How To Reduce Warehouse Inventory Shrinkage

Whether due to errors in fulfillment or theft, shrinkage can eat into profits and leave businesses struggling to stay afloat. And yet, many business owners don’t realize how much inventory shrinkage affects their bottom line. For example, the average reported shrinkage rate for just eCommerce businesses was 1.62% of their annual sales. For an eCommerce business that generates $100,000 in sales per year, this is a loss of $1,620. For businesses that generate millions in sales per year, the losses can be even more substantial.

How do you reduce shrinkage in your business?

Every company can attest that inventory shrinkage is a critical issue. Inventory shrinkage can have a number of negative impacts on business operations, including:

  • Decreased revenue
  • Replacement costs for stolen merchandise
  • Increased labor costs
  • Added security costs
  • Added technology costs to control theft
  • Company leadership’s time and attention
  • Reduced employee morale

All of these factors can have a serious impact on your company’s bottom line. Luckily, there are several actions your company can take to reduce the risk of shrinkage, including implementing proper security measures, using technology to track inventory, proper warehouse management and training for employees.

The Main Causes of Inventory Shrinkage

To solve or reduce your company’s inventory shrinkage problems, it’s crucial to understand exactly where the loss is coming from, some common points are:

  • Shoplifting (or its eCommerce cousins, chargeback fraud and return fraud) is responsible for more than 35% of retailers’ annual losses, according to the annual survey from the National Retail Federation.
  • Employee theft takes almost as big of a bite from your bottom line as shoplifting and is responsible for a whopping 33% of retail shrinkage. Employees steal using various creative methods, from fraudulently issuing fake gift cards and using their employee discounts to taking merchandise or pocketing cash.
  • Paper shrink, also known as administrative errors, paper shrink accounts for up to 20% of retail shrinkage. This includes accidentally selling your products for less money or refunding them for more money than they should be. This can be due to ticketing, transaction, or miscounted inventory errors.
  • Vendor fraud accounts for less than 5% of retailers’ total shrinkage, but it does occur, so it’s essential to be aware. Vendor fraud occurs when your vendors intentionally send you less inventory than is listed on your invoice or when vendor representatives steal products from your store or warehouse.

By being aware of the most common causes of inventory shrink and taking steps to prevent them, you can put yourself in a much better position to protect your bottom line.

Solving For Shrinkage

While several different factors can cause inventory shrinkage, you can mitigate your losses. Try out one, or several of these methods to reduce your losses and set your company up for growth down the road:

Hire a Loss Prevention Manager
One of the best ways to reduce inventory shrinkage in your company is to hire a Loss Prevention Manager. This person’s job is to track and reduce the amount of inventory lost due to theft, damage, or other causes. The Loss Prevention Manager will work with you to develop and implement policies and procedures to minimize loss. They will also conduct regular audits of your inventory levels and stockroom procedures. In addition, they may also be able to provide training for your employees on how to properly handle and store inventory.

Reduce Human Error with Checklists and Reports
Your employees are only human, and all humans make mistakes. Unfortunately, frequent errors by your employees can lead to lost inventory and a dent in your bottom line. To reduce errors made by your employees, implement a system of daily checklists and regular reports to keep staff accountable and on track. At the end of the workday, your employees can be required to submit a report that holds them accountable for the tasks and checklists they’ve completed.

Damage reports are an essential tool to help your business reduce shrinkage. You can increase employee accountability and reduce your damaged inventory by requiring a report to be completed when an employee or customer has damaged inventory.

Creating a system of reports and checklists helps to reduce human error, make employees more productive, and hold employees accountable. It also provides management with an invaluable resource for overseeing employees and solving problems as they arise.

Conduct Frequent Inventory Audits
Inventory audits help eCommerce businesses identify and correct inventory management system errors. They also help to identify and prevent theft and shrinkage. An inventory audit can be time-consuming and expensive, but it’s a worthwhile investment for companies. Not only will it help to reduce inventory shrinkage and boost profits, but it will also improve employee understanding of the importance of inventory control to your company’s bottom line.

You should also regularly implement cycle counting, a smaller-scale inventory audit that happens daily, weekly, or monthly as needed. This helps keep your employees vigilant and allows you to regularly stay on top of your overall inventory and any problem areas. An inventory audit can also help to improve customer satisfaction, boost profits, and prevent shrinkage and theft.

Train Employees About Theft Prevention
Another valuable tool to reduce your company’s shrinkage is to train all current and new employees to prevent customer and employee fraud. Ensure all your employees know the many types of scams and theft methods that can impact your company and empower them with training, so they always know what to do if they suspect theft or fraud.

Take Advantage of Technology
Numerous types of technology can help you effectively manage your inventory and reduce shrinkage. For example, RFID tags can help you to track your inventory in real-time, and barcode scanners can help you to quickly and accurately count your inventory.

Whether you are looking to save space or to improve day-to-day throughput processes, the right racking storage system can shape your facility to its maximum potential. Contact the team at Complete Warehouse Supply for your initial chat to see what solution will work best for your warehouse needs.