Measuring the Inventory Shrinkage Rate

Peter Hann By Peter Hann, 11th Dec 2013 | Follow this author | RSS Feed
Posted in Wikinut>Business>Supply Chains, Procurement & Logistics

Every business should know the inventory shrinkage rate which tells the management what proportion of the products are lost, broken or stolen between the point of purchase or manufacture and the point of sale. Armed with this knowledge the management can take steps to reduce product loss.

Reasons for Inventory Shrinkage

The inventory shrinkage rate measures the extent to which products are lost between the point at which they are purchased or manufactured by the business and the point at which those goods are sold. The reasons for the loss of products are varied and are worth investigating by any business. Some products go missing owing to administrative errors within the business, while other products fall a victim to breakage. Where liquid products are involved there is product loss through leaks or evaporation that could be reduced by improving the method of storage.

Some products end up in the wrong location and are never sold while others stay on the shelves so long that they are no longer fit to be sold or have gone out of fashion and remain neglected by the customers. A surprisingly large percentage of product loss is due to theft by staff or shoplifting by customers.

Dealing With the Causes of Inventory Shrinkage

The type of product loss and inventory shrinkage suffered by a business depends on the type of products sold and the way in which they are displayed and sold. The supermarkets sell mainly small products including everyday necessities on a self-service basis and are therefore susceptible to shoplifting. Generally attempts by supermarkets to protect their products from shoplifting would reduce the effectiveness of the self-service and convenience model of shopping on which the supermarkets have built their business. They therefore rely on surveillance cameras, security staff and the certainty that offenders will be prosecuted.

Pilfering of goods by staff is likely to take place in businesses producing, making or selling small, high value products. Protective measures taken by businesses such as jewelry retail outlets to protect their items are of course very secure and use high technology to ensure that products are recorded, secured and protected by alarms and cameras.

Products sold in DIY and hardware stores are also likely to be susceptible to theft by staff. Products can be protected by the use of security gates, wire partitions and security cages in warehouses, plus the use of security mirrors and cameras so that hidden corners are brought into view. Many businesses could also reduce the pilferage rate by performing more checks on staff before they are hired.

Businesses can guard against product obsolescence to some extent by keeping tight inventory control that can alert the business to products that may soon be obsolete. Periodic product clearance at low prices while it is still possible to sell the products can help to clear out the slowest moving items and remove the need to scrap them altogether. The problem of obsolescence can hit slow-moving or seasonal products so businesses selling these types of product should have appropriate inventory controls in place. Inventory can be analyzed in terms of age and appropriate action taken in time.

Fashion goods can give a retail business a similar problem although these are faster moving products and do not stay on the shelves for very long. The difficulty here is that fashions and tastes can also change quickly and inventory analysis must always bear this in mind. Timely clearance sales of products that may soon be out of fashion can help to reduce the level of inventory shrinkage due to obsolescence.

Breakages can be reduced by reviewing the method by which goods are transported and by improving the packaging used to protect goods. Clearly some products are more breakable than others and businesses dealing in fragile products would need to take the appropriate precautions. Appropriate rules for handling of products by staff can also help.

Measuring Inventory Shrinkage

Gaining a good grasp on the extent to which inventory shrinkage is occurring in the business can help management in planning the appropriate measures to combat product loss and can help them to measure the effect of their strategies over time.

The inventory shrinkage rate can be found by comparing the inventory the business should have, based on the amount of products purchased or manufactured, with the amount of inventory that is actually held. This can be expressed as a fraction by taking the difference between these two quantities and dividing it by the inventory that the business should have in its warehouses and stores. The inventory shrinkage can be computed at regular intervals to measure the success of policies to protect the inventory.

The more frequently products need to be transported from one place to another the greater the chance that products may be lost, misplaced or stolen. The length of the supply chain of a particular product therefore increases the possibility of losses. Although the whole supply chain may involve more than one business there are increasingly situations where the whole supply chain may belong to a multinational group of companies. In this situation the multinational would benefit from examining the whole supply chain and eliminating the possibilities for product losses.


Inventory, Inventory Shrinkage, Pilfering, Product Loss, Shoplifting, Supply Chain, Theft, Wastage, Waste

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author avatar Peter Hann
I write about business or financial issues

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author avatar Jhon Marshall
11th Dec 2013 (#)

nice post

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