Understanding and managing inventory shrinkage

Sana Editorial Team
June 22, 2021
Understanding and Managing Inventory Shrinkage

As a result of bookkeeping errors, damaged goods, theft, or other discrepancies, sometimes the amount of inventory in stock is less than the amount of inventory listed in a company’s records. This is known as inventory shrinkage: a difference between in-stock and recorded inventory.

Even mild inventory shrinkage can have a substantial impact on your business. A discrepancy between recorded and actual inventory counts can mean lost revenue. Inventory shrinkage can also indicate control issues, cashier negligence, or other issues that inhibit 100% of products from reaching a point of purchase.

Common causes of inventory shrinkage

Inventory shrinkage can be caused by several different factors. These can include issues with data use, order timing, and organization, which ultimately make it more difficult for a company or organization to effectively manage its inventory.

Exact causes of inventory shrinkage can include:

1. Inaccurate data

No matter the size of the company, data is needed to properly maintain inventory. Oftentimes, inventory shrinkage is caused simply by ineffective data collection and/or recording methods, which can mislead employees who are comparing in-stock inventory to recorded inventory.

The large amount of data needed to process inventory sometimes makes it difficult to accurately track all of a company’s items. This data includes all product data, quantities, specifications, and any privacy considerations. Depending on the nature of the company, some products are also associated with expiration dates, specific licenses, or update frequencies in inventory records.

Sometimes, data is recorded inaccurately when multiple individuals contribute to the same inventory report. In other cases, issues with time zones, product names, or other misunderstandings can lead directly to inventory shrinkage.

2. Poor timing for orders

The timing of new stock arrivals and deliveries can also contribute to inventory shrinkage. If orders are incorrectly timed, discrepancies between recorded and actual inventory can result.

Poor timing is oftentimes a greater issue for companies operating without integrated resource planning tracking software. If a business is accustomed to tracking order arrivals manually, poor timing can more frequently lead to inventory shrinkages. On the contrary, companies that leverage cloud-based order tracking, data-based inventory updates, and other automated features can decrease their chances of being affected by poor order timing.

3. Ineffective organization

Ineffective organization is another reason why companies are affected by inventory shrinkage. Most important in accurate inventory tracking is a comprehensive approach to inventory management — the process by which a company orders, tracks, stores, and ultimately sells inventory items.

Organizational failures in inventory management can lead to a variety of issues, many of which can mean inventory shrinkage. Physical or digital inventories can be organized incorrectly or ineffectively, making it more difficult for inventory managers to take accurate stock of available products.

Ineffective organization can also lead to issues with inventory forecasting, models used to predict future inventory requirements based on current sales trajectories. This means that even temporary organizational issues can yield long-term problems, and sustained inventory shrinkage that can take time to diagnose and correct.

4. Ineffective communication

Effective inventory management centers around transparent communication. All individuals involved in any aspect of inventory management must regularly communicate with one another, to ensure that inventory ordering, tracking, storage, and sales processes remain regular.

Though it sounds fairly simple in theory, effective communication is often difficult to achieve when it comes to inventory management. Client-facing clerks must maintain communication with purchasers, who must then communicate with any employees responsible for placing products on the floor for sale.

At every stage of the inventory process, clear communication must be maintained to prevent discrepancies between recorded and realized inventory.

Rather than face the possibility of inventory shrinkage, many companies have begun to trust e-commerce programs that combine all enterprise resource planning (ERP) platforms and solutions into a single database. ERP programs offer a variety of benefits to companies looking to manage inventory, including streamlined order placement and customer updates.

5. Funding issues

Inventory maintenance is difficult to maintain without sufficient capital. This is because the process itself is tedious, often difficult to get right, and easy to compromise. Without enough capital to sustain inventory turnover, inventory maintenance can become entirely more difficult to manage.

Some businesses can experience fluctuations in inventory totals — or even periods without any new inventory — because of funding issues. When this occurs, it’s critical to secure new cash flow to continue churning new inventory.

Freeing up additional capital can often be done through liquidating surplus stock, collecting on unpaid debts, and increasing transaction totals.

Tips for the prevention of inventory shrinkage

Just as ongoing inventory shrinkage can derail a company’s operations, consistent inventory totals can pave the way for long-term success. Reference the below strategies for preventing inventory shrinkage at your business and to maintain a positive outlook driven by accurate inventory figures.

1. Liquidate surplus

If you have items in your inventory that are not currently being used, consider liquidating those assets. This will help your company eliminate any surplus, while preventing inventory shrinkage caused by stagnant inventory totals.

Fortunately, there are many ways that companies can liquidate surplus inventory items. Items can be sold directly to wholesalers or back to suppliers. In other circumstances, items can be discounted and sold to bulk vendors or directly to customers.

Sometimes, a company can liquidate surplus assets simply by exposing them to customers in a different way. If your company is struggling to move certain items, consider relocating them to a different place in the store. If it’s a digital product you’re attempting to sell, it could always be advertised in a different location on your website

2. Effective systems

Sometimes, an effective inventory system can be the difference between efficient inventory management and inventory shrinkage.

Effective inventory systems can include the following elements

  • Accurate activity tracking;
  • Daily inventory totals;
  • Up-to-date inventory reporting;
  • Automated product ordering whenever inventory levels reach low totals;
  • Updated counts for any damaged or expired goods, or products that can not be sold for any reason.

These and other inventory management system features can help all employees keep track of inventory totals, and how individual product totals factor into accurate inventory counts.

3. Good technology

Technology can play a massive role when it comes to accurate inventory management. Oftentimes, technology alone means the difference between accurate inventory counts and inventory shrinkage. Ultimately, technology can help companies improve accuracy and timing for all inventory management.

Technology can also help to automate various aspects of the inventory management process. From ordering products to tracking product movement, technology automates many processes that take a considerable amount of time when done by hand.

In addition, technology can help analysts draw useful conclusions about inventory activity over time. Perhaps a certain product is subject to more theft, or is more frequently damaged. These conclusions, which can be reached using powerful inventory management platforms, can help companies protect their products and manage inventory shrinkage.

4. Track consumer trends

To avoid inventory shrinkage, many companies are beginning to track consumer trends more regularly. This means fully understanding how customers think and how they operate, to help you anticipate consumer needs and offer corresponding solutions.

Fortunately, many options can help a business better understand its customers. Many of the best customer data platforms even operate as the client-facing web store. These products collect customer data at the same juncture where it is entered, strengthening customer relationships and collecting valuable information in real-time.

Customer portal software then allows a company to fulfill fast order-to-cash processes, while accounting for every inventory item to prevent inventory shrinkage. These platforms allow you to streamline order management by as much as 81%.

5. Thorough records

No matter how a company chooses to manage its inventory, it should look to keep accurate records. A company that keeps records of its inventory — from first purchase through its final sale to the customer — will be less likely to lose that same product to inventory shrinkage.

In particular, companies should keep thorough records any time an inventory item is moved. Whenever a product is placed on the floor, returned to a stock room, recorded after delivery, or packaged for mail delivery to a customer, the company should keep a record of the update.

Similarly, companies should also keep records whenever a product’s status is updated. For example, if a particular item expires, records should be updated as it is removed from the floor. If a product becomes damaged, or goes missing from the floor, its status should be updated using your inventory management program.

Companies that keep thorough records can reference data whenever inventory shrinkage occurs, and will typically see fewer products go missing without explanation.

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