No matter how carefully companies monitor sales, storage, and replenishment, inventory shrinkage continues to be the bane of retailers everywhere. Even the smallest amount of shrinkage can negatively impact your finances in a large way, making it essential to keep these rates as low as possible.
Although inventory shrinkage is largely unavoidable, there are many effective protocols to employ to mitigate the negative impact it can have on your profitability, including implementing improved security measures, conducting regular audits, and utilizing protection materials, like using durable shrink wrap to protect goods in transit.
What is Inventory Shrinkage?
Inventory shrinkage occurs when the actual inventory levels in your warehouse or retail store are lower than those recorded on your systems. Shrinkage can occur for various reasons, but it is often the result of theft, damage, or system errors.
Retailers across all industries are affected by shrinkage, with organized retail crime being one the most significant contributors to financial loss in the retail world. Not only does inventory shrinkage impact the profitability of your company, but it also pushes up the cost of products for consumers.
Categories of Shrinkage
Inventory shrinkage can be broadly classified into three main categories: damage, loss, and operational mistakes. Each type has a clear description and requires a unique approach to address and mitigate.
If your inventory has shrunk due to loss, it means that the items in question are no longer in your possession. This is typically because of internal or external theft. Although you have paid for these items from the manufacturer, you are unable to sell them.
When damage occurs, your sellable inventory has shrunk, but the damaged item in question may still be in your possession (depending on the extent of the damage). In many cases, these items are discarded; however, you may have the opportunity to repair them or sell them as is. However, you will lose out on revenue, either because you have to pay repair costs or due to lower, discounted prices.
Operational mistakes can contribute to inventory shrinkage when merchandise is miscounted, or shipments are incorrectly entered into the system. With these mistakes, the shrinkage is more theoretical, as you never had the inventory to begin with. However, as your teams were operating under the assumption that the goods were present, it could delay shipments and restocks, which cost valuable time and money.
Prevention Strategies
While inventory shrinkage will always be a part of retail business, as it is impossible to predict and eliminate accidental damage, there are multiple strategies you can implement to mitigate the risk and boost your bottom line.
Access Control
Physical security measures can be used to secure the area where your inventory is stored. Keeping products behind locked doors or gates will allow you to better control who can access the items and monitor employees who move and handle them.
Consider using modern access control systems that require keycards or biometric scans to operate. These systems can track and log who enters and leaves your inventory areas, keeping your products safe and giving you a more accurate timeline should any internal issues occur.
Furthermore, invest in video surveillance cameras that record and capture important areas of your warehouse, business, or retail store. This will help you better identify culprits should theft or misconduct occur. Modern remote access systems allow you to review footage at any time, from anywhere in the world.
Finally, if you work in retail stores, implement electronic article surveillance or EAS. These tags will set off an alarm if someone attempts to leave the store without paying.
Inventory Management Software
Investing in reliable, high-quality inventory management software is a fantastic way to automate and manage inventory. It is also an effective tool for eliminating administration errors that result from manual inventory management. Using a centralized system will streamline your business operations and significantly lower the chances of unwanted errors.
Real-time software allows you to monitor your inventory levels at all times, better monitor stocks, and identify potential shrinkage issues due to errors. This helps you get ahead of the problem before it becomes damaging. Additionally, automated reports simplify the auditing process.
Regular Audits
Scheduled audits are planned audits conducted annually, bi-annually, or quarterly, depending on the business. They are used to thoroughly check inventory levels and ensure that a company’s stock total aligns with its operations.
While regularly scheduled audits are non-negotiable in the business world, you may benefit from conducting unannounced audits, especially if you suspect someone is tampering with your stock. These are conducted to gain a clear idea of the true nature of a company, helping to identify errors or theft and reducing the opportunity to forge false or manipulated information.
Employee Training
One of the best ways to reduce shrinkage is to properly educate and train your employees to recognize shoplifting techniques and teach them how to engage with and resolve such issues when they occur. Establish strict and reliable policies and practices to deal with internal and external theft, and regularly provide refresher courses to remind your employees of the latest guidelines and action plans.
Furthermore, use this time to properly highlight the impact of inventory shrinkage on them directly and indirectly, including a decrease or elimination of promotions, reduced paychecks, a loss of employee profit shares, and more.
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