How to reduce stock and inventory shrinkage

< back to all business news articles

24/07/2018

There's a difference between stock that's been gathering dust on your shelves for ages and isn't likely to ever be sold, and stock that you've lost due to damage, theft or mismanagement. The latter is known as inventory shrinkage, and it's not good for any business's bottom line.

Impact on sales and profits

Loss of inventory - when what's in the storeroom is less than what's in the computer – is an immediate detriment on a business's bottom line. The three main reasons this happens are down to damage, mismanagement and theft.

Inventory shrinkage also means misleading results if you’re measuring the number of times inventory is sold or used over any given time period (also known as 'inventory turnover').

The good news is that inventory shrinkage doesn't have to impact on your business. We've got some tips that will help you put processes in place to reduce it.

Use a checking system

You’ve probably heard the term ‘peer review’ – when colleagues double check each other’s work – the same principle applies to reducing inventory shrinkage:

• When inventory and stock-take is being done, two of your team should sign off on it. This will reduce errors and the chance that one person is stealing or using materials for themselves.
• Make sure inconsistencies are noted by both employees, so what’s been delivered is more or less than what you ordered.

Not only will a double-checking system reduce errors in inventory management, you’re less likely to run into trouble with employee theft. It’s less likely that anyone will attempt to steal if they know a colleague is checking behind them.

Automate inventory management

When you’re setting up your inventory system, it’s a good idea to automate as much of it as possible. Inaccuracies in stock levels are usually the result of human error (usually by counting incorrectly during a stocktake), and if you streamline and organise your stock with inventory management software, there’ll be less manual handling – and less errors.

Implement staff training

The better trained your staff are, the more knowledge they have about inventory the systems that manage it, the less mistakes there’ll be. Make sure your staff have the necessary training and tools they need to do their job properly. Tell them what the impact is if there are mistakes.

It’s also a good idea to conduct background checks on all new hires. Since employee theft is one of the major contributors to inventory shrinkage, it’s best to thoroughly vet everyone before they start work.

Check wastage

Often poor planning or mis-management is causing shrinkage by inefficient processes that means you’re using up more product or materials than necessary to complete a job. This can happen when the full complement of a product is not used (with the remainder thrown away), the wrong items are ordered, or customers return products as faulty and they request a refund.

Assign products unique identities

Stock keeping units (SKUs) is an internal product code that identifies all your product features and are unique to your business. They help keep track of your inventory and reduce errors. Universal product codes (UPCs) are essential for accurate recorded stock levels. If you have clear, simple product codes you’ll reduce inventory shrinkage and improve the way you manage your stock.

It’s also important to track inventory shrinkage. Every time you do a stock-take and note the physical inventory count, compare that with what’s recorded in the inventory management system and calculate your percentage of inventory shrinkage. If you’re managing your inventory efficiently, this number should decrease each time. If it doesn’t, it may be time to take a hard look at your inventory management and identify where the problems are.

Summary

Much of how to reduce inventory shrinkage comes down to common sense. If you suspect employee theft, double-checking can put a stop to it, combined with security cameras in the stockroom and other employee areas. Make sure that the staff who have the responsibility of managing inventory are properly trained to do so, and that they verify all paperwork before signing off on it.

Next Steps

• Conduct regular stock-takes and inventory checks so that you’re up to date with your stock levels.
• Ask staff what they can do to reduce shrinkage or waste in your business.
• Add a clear message in your employment agreements that loss of stock or materials is theft and a serious issue.