Inventory Shrinkage: 8 Effective Strategies to Protect Your Stock

Are you struggling with inventory shrinkage? Do you need some tips to prevent this? Read below, you’ll find your solutions. This will take around 6-8 minutes to read.

So before beginning the prevention strategies, you need to know what inventory shrinkage is, how you can calculate it and what can be the reasons for its root.

Inventory Shrinkage

Inventory shrinkage is simply defined as the loss of physical inventory that affects revenue in every business — especially retail business. More specifically, it refers to the amount of inventory that you lose or fail to sell during a specific time period. This problem could be slowly draining your profits without you knowing it.

How to calculate Inventory Shrinkage

You can calculate the inventory shrinkage by finding the difference between the following two:

1. The recorded stock number of a product — from POS data
2. The actual physical count of it you have  — from actual inventory metrics

Inventory Shrinkage = Recorded Inventory - Actual Inventory

Causes of Inventory Shrinkage

The following factors can cause  inventory shrinkage:

• Retail shrink due to customer theft
• Human errors: typos recorded by cashiers and salespeople
• Human error: mistakes while receiving/sending stock deliveries
• Poor inventory storage

Therefore, you have to handle this before it’s too late and a big amount of your money is wasted.

8 Effective Strategies to Protect Your Stock

So, in this post, you are going to read the following 8 effective strategies to prevent inventory shrinkage.

1. Incorporate employee screening
2. Define an SKU for every product’s variant
3. Analyze your stock levels regularly
4. Give your team proper training
5. Track receiving and stocking processes
6. Implement double-checking policies
7. Keep appropriate inventory storage for minimal damage
8. Enhance security measures

1) Incorporate employee screening

Incorporating employee screening can help with organizational theft and fraud.

Blaming employees is something that directly affects the company’s reputation — even though the accusation is true. But sadly, lots of stock can be stolen by unethical staff members.

According to the NRF research, two-third of the retailers face theft by sophisticated criminal gangs - the unethical staff.

So to prevent such thefts, you need to implement employee screening when hiring new staff. For that, you need to check proper references and background. Their identities should be clear. It may cost you losses if you just quickly hire someone grasping a successful interview without knowing his past.

One of the checks can be carried out by contacting previous employers. This practice can help you find out:

• How good the candidate plays being in a professional environment.
• How effective the candidate has proven to be regarding the job

Thus; trustworthy employees, managing your inventory, can provide priceless peace of mind and reduce the danger of any falsehood.

2) Define an SKU for every product’s variant

This technique to inventory shrinkage helps with lost products. So let’s check firstly what an SKU is about.

What is an SKU

It stands for Stock Keeping Unit. An SKU is a combination of letters and numbers. It’s unique for each retailer. It gives each product variant a unique identity to help keep stock levels accurate.

So you need to intelligently define an SKU for every product. These SKUs are lifesavers. All you have to do is, make sure your SKUs are as clear and simple as possible, and scalable enough to accommodate new products.

Note that: an SKU is not a barcode. Unlike the barcode, an SKU alone can let a human recognize a product.

The products with SKUs allow the warehouse staff and administrators to track inventory levels more efficiently and smoothly.

3) Analyze your stock levels regularly

This prevention tip helps you catch inventory shrinkage at an earlier stage. So you should analyze your stock levels regularly.

If your business is of large scale and it’s hard for you to check regularly then try an automated tool. So you can automate inventory management with software.

I’m using a software tool, named Stock Konnect, that works for me in this regard. It helps me with the inventory management of my eCommerce business. This tool efficiently manages the stock of my multichannel inventory. It saves me from stockouts and overselling as well.

But for the manual procedures, stock level analysis can be carried out by regularly taking a physical count of inventory. Compare the totals of your recorded inventory levels with each count of your physical inventory. Then calculate the percentage of inventory shrinkage. Ideally, this number should be reduced over time as you refine your inventory management strategies.

Therefore, for this job, you can assign your team to weekly count this shrinkage value so that you can nip the shrinkage in the bud.

4) Give your team proper training

Giving your team proper training helps you reduce human-errors.

Employees must be well-aware of the whole terminology of inventory shrinkage, and the negative consequences it may cause to the business.

They must know that a little repeated mistake, that seems neglectable for a time, may affect the bottom line.

So this attentiveness should be practiced on both sides. Employers should also provide the necessary course of action to minimize errors and prevent carelessness.

5)  Track receiving and stocking processes

Track receiving and stocking processes to avoid vendor fraud or error.

Errors and fraud by vendors seem to be one of the least common sources of inventory shrinkage annually.

Yet this smallest percentage can leave a bigger impact. Thus, it’s still worth fighting for prevention. This means, you need to take the following steps in this regard:

• Work with only reputable suppliers and/or check them before use.
• Track and monitor your purchases, orders, and each transaction.
• Be vigilant about the late deliveries.

For the quick and easy booking-in new inventory, you can use a barcode scanner. This can help you ensure complete deliveries and catch frauds or errors way earlier.

6) Incorporate double-checking policies

The double-checking policies can help you minimize booking-in errors.

The action has done twice to confirm accuracy is referred to as double-checking. The actions regarding inventory management need to be done twice in the warehouse to ensure accuracy.

 For example, there can be multiple actions that involve two doers. These actions can be:

• Validate in-coming inventory
• Counting each product in a single stock
• Verifying out-going products

Inventory shrinkages can be unidentifiable sometimes. So it’s better to incorporate a barcode scanner for a quick and easy double-check to ensure order accuracy before shipping.

7) Keep appropriate inventory storage for minimal damage

As the title suggests, this prevention can minimize product damage.

Appropriate inventory storage is extremely important to prevent product damage while being stored in the warehouse. Especially for the products that are fragile or perishable.

So what you need to do is:

• Place smooth layers on shelves, where needed, to protect delicate items.
• Try to keep the most fragile items closest to the floor.
• Maintain the appropriate temperature, where needed.
• Keep necessary equipment to load or unload items.
• Try adopting a FIFO (first-in-first-out) stack by making shelves accessible from both ends.

These actions will ultimately help you reduce inventory shrinkage.

8) Enhance security measures

Enhancing security measures definitely reduces thefts and frauds.

You may face some unexplained and undetected theft at some times. These unidentifiable sources may come from either employee or outside the business. So to avoid such causes of inventory shrinkage, you need to invest your time and money in enhancing security.

The following strategies can help you increase your business security.

• Incorporate security cameras inside your premises.
• Add checks on both entrances and exits.
• Train staff on better security procedures.
• Hire a nighttime security guard as well to protect large & valuable inventories.
• Appoint one person responsible for overseeing all security staff and measures.
• Keep an eye constant on CCTV footage.
• Keep security details to a few and trustworthy individuals only.
• Add remote monitoring feature.
• Use deter signs to discourage criminals.

Professional thieves can go unseen most of the time. Make sure your warehouse is secure enough systematically to be safe from them.

Final words

Neglecting minor inventory shrinkage daily can lead to bigger issues in the end. This mistake can cost you heavily.

Therefore, the aforementioned eight strategies for your business can definitely prevent such issues as much as possible. And squeeze a lot of costs that go wasted in the long run.