What is Inventory Shrinkage & What Can You Do About it?

Inventory shrinkage is something that every business owner is aware of, but they hope that they never have to come across it, at a significant volume, anyway. However, if you’re new to the game or simply want to become more clued up about inventory management, then you’ve come to the right place. In this article, we’ll be telling you what inventory shrinkage is, why we need to combat it and how you can do it effectively.

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What is inventory shrinkage?

Inventory shrinkage is an accounting term, first and foremost, that refers to the difference between inventory records and inventory in physical possession. A good example to use in this case, to explain inventory shrinkage in more detail, is to imagine a shop that logs 500 cans of chicking soup valued at a whole total of £250. But when it’s looked into more, they actually have 400 cans of chicken soup with a whole total of £200, therefore meaning shrinkage of 100 and a loss of £50. 

The issue is, there could be numerous reasons as to why the shop is now 50 cans down. It could be because of shoplifting or theft along the supply chain. It could be down to damage and waste that no one has recorded, or there were 400 cans all along and human error is to blame. While it might not seem like such a big deal, it can present more of an issue than you might have otherwise thought, but how? Let’s discuss the importance of inventory shrinkage mitigation.

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Why is it important to mitigate inventory shrinkage?

We must do everything in our power to mitigate instances of inventory shrinkage. But why is it such an important factor when it comes to business ownership? There are many negative impacts it can have on your business as a whole, from profit loss to job losses and everything in between. So why should we be doing everything we can to prevent inventory loss?

• Profit loss – inventory shrinkage will lead to a reduction in profit margins
• Additional costs incurred – inventory shrinkage can cause costs incurred by the business to increase, such as the amount of money it will need to replace the stock lost
• Price increases for the consumer – if a business needs to find the money it has lost, more so if it’s a small amount that they need to scrape back, they will pass the cost onto the consumer, meaning they will pay even more for products and services than they did before the inventory loss
• Job losses – if a business begins to lose money, it will have to reap back the profits elsewhere. Sadly, one of the first things to happen when a business is in trouble is job losses
• Business breakdown – this is the case in more extreme circumstances, but if product loss continues to happen on a large scale, it could cause the business to become financially unstable, so much so that it has no other choice than to close down

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What causes inventory shrinkage?

Sadly, there are multiple instances that will cause inventory shrinkage and profit loss. While some of the following things can be easily prevented, or at least mitigated, to a degree, there are others that are completely out of your control, such as theft along the supply chain. So what else can cause inventory shrinkage to occur? Let’s take a closer look:

• Theft – when customers or employees steal from your stock, it leaves a financial hole in your books. The worrying thing is it can be difficult to mitigate as theft can happen at any time along the supply chain
• Spoilage – more often the case in food and drink industries, spoilage can still occur when it comes to beauty products, medicines and other items that have an expiry date
• Damage – some products can become so damaged that they cannot be sold, even for a reduced price. It can come as a result of crushing or falling from a height, most commonly
• Human error – sometimes, inventory isn’t counted correctly, therefore leading to discrepancies in your records. This can falsely affect your profit margins
• Vendor inaccuracy – vendor fraud is a threat to many businesses. It’s caused by a fraudster posing as a real vendor and submitting false invoices. Therefore, your payment goes to the scammer, leaving you out of pocket. Therefore, you will have to pay again for legitimate vendors 

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10 ways to prevent inventory shrinkage

There are many things we can do to make sure that inventory shrinkage doesn’t occur. It can happen to a lesser degree, but it’s often considered to be impossible to mitigate completely. But how can you do that? Here are ten ways in which you can prevent inventory shrinkage, regardless of where you sit along the supply chain:

1. Prevent theft and shoplifting by installing state-of-the-art surveillance systems throughout your premises
2. Mitigate theft and shoplifting further by adding anti-theft devices to your items
3. Deter criminals by hiring security staff to keep an eye on the comings and goings
4. Avoid errors in accounting and billing processes by using a double-check system
5. Keep an eye on stock levels by performing frequent inventory checks
6. Establish formal inventory guidelines for selling and receiving stock to keep a closer eye on the numbers you’re working with
7. Vet vendors and employees carefully to avoid fraud, scams and theft along the supply chain
8. Train employees to make sure they can recognise signs of shoplifting and how to report suspicious behaviour 
9. Document the processes you’re using for your records
10. Automate inventory management to avoid human error

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Multy Lift is pleased to have been providing customers throughout the UK with quality material-handling equipment for over three decades. With a wide range of high-calibre warehouse machinery available, alongside warehouse services, such as mezzanine flooring and warehouse racking, you will always have your every material handling need met by choosing Multy Lift. For forklifts, reach trucks, order pickers and everything in between, including new and used machines, look no further than our expert team. For further information, get in touch with a member of our friendly, knowledgeable team today – we can also offer industrial cleaning equipment and chemicals.