Are you struggling with inventory shrinkage in your retail store or warehouse? Find out the key causes and effective strategies to prevent it here.
Inventory shrinkage covers all of the losses your business faces due to theft, fraud, damage, wastage, or management error. These will impact your profits and can lead to additional costs when accounting books need to be adjusted to reflect these discrepancies.
Thus, it is important that you understand the causes of your inventory losses and implement preventative measures to mitigate these losses. These effective measures include improving your security measures and inventory management strategies.
Scout Security’s live remote video surveillance services and comprehensive risk assessments can help you identify vulnerabilities in your business operations and prevent inventory shrinkage. Contact us now to get professional security services in the Colorado Springs and Denver Metro areas!
What is Inventory Shrinkage?
Inventory shrinkage is the loss of goods between the point of purchase or manufacture from your vendors and the point of sale.
Also called loss of physical inventory or just “shrink”, inventory shrinkage is the reduction in the amount of physical stock compared to what’s recorded in your company’s accounting records based on orders and sales data. In short, it’s when your actual stock levels don’t match what your books say you should have.
What is the Difference Between Inventory Shrinkage and Inventory Loss?
Inventory shrinkage refers to losses not caused by sales (i.e. inventory shrinkage is different from inventory loss, but inventory loss covers inventory shrinkage).
To make it clearer, inventory loss occurs when your products are not sold after you put them up for sale which can be due to various reasons. On the other hand, shrinkage is often attributed to administrative errors, theft, and damage which we will discuss in more detail in the next section.
How to Calculate Inventory Shrinkage Rate
Below is the formula for calculating the inventory shrinkage rate:
Take the following scenario as an example:
- You have $1,000 of inventory listed in your accounting records.
- After conducting a physical inventory count, you found out that you only have $950 on hand.
Thus:
Also Read: 19 Effective Retail Loss Prevention Strategies and Best Practices
7 Key Causes of Inventory Shrinkage
While shoplifting and customer theft are often highlighted in news stories covering inventory shrinkage, shrinkage encompasses much more. It includes any inventory loss occurring throughout your entire value chain, from transportation and distribution to storage and sales.
This loss can result from various factors including the following:
- Customer theft
- Employee theft
- Inventory damage
- Wastage of perishable goods
- Administrative errors
- Supplier fraud
- Return fraud
“Theft of all types, including by employees, is the largest cause of shrink. Errors are the second-largest.” – Industry Dive
According to the National Retail Federation (NRF), the average shrink rate increased to 1.6% in 2022 amounting to around $112.1 billion in losses. Around 65% of these losses are due to internal and external theft.
#1. External Theft
Consumer theft, popularly known as shoplifting, occurs when outsiders (like customers) steal products from your store. These perpetrators can range from casual, one-time offenders to organized criminal groups.
Shoplifting isn’t limited to traditional theft. It also includes actions like price tag swapping, where a shoplifter pays less by using a cheaper item’s tag.
Large retail businesses are particularly vulnerable to shoplifting. Small, high-value items like jewelry or electronics can easily be concealed in pockets or bags.
Organized retail crime (ORC) is another growing issue that involves coordinated efforts by multiple criminals, often by criminal organizations, to steal merchandise for resale.
ORC can include the following aside from shoplifting:
- Return fraud
- Credit card fraud
- Counterfeiting of price tags and receipts
Overview of How to Prevent External Theft: Preventing theft can vary based on the type of merchandise. High-value items might be secured with locked cases or ink tags, while smaller and cheaper products often require physical monitoring. Improving access control to your premises is also crucial.
Also Read: How Security Guards Prevent Shoplifting in Retail Stores
#2. Internal Theft
Internal theft, often called employee theft, is when your employees steal goods or commit fraud against you, their employer.
Given their direct access to inventory, employees can exploit their positions to steal merchandise unlawfully. They might steal physical items directly from stockrooms and might engage in fraud by undercharging a friend or keeping cash payments for themselves.
The top four reported methods of internal theft as per the 2023 National Security Survey are:
- Merchandise theft
- Cash/deposit theft
- Refund fraud
- Sweethearting, free bagging, and sliding
This not only reduces your available stocks but also impacts your company financially through lost sales and the costs of replenishing stolen items.
Overview of How to Prevent Internal Theft: Implementing strict inventory controls and thorough employee hiring processes are crucial to preventing internal theft. This includes better warehouse management, video monitoring, employee training, tip hotlines and rewards, and POS transaction anomaly notifications.
#3. Inventory Damage
Shrinkage due to inventory damage occurs when products are mishandled during shipping, stocking, or even by customers on the sales floor.
Damaged items due to broken packaging, tears, cracks, water exposure, expiration, or other causes become unsellable which will shrink your inventory. Even though you still possess the items, their condition may force you to dispose of them or sell them at a reduced price. Either way, you’ll lose revenue.
This reduction in inventory not only affects your stock levels but also adds costs for markdowns or disposal which will further hurt your business’s profitability.
Overview of How to Prevent Inventory Damage: Ensuring proper packaging, proper employee training on handling procedures, and video monitoring to ensure compliance with your company policies can mitigate losses due to inventory damage.
Also Read: Warehouse Theft Prevention: 19 Best Surveillance Practices
#4. Wastage
Wastage refers to inventory shrinkage due to goods, particularly perishable ones, spoiling before you can sell them.
Items like food, dairy, and medicines have a limited shelf life. When these items expire without being sold, they become unsellable and contribute to inventory shrinkage. When this happens, you will face additional financial losses because the money you spent on buying, transporting, and storing these products does not result in revenue.
Overview of How to Prevent Inventory Wastage: Automated inventory management, regular audits, proper inventory practices through employee training, and managing stock rotation effectively can help minimize wastage and its impact on your bottom line.
#5. Administrative Errors
Administrative errors are often caused by human mistakes during data entry or inventory management (i.e. accounting and recordkeeping errors).
These include the following:
- Miscounting items
- Mispricing and mislabeling products
- Cash counting errors
- Scanning shipments twice
- Misdirected shipments
- Incorrect measurement units
- Incorrect sales records
- Making typos
An example of an administrative error is recording fewer units than received which skews restocking decisions. These mistakes can lead to discrepancies in your inventory records and impact the accuracy of your physical inventory.
If your records are inaccurate, it affects reorder calculations and revenue forecasts. Thus, leading to unexpected shrinkage.
While this type of shrinkage doesn’t always mean a direct cost loss, it translates to lost profit because projected revenue doesn’t align with your actual inventory levels.
You can read more about “paper shrink” (a term referring to all discrepancies between your book inventory and physical inventory that can’t be attributed to fraud, theft, and shoplifting) in the provided link.
Overview of How to Prevent Administrative Errors: Proper training and backing up automated inventory management systems with regular manual inventory counts ensure data accuracy and minimize human errors.
Also Read: 17 Benefits of Video Surveillance in Manufacturing Facilities
#6. Supplier Fraud
Supplier fraud happens when your vendors charge you for more items than delivered or provide products of lower quality, resulting in unsellable stock. Additionally, theft can occur during transit from the warehouse to your store. It’s essential for employees to verify manifests to ensure that all items have been delivered before signing off on deliveries.
Overview of How to Prevent Supplier Fraud: You should thoroughly vet your suppliers and conduct regular audits of received goods to prevent these issues.
#7. Return Fraud
Return fraud occurs when individuals seek a cash reimbursement for illegally obtained items.
For instance, they might steal products and then return them for a refund. They might also purchase items with counterfeit currency and return them for a cash refund.
Overview of How to Prevent Return Fraud: Always require receipts for cash returns. This should be included in your policies.
Now, let us discuss the prevention strategies we’ve listed for the aforementioned inventory shrinkage issues in detail below.
15 Effective Ways to Prevent Inventory Shrinkage in Your Warehouse or Retail Store
Preventing inventory shrinkage requires active involvement from all your employees, from stockroom clerks to your accountants.
Whether you operate a warehouse or a retail store, a combination of the methods below can help effectively reduce inventory shrinkage:
- Comprehensive Security Measures
- Remote Video Monitoring
- Rigorous Hiring Process
- Well-Defined Inventory Process
- Inventory Management Systems
- Unique Product Identifiers
- Anti-Theft Systems
- Regular Inventory Audits
- Periodic Inventory Checks
- The Buddy System
- Optimize Store Layout
- Strict Access Controls
- Ongoing Employee Training
- Effective Vendor Management
- Requiring Receipts for Returns
#1. Comprehensive Security Measures
The first step is to implement robust security measures in your warehouse or retail store to reduce the risk of theft and unauthorized access.
Organized retail crime offenders have grown more violent and aggressive which makes a comprehensive security measure crucial to prevent damages caused by these incidents.
Below are some tips you can follow to enhance your security measures:
Install Advanced Security Systems
Investing in a comprehensive security system is non-negotiable. Modern solutions include CCTV cameras, access control, and intrusion detection systems. High-definition cameras can even capture intricate details to help identify culprits more effectively.
You can also install anti-theft alarms at security checkpoints. Additionally, make sure that fire detection and prevention systems are in place to safeguard your products from damage in case of fire emergencies.
Also Read: What Is CCTV Monitoring and How Does It Work?
Get Custom Security Solutions
Depending on your needs and budget, you might opt for custom security solutions and work with a professional security company like Scout Security. Tailoring your security setup to address specific vulnerabilities in your warehouse or store can be more effective than generic solutions.
For instance, we can create a hybrid security solution combining video surveillance and on-site security through dedicated security guards and mobile patrols. This will help strengthen your loss prevention plans.
Posting signs about your security measures and the consequences of theft can also act as a deterrent to potential thieves.
Also Read: 23 Benefits of Outsourcing Video Monitoring and Surveillance Services
Risk Assessments
Conducting regular risk assessments can help identify unknown causes of inventory shrinkage. Video surveillance can help with this as it provides comprehensive video footage of all activities in your business which you can review to pinpoint sources of shrinkage and address them promptly.
Scout Security can help with this, too, because we perform detailed risk assessments to tailor our services to suit your needs.
Tip: You can also use CCTV systems and video surveillance to identify gaps in employee training that might contribute to inventory shrinkage by reviewing surveillance footage. Security cameras can also improve employee performance and reduce shrinkage caused by operational errors since your employees are aware that they are being watched.
#2. Live Remote Video Monitoring
Remote access to camera systems by CCTV operators monitoring your premises live from an offsite location will help identify risks on the spot so you can address them as soon as possible.
While having security cameras is a good start, a comprehensive business security camera system is necessary for optimal protection. This system should integrate video analytics, surveillance, and point-of-sale (POS) systems to provide actionable insights into your business operations.
Using a professional service, like Scout Security’s remote video monitoring, allows your loss prevention managers to observe real-time activities across multiple locations on your business premises.
Aside from live monitoring, security cameras also record footage for later analysis. For instance, video analytics help identify patterns indicating potential theft and procedural issues. Thus, allowing for targeted strategies to improve your security measures and overall operational efficiency.
Also Read: 21 Benefits of Remote Real-Time Video Monitoring for Businesses: A Comprehensive Guide
#3. Rigorous Hiring Process
Almost half (29%) of the total shrink loss due to theft (65%) is caused by employees. This means that responsible recruitment plays an important role in minimizing inventory shrinkage.
When hiring, focus on the applicant’s expertise and work ethics. You should perform and review the following:
- Background checks
- Education verification
- Employment history
- Criminal history
- Credit history
#4. Well-Defined Inventory Process
A well-defined inventory process is the backbone of successful warehouses and retail stores and is crucial in preventing inventory shrinkage.
For a business owner like you, it’s vital to document every item purchased, shipped, and stored. Manual tracking might suffice for smaller businesses (e.g. handling one product line and/or retailer).
However, larger warehouses and stores can benefit significantly from digital inventory processing tools. These can track products in real-time from arrival to departure and help you maintain a seamless inventory flow. (More on this in the next section.)
Here are key tips to enhance your inventory management:
- First In, First Out (FIFO): Ensure the first items received are the first ones shipped to prevent spoilage or obsolescence.
- Prioritize Popular Items: Focus on timely handling of best-sellers to maintain customer satisfaction.
- Preemptive Restocking: Order items before running out to prevent supply chain disruptions.
- Regular Audits: Frequent stock audits help verify that inventory levels match your records to identify discrepancies early.
- Track Restock Frequencies: Track how often you need to restock to identify low-demand items and improve your stock management.
Effective communication with your team is important. Ensure everyone understands and follows your inventory procedures to minimize errors and shrinkage.
Also Read: 19 Effective Retail Loss Prevention Strategies and Best Practices
#5. Inventory Management Systems
According to Modern Retail, one of the most effective loss prevention strategies includes upgrading your inventory management system to get greater visibility into your shrink.
Leveraging the latest technological advancements can significantly improve your inventory tracking, security, and overall management efficiency. They ensure speed and accuracy in your inventory processes by eliminating human error.
Here are the key points you need to know on how inventory management systems can help your business:
- Reduction of Human Error: Automated systems minimize dependence on manual labor, decreasing errors and speeding up inventory counts and cash management processes.
- Automated Inventory Tracking: Automated systems handle tasks without human intervention. They can also catalog new arrivals and notify you of delays.
- Real-Time Analytics: Real-time inventory software allows you to monitor inventory levels continuously and makes identifying discrepancies easier. They can also generate automated reports to simplify auditing and help you make informed decisions.
- RFID Technology: Using RFID tags coupled with video surveillance enhances the monitoring of goods within and outside your store.
- Point-of-Sale Integration: Inventory management can be integrated with your order management and POS systems for accurate tracking of sales and returns.
- Sales Data Analysis: Some platforms can analyze sales data to improve your restocking strategies and identify popular products. Thus, helping you maintain optimal inventory levels and avoid stockouts.
- Single System Efficiency: Using a unified automated system reduces the risk of errors when transferring data between different systems. This ensures a smoother and more accurate inventory management process.
#6. Unique Product Identifiers
Streamline your inventory management process further by assigning each product a unique identifier, such as SKUs, barcodes, serial numbers, or GTINs.
Aside from reducing shrinkage, using unique product identifiers will also help you meet customer demands through the following:
- Shrinkage Control: Quickly spot broken or stolen items, reducing shrinkage.
- Precise Tracking: Easily differentiate and monitor individual products.
- Demand Insights: Identify high-demand items and manage stock levels.
- Post-Sale Monitoring: Allow manufacturers to track sold products for better management.
#7. Anti-Theft Systems
Consider investing in anti-theft systems like Electronic Article Surveillance (EAS) and Radio Frequency Identification (RFID) tags.
EAS systems use security tags that trigger alarms if unpaid items are taken out of your store. This can discourage shoplifting and allow for swift intervention. On the other hand, RFID tags offer real-time product tracking for enhanced control and visibility over your inventory.
Additionally, using clear garbage bags helps ensure that no inventory is being disguised as trash and taken out from your business premises.
#8. Regular Inventory Audits
Conducting regular inventory audits is essential for maintaining accurate records.
Bringing in a supervisor at regular intervals to conduct these audits can significantly reduce the chances of employee fraud and mistakes. This also ensures meticulous bookkeeping and enhances overall inventory security.
Consider Surprise Audits
To further mitigate the risk of employee theft, consider implementing surprise audits.
When employees are aware of scheduled audits, they might time their thefts to avoid detection. By conducting surprise audits, you can catch discrepancies more quickly and prevent staff from planning theft around your audit schedule.
If a full inventory count isn’t feasible on a random day, focus on specific shelves, backroom sections, or particular item categories. This approach provides a snapshot of potential shrinkage and helps you stay ahead of theft.
Also Read: Security 101: Types of Commercial Security Systems & How to Choose
#9. Periodic Inventory Checks
Regular inventory counts can prevent accidental over-ordering or excessive purchases which reduces waste and shrinkage.
Conduct inventory counts more often to gain insights into shrinkage patterns and their impact on your business. These periodic checks also allow you to estimate losses and find trends that can help reduce inventory shrinkage in the long term.
Tip: Incorporating technology that updates inventory counts in real-time, rather than relying on static tools like Excel, ensures your records are always accurate and current.
#10. The Buddy System
Implementing a buddy system is another effective way to prevent inventory shrinkage in your warehouse or retail store.
Here’s how you can do it:
- Double-Checking Inventory: Have two employees check the manifest against the received items to ensure accuracy.
- Verification at Key Points: Use two people to verify records during critical stages like signing invoices and accepting stock to prevent errors and omissions.
- Cross-Check Responsibilities: Assign different employees to check and verify inventory and reports, ensuring thorough oversight.
- Split Responsibilities: Separate tasks among your employees to reduce the risk of falsifying records and promote transparency. (e.g. different employees should handle recording and processing receipts)
- Supervised Transactions: Make sure voided sales and refunds are supervised by another employee or manager to prevent fraud.
#11. Optimize Store Layout
Start by designing your retail space with clear lines of sight. This ensures that your employees and loss prevention staff can monitor every movement in your store effectively, making it harder for potential shoplifters to go unnoticed.
A well-organized store layout not only deters theft but also enhances the shopping experience for your customers.
In addition to visibility, focus on strategic product placement to prevent shrinkage due to inventory damage.
You can place larger, heavier items on the bottom shelves to prevent damage and make it easier for both customers and employees to handle products safely. Ensure that high-value items are within sight of your employees or behind secure displays to further reduce the risk of theft.
#12. Strict Access Controls
Here’s how you can implement strict access controls to prevent shrinkage:
- Assign specific employees you trust to handle expensive items.
- Store high-value products under lock and key in separate locations.
- Make sure that your items are tethered or security-tagged to prevent theft and deter potential thieves.
- Strategically place expensive products in your store to prevent quick grab-and-run thefts.
- Use locks (traditional or electronic) to control access and restrict who can enter inventory areas.
- Use modern access control systems such as keycards and biometric scans to track who enters and leaves stock rooms.
Also Read: 15 Tips & Best Practices for Securing Your Commercial Property
#13. Ongoing Employee Training
Invest in continuous employee training and conduct refresher courses that include the following:
- Recognizing shoplifting and prevention measures
- How theft impacts your company and your employees’ paychecks
- Safe and reliable receiving processes
- How to use new inventory management systems
- New inventory management processes
Tip: Ensure employees know about upcoming training sessions and follow up to confirm new practices are implemented. Though training disrupts daily tasks, it’s a worthwhile investment to reduce long-term losses. Video monitoring can be very helpful in uncovering retraining needs.
#14. Effective Vendor Management
Vet your suppliers thoroughly and only work with reputable vendors.
Conduct comprehensive background checks before doing business with them and establish clear receiving protocols. Make sure to inspect every shipment upon arrival too.
In addition, implement vendor performance monitoring to help you track the reliability of your suppliers. Keep an eye on late shipments or incorrect orders because these issues can contribute to inventory shrinkage.
#15. Requiring Receipts for Returns
Enforce a strict policy requiring receipts for cash returns. This measure ensures that only genuine purchases are refunded to reduce the risk of fraudulent returns.
Moreover, consider implementing a system to track customers who frequently return items. Using loyalty numbers or other forms of identification can help you monitor patterns and identify potential abuses of your return policy.
Also Read:
- A Complete Guide: How Much Do Remote Video Monitoring Services Cost?
- 5 Major Differences Between Monitored vs. Unmonitored Security Systems
Work With Scout Security’s Loss Prevention Security Guards
Scout Security’s certified professionals can help you improve your loss prevention strategies and protect your revenue through live video monitoring and onsite security.
With our years of experience in working with countless businesses in the Colorado Springs and Denver Metro areas, we can give you customized loss prevention solutions to address your specific concerns. Call us now!
