Question 1

What is inventory shrinkage?

Accepted Answer

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.

Question 2

Why pay attention to inventory shrinkage?

Accepted Answer

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.

Around 90% of businesses now expect to compete mainly on the quality of their customer experience, and unhappy consumers will tell at least 15 people about poor service.

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.

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