Inventory shrinkage refers to the decrease in a company’s physical stock of merchandise that is not accounted for by sales or any other recorded transfer means. This can happen due to theft, loss, damage, incorrect record-keeping, or fraud. Also, it directly impacts a company’s bottom line, as it reduces the available stock for sale and leads to reduced profits.
Causes Of Inventory Shrinkage
Inventory shrinkage is the loss of stock or inventory that can occur due to a variety of reasons, including:
- Employee theft or fraud: This occurs when employees steal items from the inventory, either for personal use or for resale. It can also occur when employees manipulate inventory records for their own benefit.
- Shoplifting or theft by customers: This refers to the act of stealing items from store customers. This can happen in physical stores, as well as in e-commerce environments.
- Administrative errors or inaccuracies in record keeping: This can occur due to mistakes in manual data entry, system errors, or miscommunication between departments.
- Damage to products: Products can become damaged during storage, transportation, or handling, leading to inventory shrinkage.
- Obsolescence or expiration of products: Products that become outdated or reach their expiration date can no longer be sold, leading to shrinkage in inventory.
- Supplier fraud or errors: This can occur when suppliers provide incorrect information about inventory, send damaged goods, or make errors in deliveries.
- Processing errors in receiving and shipping: Errors during receiving and shipping processes, such as incorrect quantities or incorrect items being sent or received, can result in inventory shrinkage.
The Impact On A Business
Inventory shrinkage can have several negative impacts on a business, including:
- Inventory shrinkage results in direct financial losses for a business. The company has invested in a stock that is no longer available for sale.
- Inventory shrinkage can lead to decreased profitability. The business may need to purchase additional inventory to make up for the lost stock.
- Businesses with a high rate of inventory shrinkage may develop a negative reputation. Which can lead to a loss of customer trust and a decline in sales.
- Businesses may need to implement additional security measures or hire additional staff, to address inventory shrinkage that leads to increased operational costs.
Let’s take an example of “Decreased profitability”. When inventory shrinkage occurs, businesses may need to purchase additional inventory to make up for the lost stock, which can result in decreased profitability. This is because the cost of the additional inventory must be absorbed by the business, reducing its overall margin. Additionally, the lost stock can also impact the ability of the business to meet customer demand, leading to lost sales and decreased profitability. To minimize the impact of this inventory on profitability, businesses should implement proper inventory control and monitoring processes. As well as conduct regular inventory audits.