How to Track and Prevent Shrinkage in Retail

Shrinkage In Retail July 27, 2020

Jin Hyun

Writer

Shrinkage in retail, or the loss of inventory due to theft, fraud, and administrative mistakes is a major problem that hounds retail businesses around the world.

According to the National Retail Federation's (NRF) 2019 National Retail Security Survey, retail shrinkage has a $50.6 billion impact on the retail industry.

This is, unfortunately, an issue that affects both small and large businesses, though on different levels. Therefore, it is vital for owners and managers to regularly track the accuracy of their cycle counts and take preventative measures to avoid further shrinkage.

Causes of Shrinkage in Retail

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The first step to preventing inventory-related losses is to recognize the common causes of shrinkage.
According to the NRF, the most commonly identified causes of shrinkage in the retail industries include-

Shoplifting and Return Fraud - The average dollar loss per shoplifting incident in 2018 was $546.67. Of the shoplifting incidents reported, 14.6% involved losses of more than $1,000. Meanwhile, research by Appriss Retail shows that annual losses from return fraud in 2019 were estimated at $27 billion, up 35% from the previous year. In total, organized retail crime (ORC) costs retailers a staggering $703,320 per $1 billion in sales.

Employee Theft - The NRF's research also shows that cases of dishonest employees cost retailers an average of $1,264 in 2018. Much of this problem can be attributed to overstocking, which can encourage employees to see excess inventory as easy targets. Likewise, mismanaged inventory with poor tracking systems can lead to a higher risk of employee theft as there isn't a productive way to keep staff accountable.

Administrative Mistakes - Also known as paper shrink, these incidents are often caused by unintentional administrative mistakes such as poor inventory management and accounting mistakes. This is a common problem for retailers that still have manual methods of record-keeping and use basic spreadsheets. In 2017, administrative errors accounted for 19% of retail shrinkage cases.

Vendor Fraud and Error - The NRF also found that incidents associated with vendor fraud and error, such as theft or failure to provide the number of units invoiced, accounted for 5.8% of retail losses that same year. Many retailers report fraud happening when outside vendors enter a store to stock inventory. For example, a vendor can steal goods when checking a supermarket's inventories.

Process Failures - These typically include damages caused by improper storage, handling, and shipping to vendors. Take the food industry, for example; it is estimated that 4% to 10% of food items purchased by restaurants are wasted before reaching the customer.

How to Calculate Shrinkage

For businesses, the first step to calculating shrinkage in retail is to have a complete record of all sales. From here, we can calculate the level of shrinkage using the following formula-

Shrinkage = Ideal Income From Goods - Actual Income From Goods
Producing clear, quantifiable information concerning inventory losses will help businesses identify exactly how big this issue is in their operations. As they make strides towards reducing shrinkage in their stock, they can regularly measure their performance to see if their efforts are paying off.

Preventing Retail Shrinkage

Let's face it, it's impossible to completely eliminate inventory loss. With small cases, it may be acceptable to add the loss to the cost of goods sold (COGs). However, when retail businesses repeatedly encounter high shrinkage volumes, they have several options for preventing these issues in the future.

1. Be Careful When Hiring Temporary Workers
Hiring temporary employees is a common solution for coping with seasonal demand in retail. After all, being overwhelmed and understaffed by a surge in customers can also lead to losses in sales due to slow and poor customer service.

However, there's also a very real risk of cutting corners when hiring temp employees, which gives people who have not been sufficiently vetted access to your inventory.

2. Crack Down on Fraudulent Returns
A retail company's best defense against return fraud is to set a foolproof return policy.

While it's obviously important to ensure that customers have a clear avenue for returning defective and damaged items, businesses also need to protect themselves by having a clear and concise return policy. Make sure the return policy's guidelines are unambiguous and have no loopholes that customers can exploit. Talk to employees so that they can relay this policy to customers.

For example, consider offering store credits or trade-ins instead of full cash refunds for returns that don't meet all the requirements of your return policy.

3. Monitor Your Inventory in Real-Time
Full and constant visibility of your inventory is the key to effective inventory management today. Spreadsheets are great for crunching numbers, but they don't let business owners see changes in their inventory as they happen.

Consider investing in inventory management software, which gives users complete control and real-time visibility of their inventory and supply chain. From transaction monitoring and tracking of employees handling inventory, software lets managers zero in on incidents that lead to losses and understand why and how they happened.