Inventory shrinkage could be slowly eating away at your profits without you even realising.
And you have to get a handle on this before it costs your business big money.
But before you can take action against inventory shrinkage, you need to know what it is and how you can avoid it. So, let’s start with the basics.
What is inventory shrinkage?
Inventory shrinkage refers to the amount of unsold inventory that is lost or written-off over a given time period. It’s the difference in the recorded stock number of a product, and the actual amount of it you really have on-hand.
Various factors can lead to inventory shrinkage:
- Theft/vendor fraud.
- Mistakes by cashiers and salespeople.
- Human error when receiving/sending stock deliveries.
- Unlogged damages (usually brought on by poor inventory storage).
No matter the cause, brands must get to the root of any inventory shrinkage as soon as possible in order to prevent it happening in the future. This can consume time and resources, but clarity is well worth both.
Why pay attention to inventory shrinkage?
It’s tempting to just cast shrinkage off as a standard ‘cost of doing business’. Something that’s unavoidable and not worth paying too much attention to.
But inventory shrinkage can:
- Reduce profits. If you buy 100 units of an item, but 10 of them succumb to damage every month then this is going to eat into overall profitability.
- Strain customer relationships. You might continue to sell a product online, completely unaware that the only ones left in recorded stock are damaged or have been stolen. Meaning you’ll have to send a disappointing back order email to any customer buying one.
- Damage your reputation. Imagine this happens several times over, and for several different products. Or even that some damaged items slip through to actually get shipped to customers. This can create a compounded negative experience that results in bad word-of-mouth and poor online reviews.
So while losses can be caused by the tiniest of errors, the fallout may be far bigger than you expect. This is why it’s crucial to find ways of minimising inventory shrinkage as much as possible.
Strategies to minimise inventory shrinkage
1) Implement employee screening
Helps with: Theft.
No company wants to lay blame at the feet of employees.
Sadly, though, stock can go missing due to unethical staff members. Lots of stock. NRF research actually shows more than 35% of inventory shrinkage is caused by thieving employees.
Proper references and background checks are a must to identify any potential issues when hiring new staff for a warehouse or shop. It’s easy to just employ someone on the spot after a successful interview without considering their past, but a little research can go a long way.
It may be worth contacting previous employers to find out how effective the candidate has proven to be in handling inventory. Any history in inventory management — and doing it well — is a real advantage.
2) Give every product variant a SKU
Helps with: Lost products.
Use a SKU (stock-keeping unit) for every product. This consists of letters and numbers, and gives units a unique identity to help keep your stock level records accurate.
A SKU shouldn’t be confused with a barcode, as a human can recognise a product from its SKU alone – unlike with a barcode.
Giving each product a SKU allows workers across the business (from warehouse staff to administrators) to track inventory levels more efficiently.
It’s hyper important to keep the SKUs you use consistent across sales channels, warehouses, systems and anywhere else being used. This way, you’ll be able to more easily keep track of exactly where product variants are and minimise the risk of anything getting lost.
3) Conduct regular stock checks
Helps with: Catching inventory shrinkage early.
Another solid strategy to protect your stock is regularly taking a physical count of inventory.
But don’t bring your business grinding to a halt with a big annual audit. This is generally very impractical, and could mean discovering big inventory shrinkage levels come end-of-tax-year when submitting your accounts.
Instead, assign your team weekly cycle counting tasks to nip any shrinkage in the bud early on.
You can easily automate this process in Veeqo. Just head to the Warehouse Settings menu in your account and press the Stock-Take button:
You’ll then be able to assign individual staff member a weekly percentage of your inventory to count.
Each person will complete their assigned count and log any changes directly into the system to be reflected immediately. And you’ll even be able to keep track of everything through a dedicated report:
All this means any inventory that’s getting lost, damaged or stolen will be caught and addressed much earlier.
(See more about using Veeqo’s Cycle Stock Take in this help guide.)
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4) Give your team proper training
Helps with: Employee error.
Employees should be aware of the whole concept of inventory shrinkage, and the danger it poses to the business. (And therefore their livelihoods.)
It’s important for them to know that a little oversight here or an error there does have an effect on the bottom line.
But it’s also up to you as an employer to give them what they need in order to minimise errors and stop carelessness.
This means having easy-to-use inventory systems that don’t require too much technical knowledge to master. Then providing adequate onboarding for new staff and regular general training on an ongoing basis.
5) Track and monitor your purchases
Helps with: Vendor fraud or error.
Errors and fraud by vendors may be one of the least common shrinkage sources:
But it still happens. And it’s still worth protecting against.
This means taking actions like:
- Only using reputable suppliers and/or vetting them before use.
- Staying organised with your purchase orders so you can easily track which are in-transit, late, delivered, etc.
- Systematically following up on late deliveries.
- Having a solid count and book-in procedure when orders arrive at the warehouse.
You can even use a barcode scanner to make this book-in and put away process quicker and easier. All ensuring vendor deliveries are completed accurately and in full – with errors or fraud caught early.
6) Incorporate double-checking policies
Helps with: Employee theft or errors.
Double-checking is simply where an action in your warehouse gets done twice in order to confirm accuracy. For example, two different employees will be involved in procedures like:
- Booking in new inventory.
- Counting each product per single stock take.
- Verifying products sent out.
This can use up a lot of time and diminish overall warehouse speed. But it’s worth doing (even if only temporarily) if you routinely find yourself with a lot of unexplained shrinkage that needs to be addressed.
7) Store inventory for minimal damage
Helps with: Minimising damage.
Appropriate inventory storage is crucial to stop products from being damaged while sitting in the warehouse. Especially for fragile or perishable items.
This means things like:
- Using padding on shelves, where needed.
- Storing heavy and/or most fragile items closest to the floor.
- Maintaining the appropriate temperature, where needed.
- Giving your team necessary equipment.
And just being intentional and logical with your storing procedures.
It’s also worth adopting a FIFO (first-in-first-out) system to give each item as little time in the warehouse as possible.
8) Increase security measures
Helps with: Theft.
Unexplained, end-of-year inventory shrinkage could come down to simple theft that went undetected at the time – either from employees or outside the business.
So if this is a common occurrence for you, it could be time to invest in better security.
This can take the form of:
- Adding security cameras to your premises.
- Adding signage about active cameras, prosecuting thieves, etc.
- Making entrances and exits more secure.
- Training staff on better lock-up procedures.
- Even directly employing a night time security guard to protect large, valuable inventories.
Professional thieves look for easy targets and prime opportunities. Make sure your warehouse doesn’t play into their hands.
Simply accepting inventory shrinkage and leaving accurate management to chance is a serious mistake.
But the eight strategies explored above should help prevent it as much as possible in your business. And cut a lot of waste in the long run.