Inventory shrinkage
The difference between the product's stock count and the actual amount on hand. This is often called "shrink" in a retail setting.Retail shrinkage. It doesn't matter what it means, you are missing inventory that you thought you had.
Theft, inventory control problems like receiving errors, unrecorded damage, cashier mistakes, misplaced items, and theft can all lead to shrinkage or loss of stock. Retail is bound to experience some shrinkage. To avoid time and money loss, it is essential to prevent shrinkage.
How to calculate inventory shrinkage
To get an accurate count of your inventory and its shrinkage you must track your inventory levels. You can use our Inventory Management Workbook to create a system that will work for you. The guide also includes an inventory shrinkage calculator that will automate the process.
Calculating inventory shrink can be done by comparing your inventory with your actual count.
Inventory shrinkage = Recorded inventory - Actual inventory
Here, your recorded inventory either comes from an integrated POS system like Lightspeed that will automatically track and run reports on your inventory or from a manual count that you do yourself by hand.
In this instance, inventory shrinkage is the actual inventory that you have lost in units.
Imagine that you own a gift shop and you have 500 ornaments recorded in your inventory management records at the start of the tourist season. Your ornaments are gone at the end of the season but you sold only 477. This is the case:
Inventory shrinkage = Actual inventory minus the recorded inventory
Inventory shrinkage = 500-477
Inventory shrinkage = 23 units ornaments
The inventory shrinkage rate can be used to track inventory shrinkage. The inventory shrinkage rate is the difference in goods sold between what you have recorded and what you actually sell.
| Inventory shrinkage rate = | Recorded inventory -- Actual Inventory | x100 |
| Recorded Inventory |
Your inventory shrinkage rate, unlike inventory shrinkage, is expressed in percentage.
Let's go back to the previous example. This formula would be used to calculate the inventory shrinkage rate for ornaments.
| Inventory shrinkage rate = | Recorded inventory -- Actual Inventory | x100 |
| Recorded Inventory |
| Inventory shrinkage rate = | 500 -- 477 | x100 |
| 500 |
| Inventory shrinkage rate = | 23 | x100 |
| 500 |
Inventory shrinkage rate=4.6%
This means that 4.6% of the ornament inventory in your gift shop is disappearing. You can expect to lose 4.6% more ornaments if nothing is done.
The average shrink rate for retailers nationwide is 1.6%. Surprisingly, 15% of retailers experience shrink rates above 3%.
Causes of inventory shrinkage
Shrinkage is usually attributed to shoplifting/theft, or record errors. We will examine the most common causes of inventory shrinkage so you can identify them and stop them in your business.
Shoplifting and Customer Theft
Shoplifting and other forms of nonemployee theft account for a significant amount of retail inventory shrinkage.
(Source: BigStock)
The 2020 National Retail Security Survey found that shoplifting incidents are at an all-time high and now account for 1.62% of a retailer's bottom line--costing the industry $61.7 billion. It is quite staggering. However, you can get a better understanding of the impact shoplifting has on your store if you look at each case individually.
Did you know?
The average shoplifting incident amounts to $461.86 in merchandise.
Shoplifters can take advantage of areas that aren't being inspected. There are several places where shoplifters can do their dirty work, such as between racks and aisles or dressing rooms.
Shoplifters are often attracted to high-value, high demand products. When I was a retail spa manager, for example, aestheticians were required to place products away after they finished their treatments. It was not uncommon for customers to carry around skincare products in their pockets or purses after finishing a treatment.
Another common form of retail shrinkage is tag swapping. This directly impacts inventory numbers and profits. Tag-swapper place the lower-priced item’s tag on the higher-priced one and then make the purchase. Although this strategy conceals the theft at first, it can cause inventory numbers to be misaligned for both goods. This is unfortunately a common problem that retailers discover long after the fact when they count stock.
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You may also be affected by other types of customer theft such as coupon fraud or online fraud. However, these are not necessarily reported as missing units. You can spot this type of loss by examining sales figures and discount reports--this is where using a robust POS system really comes in handy.
Employee Theft
Although employee or internal theft is the exception and not the norm, the cost of just one dishonest employee on average is $1,551.66.
Internal theft is often difficult to detect and fix. Untrustworthy staff can easily steal goods from stores because they have access to more areas and are familiar with inventory control and sales processes. Internal theft can take place in many ways, including marking sellable goods as damaged and miscounting stock receipts.
We will be discussing some of the best ways to deter employee theft later. This includes creating a friendly work environment and installing access controls.
Stock Control and Clerical Errors
Avoiding stock control errors will improve your grasp of your inventory and help you avoid false shrinkage.
(Source: Multichannel Merchant)
Retail shrinkage can also be caused by stock control errors and clerical mistakes. Sometimes, errors are as simple as miscounts that do not reflect physical loss. Other errors can be more costly. For example, a supplier shipment might be recorded as "received fully" but some goods were missing.
Because of clerical errors, you can also get a false sense that inventory shrinkage is occurring. They result in an inaccurate picture about your inventory counts. If you think you have 120 units of a shirt, and you record it as such, then you will falsely believe your shrinkage rate to be close to 17%.
We'll go into greater detail below. However, automating inventory management with a point-of-sale system is the best way to reduce recording errors.
Tips to Prevent Inventory Shrinkage
You will likely experience some shrinkage in your retail store, but you can take steps like theft and clerical mistakes to reduce shrinkage. We will be discussing strategies and technologies you can use to stop customer theft, employee theft and report errors.
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