Cycle counting refers to the practice of counting a small amount of your inventory on an ongoing basis. You might do a weekly count of 10 different SKUs, for example, or you might pick 20 particular SKUs to count weekly for a month to monitor stock level changes for those products. In 2020, the retail industry’s average shrink rate rose to all-time high recently, after years of holding steady. Some dishonest vendors can steal from you by not delivering a full order, though this is, by far, not the way the majority act.
The goal is to always be on top of your inventory reconciliation to catch shrinkage as it happens. If you have inventory that’s at particular risk for theft, such as batteries or low-cost accessories, consider focusing multiple cycle counts in a row on those SKUs. Theft, fraudulent returns and neglecting to scan items for friends and family lead to mismatches in your inventory levels and can add up to big losses for your business. According to a study from the National Retail Foundation, retail businesses lost $62 billion from “shrink” in 2019, amounting to an average of 1.6% of sales. Shrinkage is the difference between the recorded (book) inventory and the actual (physical) inventory.
- Book inventory uses the dollar value to track the exact amount of inventory that should be on hand for a retailer.
- To determine the shrinkage rate, divide the total shrinkage by the total recorded inventory amount.
- The fashion industry is a master at this—just think about those ink-blot tags many stores use, making it difficult to make use of stolen goods without ruining them.
- Those 598 cases of wine are loaded onto a truck, driven to the wholesaler’s warehouse, and unloaded.
Vendor theft is not a very large contributor to shrinkage, and many retailers will not fall prey to it. Limiting shrinkage is a vital part of inventory control, and it all comes down to being better organized as a business. Here’s what inventory shrinkage refers to and how to get it under control. Consider shopping around for commercial-grade security systems If you own a large retailer. Businesses experiencing a particularly high theft rate can also hire a team of security guards to patrol parking lots and entrances. Instruct employees on best practices to avoid spoilage, such as stocking new products behind those with upcoming expiration dates.
Shrinkage at the Vendor
And from a manufacturer or vendor perspective think loading the wrong cases onto the pallet or commingling different products in storage. Waste and spoilage have far a greater category:computer file systems wikipedia impact on the food service industry and retail food sellers. When dealing with products that last a matter of days, spoilage can be a significant cause of retail shrinkage.
The recipient therefore records the invoice for the full cost of the goods, but records fewer units in stock; the difference is shrinkage. If you’re not keeping an eye on your inventory levels, you’re vulnerable to being blindsided by shrinkage rates that you never even knew were a problem. However, full physical inventory counts are prohibitively time consuming—there’s a reason most retailers only count their entire stock once or twice a year. The NRSS reports that in 2018, the average inventory shrinkage rate was 1.38% across all retail sectors.
Shrinkage is the loss of inventory that can be attributed to factors such as employee theft, shoplifting, administrative error, vendor fraud, damage, and cashier error. Shrinkage is the difference between recorded inventory on a company’s balance sheet and its actual inventory. This concept is a key problem for retailers, as it results in the loss of inventory, which ultimately means loss of profits. Shrinkage is the loss of inventory or cash from a business due to factors such as theft, damage, or administrative errors.
Double-check systemsImprove your inventory accuracy by implementing daily or weekly stock checks and receiving counts. Ensure that your team alternates counting duties to deter mistakes or even dishonest employees from reporting false inventory records. Double-checking ensures that two workers conduct inventory counts simultaneously, then compare numbers to guarantee accurate results. Your company can proactively reduce missing inventory by installing security cameras in critical areas to double checking during inventory counts. On the other hand, a steady and elevated shrink rate could indicate internal or external theft. Therefore, it’s worth revisiting your stock check/receiving processes, employee screening procedures, and overall security measures.
Restrict access to certain parts of the warehouse to only those employees who need it, making it easier to narrow down the suspects if you do have an issue. Before hiring employees, a company should vet potential employees and do a background check to weed out those with a history of stealing inventory. The company should contact the references and past employers to know the behavior and general conduct of a prospective employee.
Administrative and Paperwork Errors
Price tag swapping also falls into this category, where a shoplifter pays less than what an item is worth because a different item’s SKU is recorded in the sale. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. If you’re losing track of inventory, it may be nothing nefarious at all — just employees who aren’t properly trained. Meet with employees responsible for tracking inventory and review the processes they follow. If you find they have knowledge gaps, institute a training program. Acquiring or upgrading video security systems will also be a great help—especially in cases when fixing ink or magnetic tags to items isn’t reasonable.
Lightspeed is a cloud-based commerce platform powering small and medium-sized businesses in over 100 countries around the world. Alternatively, or in addition to the tags, you could lock particularly valuable inventory behind glass cases. This ensures employees need to speak to customers before they can touch these items, which both deters theft and gives employees a chance to upsell to customers. They should https://www.quick-bookkeeping.net/gross-pay-vs-net-pay-whats-the-difference/ never put themselves in harm’s way, but greeting every customer and making it clear employees are alert can discourage potential shoplifters. Unless you find a way to completely eliminate accidental damage, you’ll always have some inventory shrinkage over the course of your business’s lifetime. The more employees you have, the more potential for employee theft — and the harder it is to identify the culprit.
Employee theft
Every time product is acquired or sold, your inventory updates in real time. A better way to look at acceptable levels of retail inventory shrinkage is the median 2018 reported shrinkage. The median is the point in which half the numbers are above it and half below. Of note, what’s known as “POS exceptions” contribute to internal theft and are especially relevant to the hospitality industry. Because POS systems are so integrated into the sales of a bar or restaurant, employees have the ability to use them subtly and to their own benefit. That means ringing in obsolete prices, applying discounts, or otherwise being creative with how things are rung in.
Inventory shrinkage management: how to control inventory shrinkage
Explore a mentorship program if you have both experienced inventory workers and newer unskilled staff members. The latter can learn from their more experienced colleagues how to properly track and inventory items to reduce mistakes. Large airlines can’t afford to have even one crash, yet they make thousands of flights each day. They follow a rigorous safety process that involves many employees checking and double-checking to make sure basic tasks are done. If one employee makes a mistake, plenty more follow up behind to catch it and make sure, for example, that a part was replaced at a certain milestone.
When the recorded asset total on a company’s balance sheet is reduced, the amount of the reduction is charged to expense through the firm’s income statement. In effect, this means that any reduction in inventory caused by shrinkage is a direct reduction in the reported level of profitability. The situation is actually worse than that, since the business can no longer sell the inventory and earn a profit on the sale. Shoplifting occurs when a customer exits a store with more than what they paid for at the cashier. Shoplifting accounts for 38% of inventory shrinkage, and it surpassed employee theft as the leading cause of shrinkage in the 2016 National Retail Security Survey.
Those 598 cases of wine are loaded onto a truck, driven to the wholesaler’s warehouse, and unloaded. The wholesaler stocks it, scans it, inventories it, sells it, and ships it to hundreds of individual retailers. It’s actually right around average and speaks to an industry-standard amount of shrinkage control. Even a moderate amount of shrinkage can have a big impact on your business, which is why it’s important to get your shrinkage rates as low as possible.
ACME Inc.’s accounting records show $1,500,000 in inventory. After doing a physical inventory count, the company determines it has $1,470,000 in inventory on hand; therefore, the inventory shrank by $30,000. To determine the shrinkage rate, divide the total shrinkage by the total recorded inventory amount. ABC International has $1,000,000 of inventory listed in its accounting records.