Whether your business sells coffee mugs or constructs new houses, inventory shrinkage is almost certainly a concern of yours. That’s because when inventory is lost, stolen, or damaged, your business’s productivity and profitability can really suffer.
This article will define inventory shrinkage, outline the leading causes of inventory shrinkage, demonstrate how to calculate inventory shrinkage rate, and reveal six actionable steps toward reducing inventory loss, theft, or damage today.
What is inventory shrinkage?
Inventory shrinkage occurs when actual, physical inventory levels are lower than what’s noted on a company’s inventory list. In other words, inventory that’s accounted for on your company’s ledger can’t be located—or is so damaged it cannot be used or sold.
Businesses typically notice inventory shrinkage during year-end inventory counts when they realize that accounting’s inventory records do not match reports from the physical audit. While annual inventory audits are always necessary, using a perpetual inventory system like an inventory app can help you keep tabs on your inventory year-round and avoid any big surprises come audit season.
Causes of inventory shrinkage
There are many reasons why inventory shrinkage occurs, including:
Theft, including employee theft and shoplifting
Human error, including during data entry and inventory audits
Inadvertent damage to goods
How to calculate inventory shrinkage rate
You can determine just how severe your company’s inventory shrinkage is by quickly calculating your inventory shrinkage rate. To calculate inventory shrinkage, you only need two numbers: the amount of inventory you thought you had on hand and the amount of inventory you physically counted during your audit.
Inventory shrinkage rate formula
Inventory shrinkage rate example
Say you work at a car dealership that sells surfboard racks. According to your inventory records, you have 75 sets of racks on hand. But when your team actually counts inventory in the warehouse, they can only locate 73 sets.
(75 – 73 ) / 75 = .0267 or an inventory shrinkage rate of 2.67%.
How to reduce inventory shrinkage
Wondering how to reduce shrinkage? There are many ways to reduce inventory shrinkage. Of course, the best way to begin is by getting organized. After all, you can’t know what’s missing if your inventory records aren’t accurate, secure, and accessible.
Once you’ve adopted an effective inventory management system, these six tips and tricks can help lower your company’s risk of inventory shrinkage.
1. Count orders as soon as they arrive
While supplier fraud isn’t a common cause of inventory shrinkage, it’s certainly possible. And the best way to prevent it is simple: count orders as soon as they are delivered to your loading dock. That way, you can ensure you’re receiving precisely what you paid for—and you can update your inventory management software right away, too.
If you spot a problem with a delivery, let your vendor know right away. Sometimes, accidents happen.
If your business stocks expensive inventory or assets, you might consider storing them in an area with extra security. Some companies lock high-value items behind closed doors, while others move the highest value items offsite altogether.
You may want to consider hiring a security consultant to determine how to protect expensive inventory without sacrificing productivity or access at your place of business.
3. Consider RFID technology
While barcodes and QR codes are all you need to track inventory quickly, RFID technology can help reduce the risk of shoplifting. That’s because RFID tags allow businesses to keep an eye on inventory as it moves around the store—and can even trigger an alarm when exiting the premises.
Remember that RFID technology isn’t cheap, making it a viable option only for high-traffic retail businesses that need to protect their profit margins.
If you’re currently using an inventory spreadsheet or a piece of paper to track inventory, keeping accurate inventory records can be a real challenge. And when a business can’t quickly review inventory on hand, calculating and keeping an eye on inventory shrinkage rate is virtually impossible.
Fortunately, modern inventory management software like Sortly is simple to set up—and can make it easy to compare inventory records to the actual results of your inventory audits. With Sortly, you’ll always know how much inventory you have on hand, where it is, and what condition it’s in. You can use those numbers to quickly calculate inventory shrinkage rate; assist your accounting team with writing off lost, stolen, or damaged goods; or further investigate the history of inventory that’s experiencing unacceptable shrinkage.
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One final way to reduce your inventory shrinkage risk? Count small batches of inventory—completely unannounced. This “surprise” inventory audit should occur completely at random, preventing any advanced planning or number manipulation ahead of the count. You’ll get a clear look at what’s really going on in your stockrooms without having to count every single thing on hand.
Once you’ve performed your surprise audit of a small batch of inventory, you can calculate a quick inventory shrinkage rate. If it’s beyond your acceptable threshold, you’ll know to count everything else and determine the root cause(s) of the issue.
6. Further discourage theft
Whether you’re concerned about employee theft, shoplifting, or both, adding video surveillance could discourage inventory theft.
You can install your own recording devices or hire a security firm to add an extra layer of diligence. Either way, you’ll want to post visible, easy-to-read signage about surveillance to inform employees and customers they’re on camera and further discourage theft.
Sortly is a top-rated inventory management software solution perfect for businesses looking to reduce inventory shrinkage.
Sortly can help you get organized and keep an eye on your inventory each and every day. Plus, when it’s time to audit inventory, Sortly can make these physical inventory counts faster and more accurate. Sortly can also help you quickly calculate inventory shrinkage with highly-customizable, data-rich reports.
Ready to get your business organized and do more to prevent inventory shrinkage? Try a two-week trial of Sortly today.
Lauren writes about inventory for Sortly. Her favorite thing to organize? Her comically large collection of stuffed animals.