Dealing with Inventory Shrink

Stephen DeAngelis

August 16, 2017

Inventory shrink remains a problem for every retailer. How big of a problem? A year ago Joel Griffin (@SecInfoWatch) reported, “For the second consecutive year, loss prevention executives report that retail shrink levels remain at historically low levels. According to the 2016 National Retail Security Survey … conducted by the University of Florida in partnership with the National Retail Federation, inventory shrink as a percentage of retail sales actually remained the same as the year before. At 1.38 percent, they are the two lowest shrink percentages recorded in the survey’s 25-year history.”[1] Although that is great news, the monetary cost of inventory shrink continues to rise. According to the National Retail Federation, losses from shrink increased from $44 billion in 2014 to $45.2 billion in 2015 to $48.9B in 2016.[2] The latest figure increases the inventory shrink percentage from 1.38% to 1.44% of sales.

Causes of Inventory Shrink

Concerning the NRF/UF report, Daphne Howland (@daphnehowland) reports, “Shrink was divided into shoplifting and organized retail crime (36.5%), employee theft/internal (30%), administrative paperwork error (21.3%) and vendor fraud or error (5.4%).”[3] She continues:

“Shoplifting accounted for the greatest losses hitting retailers last year, with an average loss of $798.48 per incident, up from $377 in the prior year. Employee theft is also growing at a rapid clip — rising on average by $689.03 per incident from 2015 to 2016. Overall, however, the study found that the average cost of retail robberies is dropping — falling to $5,309.72 from $8,170.17 in 2015, but that number is still more than double the average cost seen in 2014.”

Paul Trujillo (@TruPaultx), a Product Marketing Manager at Informatics, delves a little deeper into the causes of inventory shrink.[4] He writes:

  • Unknown causes. We should get this one out of the way first: Apparently 6 percent of inventory shrinkage is due to unknown causes. There’s really nothing you can do here. Things just slip through the cracks sometimes. Chalk it up to the cost of doing business and move on, rather than wrack your brain and make yourself crazy over chasing a few percentage points. There are bigger fish to fry.”
  • Shoplifting. “A whopping 38 percent of inventory shrinkage comes from customers stealing the inventory. This is the classic, almost stereotypical reason retailers lose their inventory, and likely the reason that sprang to mind first. Even in a world of increased security by means of more cameras, digital tags, and more precautions, it’s still possible for people to walk out of the store with more than what they paid for.”
  • Employee theft. “The second most common cause is employee theft, at 34.5 percent. There are lots of reasons why an employee might steal from you. They might just be dishonest people. They might feel undervalued, underpaid, and underappreciated, and consider taking some of the business’ inventory as a way to recoup their losses. They might feel that a piece of the inventory pie is their right as an employee. Either way, for many years it’s been pretty easy to cover up theft of inventory as an employee. If one product out of many hundreds or thousands or tens of thousands go missing in the rush to get everything out to customers, what employer would take the time to track it down? Better to assume it went missing through common error and focus instead on the rest of the not-missing inventory. It’s that attitude that hurts business owners who don’t know how to respectfully (you can’t go around suspicious of all your employees), and effectively, battle the spectre of employee theft.”
  • Paperwork error. “Though business is increasingly done not through paper but digitally, administrative and paperwork errors are cited as the source of 16.5 percent of shrinkage. This can be as simple as a misplaced decimal point or extra zero, pricing mistakes that lead to markups or markdowns, or accidental reorders that leave businesses with excess inventory that can add up over time.”
  • Vendor fraud. “It’s one thing to be diligent about your own employees and try to hire only honest, hardworking people who understand not to steal from their employer. But if you’re in a business that involves a sophisticated supply chain, your inventory is going to at some point be under the jurisdiction of a third-party vendor. As a result, about 7 percent of inventory shrink comes as a result of vendor fraud.”

Of course it’s not just retailers who suffer when inventory shrink occurs. Richard Hollinger, a veteran University of Florida criminology professor and the lead author of the report, states, “When criminals steal from retailers, consumers pay higher prices, the safety of innocent employees can be compromised and shoppers looking for popular merchandise often cannot find it. Retailers need to continue to invest in new technologies to prevent and prosecute these crimes.”[5]

What Can Be Done?

Trujillo recommends, at the very least, every company should invest in an automated inventory management system. He explains, “You might think in this digital age that everything is done with software — but amazingly, 43 percent of small businesses polled in the Wasp State of Small Business Report say they don’t track their inventory at all or use a manual process to do so.” He continues:

“Inventory management software holds everyone — even employees you trust — accountable. It takes the possibility of keystroke error out of the hands of even your most reliable accounts, who are bound to make mistakes because that’s just human nature. It helps you track the location of your inventory from its point of origin to the point of sale, (if employees are outfitted with barcode scanners or mobile computers, each step can be logged and accounted for). And it can help you ‘pull’ rather than ‘push’ inventory to meet surging (or flagging) demand, so you only reorder inventory when necessary and don’t find yourself overloaded with carrying costs that can only be partially offset with discounts.”

Analysts from Contalog assert, “The first step to combating inventory shrinkage is identifying the root cause.”[6] Sometimes even unknown causes of shrinkage can be identified with the right system. For example, the Enterra® Intelligent Inventory Management System™ (IIMS) uses Inventory Risk Signals (IRS) to help identify sources of shrink. An IRS is some physical event that could distort inventory integrity. For example, if a weather data trigger detects that it rained at a particular store’s location, it would initiate the IRS “inventory may have been left outside that could be damaged by rain.” Contalog analysts suggest a few other things companies can do to reduce inventory shrink. They are:

  • Conduct Employee training and increase awareness. “If you can plug the leak internally, you can save a vast majority of your stocks from vanishing. This requires training and making employees aware of the collective loss that each of their individual pilferage actions is causing.”
  • Rotate control duties between employees. “One staff can enter stock receipts, while another ensures physical accuracy, while a third person handles stock issues. A supervisor can ensure that all the three functions are carried on with accuracy with the help of an inventory management system.”
  • Secure your premises. Make sure you can answer three questions. “Is it difficult for stocks to get in and out your store premises? Are the stock movements always monitored? Do you have a system to know when somebody is checking out without billing?”
  • Set up in-store surveillance. “An in-store surveillance consisting of CCTV cams, wired tags, sensormatic tags, etc. can ramp up security for stocks. Camera surveillance will help point fingers at dishonest employees who steal stocks. Wired tags and sensormatic tags will discourage customers to shoplift.”
  • Automate inventory management. “Standardizing your inventory management using a software will augment inventory tracking and help crack down on fraudulent activities. Furthermore, it will also minimize the extent of administrative errors that are prone to happen in a manual inventory management process.”

Summary

Most retailers try to protect themselves from inventory shrink; but, the figures show that more needs to be done. Trujillo notes, “There are a number of reasons why one in every five small businesses fails to survive their first year, and half of them fail within five years, and inventory shrinkage is certainly one of them.” Sometimes a few simple steps can help. In other cases, a company many need to leverage advanced cognitive computing capabilities to help identify and address the problem.

Footnotes
[1] Joel Griffin, “Retail shrink rates remain at historically low levels, survey finds,” SecurityInfoWatch.com, 17 June 2016.
[2] Daphne Howland, “NRF: Inventory shrink cost the industry $48.9B in 2016,” Retail Dive, 26 June 2017.
[3] Ibid.
[4] Paul Trujillo, “Top Reasons for Inventory Shrinkage,” Business2Community, 24 July 2017.
[5] Howland, op. cit.
[6] Meena, “How to Reduce Inventory Shrinkage in a Pacy Business Environment,” Contalog, 24 January 2017.