The company can have 50 units of the same footwear SKU, and each one can be owned by a different consignor with a different selling price. Additionally, these shoes can cost anywhere from $50 to $15,000 for a single pair. If Stadium Goods loses the inventory, it’s accountable and has to pay the marketplaces for that product. In total, it has 500,000 individual pairs of sneakers at its third-party logistics (3PL) partner, Barrett Distribution Centers. Or warehouse shrinkage can occur when inventory is logged in at the receiving dock but isn’t found on the shelves.

• At point of sale, stores can experience retail shrinkage from breakage and shoplifting.
• According to the National Retail Federation’s 2022 Retail Security Survey, shoplifting (of all kinds) is the biggest source of shrink.
• It also eliminated manual counts and physical inventory (PI), saving over $200,000.
• Shrink is the industry term for inventory loss often attributed to theft, damage, or errors.
• Those 598 cases of wine are loaded onto a truck, driven to the wholesaler’s warehouse, and unloaded.

Remember how much you pay for automated lifts, plus insurance and maintenance? Companies across the US are reporting this process is up to 15 times faster than manual cycle counting with perfect recall and traceability. While the focus in the media has been on shoplifting, shrinkage in the warehouse has also been an issue. I’d like to focus on misplaced inventory in warehouses and discuss how you can combat shrinkage by evolving your logistics and storage practices.

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While training time may seem unproductive, it will improve your bottom line if it reduces your shrinkage rate. Fortunately, business owners don’t have to be held hostage to shrinkage. Here are ways to prevent inventory shrinkage in your own warehouse. If you outsource your fulfillment, make sure your fulfillment company has implemented these and other measures to reduce warehouse shrinkage. For example, let’s say the products in the example above cost $10 each to manufacture and ship to your eCommerce fulfillment warehouse.

By leveraging new, proven technologies, you can save yourself and your company time, money and lost product. The U.S. Department of Commerce data shows ecommerce sales have been growing steadily for over a decade, with significant growth in the past three years. Distribution centers (DCs) now need to be able to provide supplies directly to stores but also shift to direct-to-consumer (DTC) for online purchases. The number of transactions and movements have gone up dramatically, because DCs are expected to manage both. This means retail distribution needs to operate as efficiently as possible, as teams are trying to do more with less resources. And if they’re doing this manually, with high employee turnover, the room for error is high.

Frequently Asked Questions About Inventory Shrinkage

Give workers the tools they need to expedite the payment process and create line item records for every item sold through point of sale (POS) system software. Divide your inventory shrinkage value by the total value of your recorded inventory, then multiply by 100. Inventory shrinkage can take place when items, such as expired produce, are naturally no longer sellable. Shoplifting and other forms of nonemployee theft account for the most significant amount of retail inventory shrink. You can use our shrinkage calculator below to determine the shrinkage your business is experiencing. And continue reading to learn how to calculate shrink by hand, review the causes and impacts of retail shrink, and explore ways that you can prevent loss in the future.

Reducing inventory shrinkage has a direct impact on a brand’s bottom line because fewer products are going missing and can be sold. A key way to prevent inventory shrinkage is to improve inventory tracking and accuracy. Counting inventory often — using software that counts inventory in real life rather than a manually updated Excel spreadsheet — can help identify shrinkage before it becomes a large problem. Doing this on a regular basis in a pattern can cut down on the time it takes. A large amount of inventory shrinkage can also impact how lean a business can be with inventory levels. Having an accurate view of inventory items helps brands reorder at the right time to not have to pay to store excess products but avoid stockouts.

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This is especially negative in retail environments, where businesses operate on low margins and high volumes, meaning that retailers have to sell a large amount of product to make a profit. For example, if a retailer accepts $1 million of product, then the inventory account increases by $1 million. Every time an item is sold, the inventory account is reduced by the cost of the product, and revenue is recorded for the amount of the sale. In businesses with complex supply chains, the inventory may at one point be handled by third parties who are not part of the company.

How to Calculate

The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. Inventory shrinkage implies the difference between the value of inventory available and of inventory bought. Inventory is the goods that a business source or produces with a vision to sell in the market.

Consider the strategies below for preventing shrink due to shoplifting, employee theft, and clerical errors. Stock control and clerical errors are other common causes of retail shrink. Some errors might be as simple as miscounts and do not reflect physical losses. Others can be costly, such as net realizable value formula recording all of the goods in a supplier shipment as “received in full” when some items were actually missing from the shipment. It may be impossible to reduce inventory shrinkage completely, but with careful accounting records, honesty, and security measures, you can limit waste and theft.

What Is Shrinkage in Inventory?

Sometimes, inventory may disappear off the shelves and cannot be matched to any of the other causes of inventory shrinkage. Unknown causes represent about six percent of the total inventory shrinkage. Retail executives are signaling a crisis in shrink and investors are taking note. Despite recognition of the growing problem, retailers, in many cases, are struggling to devise a comprehensive approach to regain control over the current situation. The lack of a clear strategy to combat escalating shrink, or even a demonstrated confidence in understanding its root causes, suggests that shrink losses will remain at heightened levels. What’s more problematic, the trend of shrink appears to be far from reversing course, with losses more than doubling over the past five years.