Inventory shrinkage occurs when a vendor has fewer products in stock than they have in inventory. This difference can occur for several reasons, including theft, damage or clerical error.
Though similar, inventory shrinkage is different from inventory loss, which occurs when a product is not sold after it goes up for sale. Inventory loss can include inventory shrinkage causes like theft, but also includes outdated products and spoiled inventory.
On average, American retailers lose roughly 1.33% of sales each year due to inventory shrinkage. Typically, manufacturing companies plan for 2 - 3% during a calendar year, though exact rates vary by organization.
Anything more than 3% can represent more than a simple miscalculation, or the occasional faulty product. High inventory shrinkage rates can indicate the presence of retail crime, or potential issues in the product transportation process between a warehouse and storefront.
While many manufacturers anticipate inventory shrinkage in sales forecasts, all companies must take steps to reduce it.
In certain cases, inventory shrinkage can occur simply because products are mislabeled. In a busy warehouse, products are constantly moved, cataloged and prepared for sale. Even though it might require a little extra time, clear labeling can help mitigate concerns down the road.
If your warehouse has multiple employees labeling products at the same time, make sure each employee uses the same language, abbreviations and dates on all labels. Consistency is critical and will make it easier to read and process labels when it comes time to stock shelves or transport inventory to another location.
Clear labeling also helps to ensure compliance with property storage and safety regulations. If you’re processing products with sensitive materials, pending expiration dates, or other pertinent information, make sure to include those details in all labels. You might even include common workplace safety signs and symbols on your labels, to make other warehouse employees aware of potential hazards inside of individual containers.
Labeling is time consuming, particularly if your warehouse processes thousands of items every day. To expedite the labeling process, consider equipping warehouse employees with portable label printers. Industrial label printers work well when cataloging larger items.
If you’re labeling cables, tubing or other smaller items, use a heat shrink label printer. To keep track of even smaller wires, use cable-specific heat shrink labels to help indicate the function and connectivity of all equipment. This can ensure nothing important gets disconnected by accident.
Most successful warehouses have at least one thing in common — they all operate with a defined inventory process. Inventory management is a complicated practice, and requires you to document all items that have been ordered, stored and shipped to individual retailers.
Some warehouses can operate without the need for any digital inventory processing tools. For example, if your warehouse only houses a single product line, or products for a single retailer, you may have enough time to track inventory updates manually.
Larger warehouses often rely on digital solutions to assist in inventory processing. From the moment a product arrives at your warehouse to the moment it departs, inventory management software can help you track its every move. Some inventory processing tools are also used by retailers to keep track of sales, product returns and restock orders.
No matter how you process your inventory, here are a few inventory management tips to keep in mind:
It’s also important to communicate your strategies to all warehouse team members. Make sure everyone understands the importance of a streamlined inventory process. Whenever you introduce a new step in your inventory management process, take time to familiarize all of your employees with the new process.
If you don’t keep warehouse employees up to date on inventory process, you could be setting yourself up for some inventory shrinkage.
You can make the inventory management process easier by assigning each product a unique identifier. Whether you label your products with serial numbers, Global Trade Item Numbers (GTINs) or bar codes, unique identifiers help you tell similar products and equipment apart.
Unique product identifiers fulfill another purpose: they help product manufacturers track products after a sale. For example, if your store sells products on behalf of another manufacturer, that manufacturer can track inventory through its identifier.
Uniquely identified products are easier to track. This ability alone helps you limit inventory shrinkage and identify products that might be broken, or stolen, more than others.
Successful inventory management is often predicated on speed and accuracy. To successfully receive, catalog, manage and ship products, you’ll need to record every product movement. This process alone can overwhelm a single inventory manager, or managers, depending on the size of your warehouse.
To expedite inventory management and focus your attention on higher-level concerns, consider automating your inventory management process.
Inventory automation is one of the modern technologies that can improve warehouse efficiency. Inventory automation tools perform tasks automatically without any human input. For example, your inventory management automation program might catalog new warehouse arrivals or notify you when a shipment is late.
Some inventory automation platforms can also help you assess sales data to inform more successful operations. For example, the software might identify a recent uptick in the popularity of a particular product, helping you increase restock frequencies before you sell out. Automation platforms might also identify products frequently purchased together, or the items with the lowest margins.
Automated inventory management solutions allow you to track products and identify expiring inventory — all of which help you limit inventory shrinkage.
Human errors can sometimes play a large role in inventory shrinkage. Whether employees are misplacing products or mislabeling inventory, communication breakdowns often result in inventory shrinkage that can be prevented.
To combat human-led inventory shrinkage, make sure your employees receive training on any new processes. Take time to frequently review inventory logs, and discuss any discrepancies with employees.
Make sure employees are aware of any upcoming training sessions. Familiarize them with the processes to be reviewed, and inform them of all the skills they’ll learn by training’s end. Follow up with employees in the weeks or months after training to ensure that the new processes have taken hold.
Warehouses are sometimes hesitant to offer employee training because it takes employees away from their daily tasks. Still, paying for employee training today is much less expensive than paying for inventory shrinkage through the rest of the year.