another method of reducing employee theft is through effective interviewing. Carefully screen and check the references of all job applicants.
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Request Free ConsultationStrategies to Minimise Inventory Shrinkage
Below are strategies to minimise inventory shrinkage to maintain accurate inventory levels and reducing losses:
- Implementing Security Measures: Adding surveillance cameras, and perform regular audits and inventory checks
- Enhancing Employee Training and Policies: Conduct theft prevention training and also have a clear return and refund policies
- Improve Administrative Procedures: Have accurate data entry systems and regular review of inventory records
- Strengtening Supplier Relationships: Have a thorough vetting of suppliers and do regular supplier audits
- Utilise Technology: Use inventory management softwares and warehouse management systems to automate tracking of inventory
Minimising inventory shrinkage starts with accurate tracking. This is accomplished with frequent cycle counting and the use of a good warehouse and inventory management system. The one thing worse than a problem you know about, is one that you don’t. The sooner you learn of your inventory shrinkage problem, the sooner it gets resolved. For more information on inventory and warehouse management, please contact us.
