What is Inventory Shrinkage?
In today’s competitive retail world, retailers are tasked with more responsibility than ever before. Not only do they have to deal with increased competitive pressures and ever-shrinking margins but also the age old problem of shrinkage. Although shrinkage occurs primarily in retail businesses it’s also applicable to trades and manufacturing businesses as well. Shrinkage has seemingly occurred when the physical count of your inventory doesn’t seem to match up with the merchandise records you ought to have. Before a retailer can tackle shrinkage, they must first determine the root causes behind it and then give it a priority in terms of return on investment. Inventory shrinkage can be as a result of several factors such as:
- Employee theft
- Misplaced stock
- Pricing errors
- Shipping errors
- Leaving perishable products out of refrigeration
- Inefficient record keeping
- Physical damage owing to poor handling techniques or weather conditions.
- Expiration of stock owing to poor stock rotation
- Over ordering of a particular product which then needs to be sold at a discount
While it’s commonly misunderstood that retailers absorb shrinkage as the cost of doing business, the truth of the matter is that it’s an expensive problem which needs to be addressed. With tighter resource constraints than ever before, there needs to be not only effective solutions but efficient ones as well.
Can Shrinkage be controlled?
While the problem shrinkage can never be truly eliminated in the retail environment it can, and must, be controlled. Inventory shrinkage leads to a diminish in the retail business’ income which, in turn, reduces the potential profit. As a business owner, one of the most important things you can do to reduce shrinkage is by letting all your employees know that it is imperative to keep shrinkage down to an acceptable level.
Imagine working hard throughout the year to earn a small profit and then seeing that profit getting eroded in front of your eyes owing to shrinkage once the physical inventory count has been taken. Here are some ways shrinkage can be reduced or prevented to an extent:
- Tightening security around your business
- Hiring a security service to guard your store
- Designating only specific employees to accept, open and distribute new shipments where they belong
- Reviewing each day’s transactions in front of your associates for accuracy as well as suspicious or repetitive transactions
- Verifying any purchase orders before they are filed.
- Physically counting the inventory in your business every year or twice a year to match ledger with actual stock.
Although these measures can reduce instances of shrinkage, no single shrinkage control program will work for every retailer since every situation is unique. Furthermore, it’s not only disheartening for the business in general and employees in particular but could also have a tumble-down effect across all aspects of retail. Here are some major repercussions as a result of shrinkage being recorded in business:
- Reduced Profits or Potential Loss
Shrinkage often affects the profitability of a business and cuts into profits which affect the functioning of the business on the whole.
- Prices and Wages
Business owners often resort to increasing the prices of their goods as a way of dealing with lost sales owing to shrinkage. This has a cascading effect as consumers have to face the brunt of the increase in prices. Additionally, this could also put the business at the risk of losing their competitiveness in the market. Employee wages will also take a blow and any potential pay hikes will be put on hold which makes it tough to hold on to good employees.
- Increase in Security
To tackle the issue of shrinkage, businesses often hire security agencies or put in place surveillance cameras to patrol the premises and monitor the activities of employees and customers. Furthermore, a business may also put in place strict internal control measures to supervise and audit bookkeeping and inventory control. This may lead to mistrust between management and employees and also increase in overhead expenses.
- Management Focus
Businesses with high shrinkage often resort to loss prevention modules which place greater emphasis on loss prevention. Managers and employees alike are given the training to be more vigilant while hardware such as bar code scanners, RFID and electronic article surveillance (EAS) tags are also put in place to reduce shrinkage. This not only leads to more money being expended but may also require managers and employees to dedicate more time and attention to prevent shrinkage rather than focusing on other aspects of their job including training, staffing, and other day-to-day operations.