Inventory Shrinkage

When inventory counts performed in the accounting department don’t match those done in the warehouse, a closer inspection is necessary to identify the source of any inventory shrinkage. Shrinkage can happen for many different reasons:

  • Employee Theft
  • Breakage
  • Spoilage or Waste of Perishable Goods (food, medicine, chemicals)
  • Human Error (manually inventory entry)
  • Incorrect Amount Shipped by Supplier

However it occurs, the end result is a hit to your bottom line. While you may not be able to remove all shrinkage, there’s plenty you can do to reduce it.

How do you reduce inventory shrinkage?

Some stock shrinkage is inevitable. In the baking industry, there may be waste due to evaporation or batter sticking to the bowls, pans, and utensils. In the fresh produce market, no matter how efficient your shop workers are, fruit and vegetables can spoil when exposed to less than ideal conditions (excessive heat or cold, for example). Yet, there are ways to make a noticeable impact towards reducing business shrinkage caused by factors we can control.

First, you need to uncover the source of the problem.

Let’s start at the beginning – the arrival of goods from the supplier. Do we have what we ordered? Scanning each product’s barcode upon arrival will update your inventory software to reflect the actual number of products. If there is an error, it will be immediately flagged, and the inventory control manager can communicate the error to the supplier to request a credit, if appropriate.

Manual stock taking with manual systems is notoriously unreliable. It is easy to transpose digits and record an incorrect number of products. Scanning a barcode will help eliminate human error. Updating your inventory counting methods to scan barcodes with the SOS Inventory mobile application is the ideal solution.

The volume of inventory shrinking by breakage or spoilage naturally depends on the nature of the product. Fresh produce, for instance, must be tracked by lot number to ensure it moves along the production line and gets delivered to the customer while it is still fresh. Using a first in first out system of accounting to determine which products are sold first should keep product moving before expiration.

Tabulating Shrinkage of Inventory

How do you calculate inventory shrinkage?

You’ll want to start by performing a physical inventory count and tabulate its value. Your accounting department should provide a report of inventory cost for comparison. Subtract the cost of the physical inventory from the number provided by accounting to find the shrinkage value. Take this amount and divide by the accounting department’s inventory cost to calculate the inventory shrinkage percentage.

Inventory Shrinkage Formula

Inventory Cost on Record – Physical Inventory Cost = Shrinkage Value

Averting Unnecessary Inventory Losses

Losses that occur on paper due to error and do not involve breakage, theft or spoilage are much easier to avoid. A simple human error one day shows up as a shrinkage down the line when a physical count is conducted. These are the types of errors that can occur at any business, including your suppliers’. A simple checks and balance system can prevent the misplacing of a digit. For one, scanning barcodes is a more reliable method for entering product information than keying it in manually.

When shipments arrive from suppliers, the inventory count indicated on the purchase order should match the invoice and the invoice count should match the number of products received. Whether by accident or the rare nefarious intention, mistakes in inventory can occur even before production begins.

Inventory Accuracy

inventory shrinkage formulaDetermining inventory accuracy is akin to balancing your books; you are reconciling the accurate data in your records against a physical count. To calculate this figure, divide the physical count by the records count.

Q: What is an acceptable inventory shrinkage?

A: An acceptable accuracy percentage is 97%, putting the shrinkage at 3% or less.

Q: What’s the best way to detect stock shrinkage quickly?

A: Track your inventory with SOS Inventory for real-time inventory counts and you’ll be able to know immediately if your inventory quantities match your records.

Q: What is an inventory shrinkage example?

A: One way inventory can diminish is through breakage. If an item is made of glass, rough handling or dropping will result in loss of inventory.

Averting Stock Shrinkage

inventory shrinkageFortunately, there are steps you can take in any business to reduce stock shrinkage.

  1. A quick and inexpensive step any small business can take is locking doors and closing off access to inventory. Only warehouse staff should be permitted inside the warehouse. To encourage employee honesty, cameras should cover all exits and the warehouse floor.

  2. Make employees responsible for inventory accuracy.

  3. Count all items upon arrival from suppliers and check physical counts against stock records.

  4. Conduct physical inventory counts, preferably using a barcode system, to reduce human error.

  5. Use an integrated perpetual inventory system to ensure inventory counts are constantly updated throughout the system from any department in the business. That system should be capable of bin or lot tracking.

Shrinkage in Retail

how to calculate shrinkage accountingWarehouses and distribution centers suffer inventory shrinkage caused mainly by internal company issues. Retailers, however, face many of those same challenges, plus a great deal of theft from shoplifting and handling cash. Retail shrinkage accounts for billions of dollars in losses every year. At 1.38%, according to the National Retail Federation, the industry-wide average does not seem high, but a small business doing a million in sales could easily lose $10,000 a year.

By far, shoplifting is the retail industry’s biggest challenge. Although we now have access to improved security technology, thieves are ever adapting to find ways to get around them.

Employee theft accounts for up to half of retail shrinkage, caused not only by theft of products, but also by fraudulent discounts, refunds, and credit. Friends and family only discount schemes meant as an incentive are often abused.

Then there is the unknown. Unknown causes are those that cannot be identified. Perhaps an employee misplaced goods on the premises. You might not be able to identify the cause if you don’t have checks and balances of your IT systems in place. Retail shrinkage calculations consider all of the above issues.

SOS Inventory was designed specifically to enable tracking and tracing and updating inventory counts from every workstation at your business. With a thorough and accurate inventory management system in place, identifying shrinkage sources is easier and inventory costs and counts more accurate.

Find out why more small businesses turn to SOS Inventory for reliable inventory control. Sign up for your free trial today and dramatically reduce your inventory shrinkage.

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