Inventory Management: The Causes Of Inventory Shrinkage

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. While businesses often pass on the cost of lost inventory to their customers, the practice makes their prices less competitive which adversely affects future sales.

Inventory Skrinkage Management

Chronic inventory shrinkage is a serious inventory management problem. Identifying and "plugging up" the sources of this loss should be a top priority. Common causes of inventory shrinkage are considered next.

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. Still another type of error are mistakes in processing product returns in which customers are credited for returns that weren't made.


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.


An unfortuneate 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.

Minimizing 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.

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