inventory shrinkageHow bad is your inventory shrinkage?  If it is greater than 0.46% it is time to take action.  According to a study from theWarehousing Education and Research Council the median metric for shrinkage is 0.2% while best in class is less than 0.005% based on a percent of total inventory.

One of the biggest supply chain concerns is inventory shrinkage.  There is a direct impact to business bottom line profitability and shrinkage can be symptomatic of other issues such as employee productivity or broken processes.

Most managers are aware of the primary causes of inventory shrinkage.  Theft is typically a small fraction of the causes, while issues such as breakage, spoilage of perishables, data errors and process problems can cause the majority of shrinkage problems.

There are quite a few methods that can help to address inventory shrinkage.  Some are fairly well known while others may not be as recognized.  When taking a look at your inventory related issues, consider the following:

RFID – this solution has been around for quite some time.  A radio frequency identifier tag is inserted onto valuable inventory items and tracked to confirm their location.  Retail environments utilize this solution quite often, and it can be found throughout the electronics, video game and computer industries among others. Depending on your product, RFID costs can be offset from losses in inventory.

Improved analytics – your data can be your worst victim for shrinkage issues.  From the order and shipping processes to receiving and cycle counting, there could be errors causing shrinkage issues.  New analytics capabilities can evaluate transactions at both the macro and micro levels.  This shows managers potential issues based on error rates by supplier, product type, specific warehouse or specific employee. Problems can then be isolated and resolve in a much shorter timeline.

Inventory backflush processes can conceal errors that are not as easily detected.  Carefully consider how and when to apply backflush practices, and know when it is best to utilize more traditional methods for managing small components, fluids and other bills of materials items.

New product introductions can sneak in at the very beginning and become a shrinkage issue before the product is even fully introduced.  Consider evaluating new products with higher first transaction scrutiny in order to avoid future problems.

Product data such as unit of measure oversights can cause substantial problems – make sure your product information is accurate and have triggers in place for items where unit of measure could be a problem such as blister packs, rolls, and other items.  Review items such as expiration dates for perishables, bulk pack and other package quantities to confirm the right amounts travel throughout the supply chain.

Security cameras – While this is the most obvious it is also the most effective for theft.  These can also be used to review processes and find issues where stock counts are incorrect or items are not stocked correctly.

Your business profits can go down the drain due to inventory shrinkage.  With the right tools and analytics in place your business can recover quickly.  For a comprehensive review of your inventory management systems and processes, contact TMG for a supply chain inventory assessment.

7 Responses to Inventory Shrinkage – Even the Best Don’t Do All of These
  1. Comprehensive and insightful covering
    all the factors that I am aware of regarding shrinkage.
    Thank you,
    Marc Mintz

  2. Nice summary. Just a couple of comments/questions please:
    1. Does “shrinkage” reduce when FIFO accounting is the rule? I would think that should help rotation and shelf-life (measured from the consumer perspective).
    2. Is the shrinkage percentage measured as a % of total inventory value or by units according to SKU’s? Or should it be both?
    Thanks,
    Nick

  3. Hi Nick,

    Good questions….

    1. Does “shrinkage” reduce when FIFO accounting is the rule? I would think that should help rotation and shelf-life (measured from the consumer perspective). Most industry experts absolutely agree that utilizing FIFO is a best practice to help in addressing shrinkage issues. Very good point!

    2. Is the shrinkage percentage measured as a % of total inventory value or by units according to SKU’s? Or should it be both?

    In the Warehousing Education and Research Council statistics shrinkage was measured as a percentage of total inventory value. Some businesses elect to do other types of measures, but from an accounting perspective using a percent of total inventory value is the most common.

    Don

  4. Good info but I realize this is allot of different industries. I am in the beverage industry (Beer and soft drinks) and would be interest in the shrinkage to inventory and % of sales.

    Thanks

  5. I used to work in the licensed catering industry and we found tremendous variation from site to site. Our strategy was to watch for increases and investigate. Most often, we caught instances of greed leading to greater than normal shrinkage.

  6. What year was this study done?

  7. Hey, thanks for the forum post. Fantastic. Tintinger


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