Shrinkage in Retail is the loss of Inventory that can be attributed to few factors such as administrative errors, vendor errors, damage, expiry, cashier errors and others. Inventory shrinkage is a key problem for retailers, as it results in the loss of inventory, ultimately affecting the overall retail business profits and loss.

Global Statistics (Survey from Forbes): Average shrink in FY2018 survey was 1.38% of sales which is up from FY2017, but down from 1.44% in FY2016.

National Retail Security Survey: The annual National Retail Security Survey, now in its 29th year, is an annual survey among retail loss prevention professionals, covering inventory shrink, employee integrity, external retail crime and more. This report serves the retail and solution provider communities, our law enforcement partners, and helps informs policymakers and the media as well. The years of relative stability, the shrink rate jumped to an all-time high in FY 2019. Roughly seven in 10 reported a shrink rate of 1% or higher, compared with slightly more than half in FY 2018. Almost twice as many reported shrink rates of 3% or higher.

Key findings:

• The impact of inventory shrinkage on the retail industry continues to be sizeable.
• There’s an increased focus on issues such as organized retail crime and cybercrime.
• 2020 will see investments in LP teams and technology tools to fight crime.

The average shrink rate was 1.44 % globally, but most retailers reported a shrink of 2 % or higher. Shrinkage normally is higher in volume retail (Eg. Food Retail) than in value segment (Eg. Electronics). Eg. Supermarket faces more inventory shrinkage in operational issues due to lack of training to staff, inadequate processes in store operations, inventory accounting etc.,

Majorly two types of inventory shrinkages are common in retail

1. Known shrinkage: The inventory that can be identified, quantified, and explained at the time the loss occurs. Known loss includes damage, distress, out of date or beyond sell by date, breakage, perishables not sold, customer returns, etc.
2. Un-Known Shrinkage: The losses discovered during reconciliation between physical Vs Book Inventory

Typical steps to control inventory shrinkage

Retailers are following various measures to control the shrinkage by having rigid inventory management systems and standard operational process in place. Also making the continuous monitoring to ensure losses are under control. There are few measures and process given below

• Implementing thoughtful Layouts in Stores and Warehouses
• Installing Surveillance, Anti-Theft Signage, Anti-Shoplifting devices like security tags
• Having intelligent policy on Returns, Exchanges, Damages, Expiry, Vendor returns, Wastage and production accounting.
• Continuously monitoring and Improving the receiving and stocking process
• Having end to end inventory transaction system for tracking
• Updating standard operating process in store operations
• Periodical Checks, verifications, adjustments by doing stock audits with internal and external agencies
• Regular monitoring, tracking and corrective actions on known shrinkage like expiry, damaged etc.,
• Improving and auditing Hiring Process, Training practices
• Building healthy culture of integrity and teamwork starting from Top to Bottom
• Reduce Temptation – store valuable items in secure areas that require higher authorization levels for access
• Separation of Duties – do not have the same person processing the receipts be responsible for recording them as well
• Barcode labels for end to end accurate inventory tracking
• Stacking FIFO display method to avoid expiry
• Inventory Valuation based on relevant method like Weighted average cost, Batch price

Summary

Inventory shrinkage is a challenge, that will never go away completely, but can be reduced to a minimum to avoid compromising the profitability, and it starts by implementing a solid inventory tracking method.

Shrinkage can be a bad thing for the retail industry, eating retail profits unnecessarily and creating more work for employees. Better inventory tracking can help to control this and maximize profitability.

Contributed By : Madhivanan S