What is Inventory Shrinkage?

Inventory Shrinkage

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Inventory Shrinkage

Inventory shrinkage, or simply shrinkage, refers to the loss of products between the point of manufacture or purchase from a supplier and the point of sale. It’s the difference between the amount of inventory that a business should have according to its records and the actual amount of inventory it physically has on hand.

Inventory shrinkage can be caused by a variety of factors, including:

  • Theft: This includes both external theft (shoplifting) and internal theft (employee theft). It’s a common cause of inventory shrinkage in retail businesses.
  • Supplier Fraud: This occurs when suppliers claim to have delivered more goods than they actually have.
  • Damage: Inventory can be damaged in the warehouse, in transit, or on the store floor. Damaged goods usually can’t be sold and thus contribute to shrinkage.
  • Administrative Errors: These include mistakes in shipping and receiving, miscounting items, and data entry errors. Such errors can cause discrepancies between the recorded inventory levels and the actual inventory on hand.

Inventory shrinkage is a serious issue for many businesses, especially those in the retail sector. It reduces the amount of inventory available for sale, which can lead to lost sales and reduced profits. Businesses often implement various measures to reduce shrinkage, such as improving security, training employees, implementing stricter inventory control procedures, and regularly auditing their inventory.

Example of Inventory Shrinkage

Let’s consider a clothing retail store for this example:

According to the store’s inventory records, they should have 100 units of a certain type of jeans. However, when a physical count of the inventory is performed, only 90 units are found.

This indicates that there are 10 units missing. The store has experienced inventory shrinkage of 10 units. This could be due to a number of reasons.

Perhaps a customer shoplifted a pair of jeans (external theft), or an employee took a pair without properly accounting for it (internal theft). It’s also possible that the store received fewer jeans from the supplier than they were billed for (supplier fraud). Maybe a pair was damaged in the store and had to be discarded, or a pair was returned by a customer and was accidentally not added back into the inventory system (administrative errors).

The value of the shrinkage would be the wholesale cost of the 10 units of jeans that are missing. For example, if each pair of jeans costs the store $30 from the supplier, the total cost of the shrinkage is $300. This is a direct hit to the store’s bottom line, as these are goods that the store can no longer sell to generate revenue.

To mitigate such losses in the future, the store might need to review and improve its inventory management procedures, enhance its security systems to deter theft, train employees on proper inventory handling and data entry, and reconcile its inventory records with physical counts more frequently.

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