Businesses diligently stock shelves, meticulously manage inventory, and ensure products are consistently available for consumers. However, a silent, often unseen threat known as inventory shrinkage gradually erodes profits, posing a challenge for businesses of all sizes.

In this blog, we’ll define inventory shrinkage, exploring its common causes, its impact on businesses, and effective strategies to combat it.

What is inventory shrinkage?

Inventory shrinkage refers to the inconsistency between recorded inventory levels and the actual physical inventory available for sale, often measured as a percentage of total inventory value.

Shrinkage Rate = ((Value of Recorded Inventory – Value of Actual Inventory)/ Value of Total Inventory) x 100

Inventory shrinkage remains a significant issue for the retail industry. According to the National Retail Federation (NRF), retail shrink in 2022 amounted to over $112 billion, driven by factors such as shoplifting, employee theft, administrative errors, and damaged goods. This is a notable increase from previous years, $90.8 billion in 2020 and $94.5 billion in 2021. Additionally, major retailers have been vocal about the increasing rates of organized retail crime (ORC), which has significantly contributed to these losses. For instance, one large U.S. retailer reported theft-related losses of $400 million last year, leading to the closure of several stores due to safety concerns.

Understanding the nuances of inventory shrinkage is essential for effective management, as the cumulative effect of these losses can significantly impact your bottom line. 

Different types of retail inventory shrinkage

The two primary types of inventory shrinkage include:

• Unknown Shrinkage – Also referred to as “unexplained shrinkage,” this type is often due to theft, including employee theft and shoplifting.
• Known Shrinkage – Losses that can be attributed to specific causes, such as damaged goods, expired products, or administrative errors. Known shrinkage can also include known theft, for example, when someone is observed taking an item out of the store without paying for it. 

What are some common causes of inventory shrinkage? 

Several factors contribute to inventory shrinkage, including: 

1. Inventory Shrinkage Due to Theft

Theft is the primary cause of inventory shrinkage, occurring through various channels such as shoplifting, employee theft, and vendor fraud. Shoplifting involves customers stealing merchandise from the store and can be particularly difficult to detect and prevent, especially in busy retail environments. Employee theft, ranging from stealing products to manipulating inventory records, can be especially damaging as it often goes unnoticed for longer periods. Vendor fraud occurs when suppliers or vendors engage in fraudulent activities, such as delivering fewer goods than invoiced or inflating prices.

2. Inventory Shrinkage Due to Administrative Errors & Process Inefficiencies 

Administrative errors and process inefficiencies also contribute significantly to inventory shrinkage. These issues include mistakes in inventory management, such as inaccurate record-keeping or pricing errors, and can be exacerbated by inefficient practices, lack of controls, or inadequate training. 

3. Inventory Shrinkage Due to Damage and Spoilage 

Damage and spoilage are significant contributors to inventory shrinkage, often resulting from physical damage or the spoilage of perishable goods during storage, handling, or transportation. Physical damage can occur due to improper handling, accidents, or inadequate storage conditions, leading to products becoming unsellable. Spoilage primarily affects perishable goods, which may deteriorate if not stored at the correct temperature or if kept beyond their expiration dates.

How to prevent inventory shrinkage due to theft   

1. Theft Protection Technology: Implement Electronic Article Surveillance (EAS) systems, AI-based video analytics, RFID tags, and enhanced surveillance systems to track real-time inventory shrinkage. In addition, consider leveraging Exception Based Reporting (EBR) to analyze transactional data to identify both external threats and internal issues, such as employee involvement or organized retail crime (ORC). RFID scanners at exits, combined with POS data, can detect products leaving the store without being paid for. Appriss Secure™ can provide real-time shrink reporting on such occurrences when both RFID scan data and POS data are available. This approach excludes theft occurring outside scanned areas, such as backdoors and products with removed RFID tags. Some retailers are even adopting physical deterrents, like locking up products, although utilizing theft protection technology can sometimes negatively impact customer experience. Therefore, it’s important to balance product protection with sales enablement to ensure both security and a positive shopping experience.
2. Inventory Management Software: Utilize advanced inventory management solutions to track inventory levels, identify unusual patterns, optimize retail inventory, and ensure accurate tracking. Implementing RFID technology can significantly enhance this process by enabling closer to real-time inventory management. RFID often results in the timely identification of shrinkage, as it can detect discrepancies as they occur, rather than waiting for the next inventory count, which typically happens once or twice per year.
3. Comprehensive Employee Training: Training staff to recognize and report suspicious behavior and uphold strong standards to reduce internal theft can be an effective way to maintain inventory accuracy. Additionally, training employees to actively engage with customers discourages potential thieves who prefer less interaction.
4. Conduct Regular Audits: Frequent inventory checks and audits help catch discrepancies early and address issues promptly.
5. Enhance the Store Layout: Design the store layout to maximize visibility and reduce blind spots where theft can occur. This involves a careful balance between Loss Prevention and Marketing/Sales strategies. While Loss Prevention aims to secure high-value or highly desired products by placing them further from exits, Marketing/Sales may prefer these items to be easily accessible and located near exits to drive sales. Achieving the right balance ensures both security and customer convenience.
6. Collaborate with Law Enforcement: Build relationships with local police to stay informed about theft trends and receive assistance when needed, enhancing overall theft prevention efforts. Learn how to prepare and present organized retail crime (ORC) cases to build trust and develop relationships with local, state, and federal agencies.
7. Shrink-Based Performance Bonuses: Be cautious when tying shrink metrics to management performance bonuses, as this can lead to manipulation of inventory numbers through adjustments to secure bonus payouts–instead, link bonuses to the accuracy of inventory entry by conducting audits of inventory adjustment samples. 

Inventory management software to prevent retail shrink 

Appriss Retail understands the importance of effectively tracking inventory shrinkage due to theft. We offer a comprehensive suite of solutions to help retailers prevent loss and maximize profits. Our advanced inventory management software and cutting-edge security solutions enable businesses to protect their inventory and ensure a seamless shopping experience for their customers. Secure Inventory helps retailers optimize store inventory through artificial intelligence and advanced analytics. Using our cutting-edge technology, you can proactively address shrinkage issues, optimize your supply chain, and safeguard your profits.

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