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Mar 21, 2024
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What is Inventory Shrinkage?

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Managing inventory is an essential part of business for distribution centers, manufacturing plants and retail outlets. Some challenges include cash flow management, storage, handling costs, and demand forecasting. Inventory shrinkage happens when products are lost between the manufacturer or supplier and the seller. Theft and damage are two of the reasons behind it.   What Exactly is

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Business * Managing inventory is an essential part of business for distribution centers, manufacturing plants and retail outlets. Some challenges include cash flow management, storage, handling costs, and demand forecasting. Inventory shrinkage happens when products are lost between the manufacturer or supplier and the seller. Theft and damage are two of the reasons behind it.  

What Exactly is Inventory Shrinkage?Inventory shrinkage is the difference between what’s recorded in the inventory and what’s there. Other contributing factors include administrative errors like incorrect data entry, perishable goods that get spoiled and suppliers who invoice for more products than they deliver.

Causes of Inventory ShrinkageEmployees stealing is one of the significant causes behind inventory shrinking. They take products to use personally or manipulate inventory records. Shoplifting and robbery are other ways inventory gets stolen. There’s both internal and external theft to deal with.

Employee TheftEmployee theft is a big problem. It covers various activities, from misappropriating funds to stealing products off a shelf. There are also intangible assets that can get stolen, like intellectual property, trade secrets and confidential information.

External Theft (Burglaries or Shoplifting)Shoplifters, burglars and other external parties often lead to inventory shrinkage through theft. Shoplifters use a variety of tools, like devices that deactivate security tags. Burglars can cause significant damage during break-ins.

Proactive measures include:

Advanced security systems like CCTV cameras. Locked cabinets and secured display cases. Vigilant employees who maintain a presence on the sales floor.The National Retail Federation’s National Retail Security Survey 2023 reports a bump in the shrink rate ( from src.4% in 202src to src.6% in 2022). That spells USD srcsrc2.src billion in losses for retailers.

Vendor FraudVendors can contribute to inventory shrinkage through unethical practices like billing for undelivered goods and overcharging. Small businesses should conduct regular audits and thoroughly vet all of their suppliers.

Supplier FraudSubstandard and counterfeit products can contribute to this problem. Supplier agreements that outline recourses for non-compliance and quality expectations are necessary. Regularly auditing your suppliers also helps.

Administrative ErrorsA mistake made in record keeping and stock management can be two culprits. For example, a warehouse employee who records higher quality items than are received can inflate recorded inventory. That leads to perceived inventory shrinkage since the recorded items were never in stock.

Accounting ErrorsInaccurate accounting can affect inventory levels. Under recording inventory purchases can show lower inventory levels than existing ones. That can result in what looks like significant inventory shrinkage.

How to Calculate Inventory ShrinkageCalculating inventory shrinkage is as easy as using a simple formula.

(Recorded Inventory Value?Actual Inventory Value)/Recorded Inventory Value×src00% Here’s an example of how that works. An inventory was

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