October 6, 2018      3 min read

When the physical count and value of stock does not reconcile to the reported value from the accounting system, inventory shrinkage happens. Essentially, there is a loss of stock and subsequent value that must be investigated and reconciled. Inventory shrinkage is quite a problem in and of itself, but also over time if not resolved, the accumulative value can severely impact a business.

In the US in 2015, US$45.2 billion was lost due to inventory shrinkage which was remarkably higher than the US$35.3 billion reported in 2008. So, if inventory shrinkage is such an issue, how might one go about stopping it? Let us first look at how it occurs before considering some changes to make to combat it.

Causes of inventory shrinkage

Shoplighting and theft

Unfortunately, theft is a seemingly common occurrence in business and the most inevitable commodity to be stolen is inventory. This can be due to shoplifting by customers or even employees. In fact, just over 40% of inventory shrinkage is due to employee theft while an equally staggering 35% is due to shoplifting.

Administrative mistakes

The leading cause of inventory shrinkage is administrative mistakes, which include accidental reordering or over-ordering, pricing errors, incorrect numerical values (particularly adding or subtracting zeros) or misplaced decimal points. Of course, the reason why mistakes make it to the point of inventory shrinkage is that a business must honour customers, which can often mean they have to honour their mistakes for the customers’ benefit.

Damaged stock

Any items in stock that are damaged and therefore not fit for sale can have a significant impact on a company’s losses. This can be due to mishandling by employees, damaged caused during transportation, or an adverse event in the warehouse.

Obsolescence

If products take too long to sell, they are put at risk of becoming obsolete, after which point, their value is significantly reduced.

Supplier fraud

The supply chain can be complex and therefore difficult to control and relatively easy to take advantage of; for example, taking goods off the back of a truck while in transit.

Combatting inventory shrinkage

Now we have identified come of the causes of inventory shrinkage, let’s highlight some methods of ensuring it is controlled, if not eradicated.

Count, count and count again

Despite the adoption of automated systems being a major step forward, businesses should still conduct a stock take. Depending on the size of your warehouse, this could be an onerous task, however there are things you can do to make it easier.

Store inventory in logical orders and groupings, always keeping stock in its area so that counts are far easier. Or do like Amazon do.

Consider using other metrics such as weights and averages for smaller items so that any discrepancies can still be picked up easily without touching every single item. Keep accurate employee records regarding receipt and moving of inventory to quickly and accurately identify possible culprits when things are amiss.

Automate

Despite listing manual counting as a method of combatting shrinkage, automation is also important. Inventory management software allows traceability of all inventory throughout the supply chain, which of course provides valuable data in ascertaining problem areas later on.

Metrics

Ensure you know your company’s inventory shrinkage value and use it to compare to previous and subsequent years. In doing so, any methods you have adopted to control it can be analysed for effectiveness before needing to go back to the drawing board or confidently carrying on with the solutions you have introduced.

Inventory represents a significant proportion of a company’s assets and value and therefore must be controlled and even looked after to prevent it from becoming a liability and derailing a company’s success.

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