Inventory shrinkage occurs when stock goes missing inexplicably. And while it might sound like a weird occurrence, it happens way more frequently than you might think. In 2017, shrinkage cost retailers nearly $100 billion, according Tyco Retail Solutions. The National Retail Federation’s National Security Survey 2018 shows that shrink cost retailers 1.33 percent of sales.
It’s important to get a handle on shrinkage before it eats into your profits too much. Scaling businesses in particular will want to keep an eye on this metric. “Even though shrink represents a small portion of the overall transactions, it’s still meaningful. It points to the level of operational process and control,” said Chris Guillot of Merchant Method. “When you have strong loss prevention technique, you have strong technique almost everywhere else: customer care, customer service, employee training, etc.”
Below, we’ll look at the most common causes for inventory shrink, according to the National Security Survey 2018, and how you can prevent it.
External theft is the biggest contributor to shrink, accounting for 36.5 percent of missing stock, and a much more complicated challenge for brick-and-mortar businesses. On average, shoplifting costs retailers $800 per incident. To dissuade dishonest shoppers from taking advantage of the five-finger discount, here are some measures you can take:
- Get your employees involved. Hire an expert to provide training to associates, so they can look for the signs of shoplifting and behave in ways to prevent. A friendly, personable approach and lots of eye contact can go a long way.
- Take proactive security measures. Install cameras (even fake cameras can deter thieves), hire a security guard to man the front entrance, get theft-prevention price tags, mirrors in aisles so associates can see more, and other anti-theft protections for your business. It’s also okay to kindly let customers know about these measures you’ve taken with in-store signage.
- Consider your store layout. If you place high-value items near the entrance, it’s a lot easier (and more tempting) for browsers to take. Instead, put expensive and small items that are easy to hide in more conspicuous places. Perhaps it’s next to the register, an area where there’s typically an associate, or even behind a locked case.
- Also look at product displays. Just like you don’t want to put easy-to-snag items near escape routes, you’ll also want to arrange products in such a way that it’s obvious that an item is missing. Shoplifters may be less likely to take an obvious item, and associates will more easily identify when items are missing.
Coming in at second, internal theft accounts for 30 percent of shrink. This means that employees are stealing from their employers, and it’s much more costly, losing businesses nearly $2,000 per instance. While this may be a more uncomfortable issue to address, it’s important to nip it in the bud. Many of the tips above apply here, and there are also additional steps you can take to mitigate the risk of internal theft:
- Increase accountability. Allow employees to take ownership over certain tasks, which empowers them by giving them responsibility but also helps you by keeping them accountable. Having teams of two, where employees check one another’s work, can also reduce shrink.
- Educate yourself. Know the common tactics that employees use to steal, as they’re different from external thieves. Some common tactics include price-switching, return stolen items for cash or store credit, fake gift cards, and “accidentally” not ringing up all of the items in a friends’ purchase, among others.
- Train your employees. It’s important to also educate employees. Let them know how detrimental theft is to a business. Inform them of the costs to your business, how it affects them, and the role they play in preventing shrink. It also doesn’t hurt to inform them that you’ve educated yourself on the signs to watch out for.
- Provide a positive working environment. If your employees are happy, then they’ll have less of a reason to steal from you. Can’t offer competitive wages? Consider giving favorable employee discounts or even freebies.
- Screen employees thoroughly. Check references, conduct a background check, and have in-person interviews to make sure you’re hiring honest staff.
Administrative and Paperwork Errors
The third-biggest cause of shrink at 21.3 percent is “administrative and paperwork errors.” This can really mean a range of things, and it may vary depending on the retailer, but there are ways you can address issue:
- Label properly. Mislabeling can wreak havoc on your inventory data. Make sure whoever’s in charge of labeling is doing so carefully and according to a process.
- Review, modify, and establish processes. Speaking of processes, you’ll want to look at your current ones and see where the discrepancies are occurring. After finding the source of the issue, change processes accordingly to prevent it from happening again.
- Look at your SKU numbers. Are product codes clear or are they nonsensical? Remember, you have multiple team members and possibly even external vendors who need to adhere to your systems, and a numbering system without logic can be more difficult to follow.
- Audit regularly. This shouldn’t just be an annual event, and you should conduct different types of audits to monitor shrink. Carolyn Moneymaker, distribution center manager at United By Blue, oversees the company’s stock levels and data. “Count and reconcile inventory constantly, through cycle counts and full physicals,” she says.
6.8 percent of shrink is caused by vendor fraud, which isn’t too much, but also something that can be prevented.
- Vet carefully. Ask contacts in your network, other vendors you use, and conduct thorough online research to make sure there are no common issues with the vendor. You can also ask the vendor to speak with some of their existing customers that are similar to you. If they’re resistant, that’s a red flag.
- Understand who your vendor’s employees are. If your vendors hire primarily contract and temp workers, those employees may be less invested, and thus not as reliable or honest.
- Maintain open lines of communication and good relationships. Just like you’ll want to create that personal connection with shoppers, it helps to do so in your business relationships. A friendly repertoire can go a long way in business.
- Cross-check your data. It’s important to maintain your own records, no matter how detailed or accurate your vendor’s may be. That way, you’ll be able to identify discrepancies more easily as they pop up, and you can validate the accuracy of your own data.
Upgrade Your Inventory Management to Reduce Inventory Shrink
In one survey that we conducted, over 75 percent of retailers said the most frequent cause of an inventory issue was from human error and manual processes, which ties in closely to our administrative and paperwork issues discussed above. Ultimately, an inventory management software that can centralize, automate, and streamline your processes will address many of these human errors.
When choosing the right inventory management software for your business, it’s crucial to look at the integrations. The IHL Group and OrderDynamics found that 15 percent of inventory distortion issues are caused when software can’t talk to each other. If you have other tools and systems already set up, an IMS that can seamlessly integrate will help you stay on top of stock and reduce shrink.
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