All About Inventory Shrink

Understanding shrink can save your company money.

What is inventory shrink?

Inventory shrink is a reduction in physical inventory caused primarily by shoplifting, employee theft, administrative errors, and vendor fraud.
Inventory shrink can cost more than just profit, as lost inventory can cost your company reputation, allowing theft to continue can cost good employees.

The industry standard for inventory shrink drivers is

40-40-20 principle

It is generally accepted that inventory can be primarily broken up into 3 categories for cost, and it lets you focus on what has the best ROI.
Operational shrink: these can be receiving errors, selling errors, billing errors, all kinds of operational drivers for inventory shrink, this generally accounts for 40% of your total inventory shrink and has a great ROI, because as you identify problems, you can also change practices going forward.
Internal theft: this can be, employees, contractors, vendors or anyone that does business for your company and steals. This is often expected running around 40% of your total shrink, and again has a great ROI, because removing an internal theft not only ends that theft but shows other employees you take the matter seriously.
External theft: this is shoplifting, break & entering, robbery. This accounts for around 20% of your total shrink and has a low ROI, especially when battled in a reactionary manner.

Stopping Operational Shrink

The first step in identifying where you have an inventory shrink issue. Doing so requires certain steps:
  • audit inventory purchasing
  • audit inventory receiving procedures
  • audit internal inventory tracking
  • audit inventory sales processes
These are not simple audits, they involve examining each process on a long-term basis, not just one random audit, but spend a week reviewing how you do each process, how you can tweak them, break each process down to it's root and restructuring.
This can be a time consuming process and is often times accomplished by an independent third party for a small company, because of the time involved. You can contact me at Kevin Ian to get a consultant on how best to handle this for your business.

Stopping Internal Shrink

Internal theft can harm you company, and also be viewed as a personal attack, as it is often done by someone you, as a small business owner trust.
The first step to combating internal theft, is a good on-boarding process, one where you discuss internal theft, teach your employees about the damage of internal theft, explain how your company combats it.
A solid strategy of combating internal theft is to conduct in-depth background investigations of employees you hire, plenty of services can help you in this endeavor.
You should also routinely have an internal theft audit conducted, where you review the processes and procedures employees do, to identify potential theft dangers.
The final way to combat internal theft is to conduct and open or closed investigation:
open investigation- you suspect internal theft, but do not know how, who, or potentially in what form it is occurring. A skilled investigation is needed for this process, not just because it is so in-depth, but because of the potential liabilities of an improperly handled investigation.
You can contact me for a consultation if you are interested in possibly having an internal investigation conducted, or to help setup your internal theft prevention program.

Handling External Shrink

Notice I did not say "stopping" like I did for operational and internal, because you have only a little control over external theft, unlike operational and internal shrink drivers. This is because even if hard targets like banks get robbed, then any place is vulnerable.
So, what can you do? Know the threats that your business realistically face. Is it robbery, is it break-ins, is it counter-intelligence efforts? Have a threat/risk assessment conducted for your company, it will show you where best to use your resources to combat the threats your company faces.
Once you have identified the threats your company faces, you need to go about addressing the controls you will put into place. Common methods of combating external shrink include:
Security Guards
Access Controls
Shelf limiting
Communications Encryption

There are many more controls you can put into place, and you should only invest in the ones that will best address your companies real threats.

If you need a risk assessment, or want to schedule a consultation for your company, please feel free to contact me.