Retail Shrinkage is a serious retail challenge, especially when its causes can’t be accurately determined. Somewhere between 1.5% and 2.5% of revenue can be lost depending on the channel. For the last few years, inventory shrinkage has annually cost U.S. retailers just under $50 billion combined. Worldwide losses are believed to be north of $100 billion. That’s a big bite out of potential profits. Paul Trujillo (@TruPaultx), a Product Marketing Manager at Informatics, reports, “According to the National Retail Federation, there are five main ways for your supply to disappear.”[1] Those ways are:

1. Inaccurate or fraudulent fulfillment. “Sometimes it doesn’t even make it to the store. Roughly seven percent of shrink comes from the vendors in the form of overcharges or undersupply.”

2. Human errors. “Human errors count for another 16 percent.”

3. Shoplifting. “Shoplifting counts for 38 percent of loss.”

4. Employee theft. “Employee theft comes in as the second largest cause at 35 percent.”

5. Unexplained or “act of God” shrinkage. “The remaining four percent don’t fall into any of these categories and are generally chalked up to ‘acts of God’ or left as unsolved mysteries.”

Regardless of how inventory is lost, shrinkage costs retailers a lot of money. To reduce shrinkage, retailers need to have a strategy to address each of the ways inventory can be lost.

Inventory shrinkage strategies

Addressing inventory shrinkage begins with inventory management. Trujillo explains, “Take the plunge and invest in an inventory management system. The savings from reduced shrinkage and more accurate supply orders will quickly make up for the expenditure on the equipment and software. You will be able to maintain a real-time account of what remains in stock with each pulled truck or sale made.” Every retailer knows carrying inventory comes with costs. Too much inventory results in storage costs. TJ McCue (@TJMcCue) reports, “The Supply Chain Digest estimated in 2015 ‘ that U.S. retailers are currently sitting on about $1.43 in inventory for every $1 of sales they make.'”[2] McCue agrees with Trujillo that inventory management is essential. “Let’s cut to the chase,” he writes, “inventory management and control is the key. Without an active inventory process, you do not realize your losses until it is too late.” Below are some strategies that can be used to address the various ways inventory can be lost.

1. Inaccurate or fraudulent fulfillment. Inaccuracy can only be countered with accuracy. That’s exactly why Trujillo and McCue urge retailers to implement an active inventory management system. APQC analysts note, “Thoroughly evaluating shrinkage includes looking at the actions of employees and suppliers to identify fraudulent behavior, as well as badly defined or documented processes that might lead to higher errors or inventory problems at multiple points in the process.”[3]

2. Human errors. A good inventory management system can also help reduce human errors. In addition, a good training program can help ensure employees know how the system works and why inventory tracking is essential to the business. Trujillo adds, “You can point out how shrinkage will diminish your company’s profits and your employees’ paychecks. And you can invest in inventory management software and train your people to use it properly. You can beat the shrinkage.”

3. Shoplifting. As the greatest source of inventory loss, shoplifting obviously must be addressed. Kiera Abbamonte (@kieraabbamonte) writes, “Shoplifters may steal items ranging in price from $1 to $1,000. They may work alone or in a group of thieves. They may strike once or come back every week. Shoplifting can take many forms and it can be a problem for any and every retailer. That’s why it’s vital that you take steps to mitigate the potential for shoplifting in your store.”[4] She recommends three common sense strategies for dealing with shoplifting:

• Conspicuous surveillance and signage: “Don’t underestimate the power of monitoring your store and making it very clear to customers that you are. Surveillance cameras enable you to catch shoplifters before they ever leave the store, and signage reminding customers about cameras and your willingness to prosecute shoplifters can go a long way in deterring that behavior.” Some stores have started using facial recognition software to detect repeat offenders. There is, however, a growing backlash to the use of facial recognition that could affect a retailer’s reputation.
• Deliberate store organization: “Depending on your store’s layout, you might be making it even easier for shoplifters to do their thing. Dark or unmonitored corners and overflowing or disorganized merchandise make it easy for shoplifting to go undetected. … If your store carries expensive or frequently shoplifted items, consider locking them away in a case.”
• Great customer service: “Encourage your staff to greet customers when they enter the store, offer help as they look around, and always staff areas like fitting rooms. Reminding shoppers that there are people around to catch shoplifting is another great way to deter shoplifting behavior.”

4. Employee theft. Trujillo notes, “You never want to believe someone you trusted to work in your business would ever steal from it, but disgruntled personnel could see it as a way to get back at the boss.” Employees don’t even have to be disgruntled — they might even feel entitled to an employee “perk.” Regardless of the reason, employee theft is close behind shoplifting as a cause of inventory loss. Although aggressive measures, like checking employees’ bags as they leave work, can work, they can also reduce employee morale. Abbamonte suggests a few practical ways to curb employee theft and fraud:

• Audit your hiring practices: “Retailers aren’t always known for stringent hiring requirements, but you should take care in deciding who your frontline partners in the loss prevention fight will be. Look for conscientious employees who conduct themselves with integrity.”
• Train employees properly: “Once you have the right team in place, it’s your job to give them the training they need to mitigate errors contribute to losses, identify shoplifting and fraud, and bring down your retail shrinkage rate.”
• Consider your store culture: “When your retail store has a great workplace culture, employees stick around longer and are more invested in your store’s success.” You might even consider offering them steep employee discounts to encourage employees to buy rather than pilfer items.

5. Unexplained or “act of God” shrinkage. Sometimes accidental breakage and true acts of God can’t be prevented. Nevertheless, good training and proper storage can reduce losses. As for unexplained losses, the best way to counter them is to try and find an explanation. To help discover unexplained losses, retailers might consider using cognitive technologies like the Enterra Intelligent Inventory Management System™. By analyzing a variety of data, the system detects and predicts the many different risk-signals and patterns of shrink by item; it attributes the causes and determines the environmental conditions of shrink; and it can estimate the likelihood of an item being in-store but off-shelf. The system can also alert store management to physically verify and correct inventory when shrinkage appears excessive.

Concluding thoughts

When inventory accuracy improves so does on-shelf availability, while reducing out-of-stocks. Additionally, by identifying the patterns and causes of shrinkage, they can be addressed. Better inventory accuracy helps retailers lower the markdown budgets, rapidly identify and resolve in-store issues and improve product inventory. APQC analysts add, “Focusing on minimizing shrinkage as a percentage of revenue can help organizations control costs and improve profit margins. The savings can be significant and impact an organization’s competitive position and success in the market.”

Footnotes
[1] Paul Trujillo, “Beat The Shrink: How Inventory Management Can Help Reduce Shrinkage,” Business 2 Community, 25 April 2017.
[2] TJ McCue, “Inventory Shrink Cost The US Retail Industry $46.8 Billion,” Forbes, 31 January 2019.
[3] APQC, “Metric of the Month: Shrinkage as a Percentage of Revenue,” Supply & Demand Chain Executive, 3 October 2017.
[4] Kiera Abbamonte, “Loss Prevention: 4 Types of Retail Shrinkage and How to Prevent Them,” Shopify, 1 August 2018.