How to reduce shrinkage in inventory

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ecommerce business owners are all too familiar with the challenges of 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 ecommerce business owners don’t realize how much inventory shrinkage affects their bottom line. 

A recent study cited in the 2021 National Retail Security Survey found that inventory shrinkage costs ecommerce businesses an average of 1.62% of their annual sales. That may not sound like much, but for a business that generates $100,000 in sales per year, that’s a loss of $1,620. 

And for businesses that generate millions in sales per year, the losses can be even more staggering. 

Inventory shrinkage is a severe problem for ecommerce businesses, which can significantly impact the bottom line.

How do you reduce shrinkage in your business?

Let’s dive in.

How inventory shrinkage is impacting your business

ecommerce business owners can attest that inventory shrinkage is a critical issue. 

And it’s not just big businesses that are affected by shrinkage; small businesses experience losses, too – often with less of a profit and operational cushion to absorb.  

Inventory shrinkage can have a number of negative impacts on small businesses, 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, and 
  • Reduced employee morale. 

All of these factors can have a serious impact on a small business’s bottom line. 

So what can ecommerce business owners do to prevent shrinkage? Well, there are several actions your business can take to reduce the risk of shrinkage, including implementing proper security measures, using technology to track inventory, and providing training for employees. 

By taking the steps outlined below, eccmmerce business owners can help to reduce the negative impact of inventory shrinkage on their business.

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.

  1. Shoplifting: 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.
  2. Employee theft: 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.
  3. 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. 
  4. Vendor fraud: 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.

While several different factors can cause inventory shrinkage, you can mitigate your losses. 

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. 

Hire a loss prevention manager

One of the best ways to reduce inventory shrinkage in your ecommerce business 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. 

Hiring a loss prevention manager can help significantly reduce the amount of inventory shrinkage in your ecommerce business.

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. 

Implementing daily checklists means your employees know and understand what needs to be done when they arrive at work and exactly how you want them to complete each task.

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.

Double (and triple) check your vendors

It’s not just your employees that make mistakes or pilfer inventory. Your vendors may be a source of shrinkage for your business as well. 

It’s critical to your business to double-check and triple-check all of your vendor’s paperwork to ensure your inventory is fully accounted for and in saleable condition. 

To reduce vendor fraud, you should:

  • Check that all of the items on your invoice are correct and have been delivered
  • Confirm that none of the inventory is damaged or broken
  • Ensure any perishable items are well within the sell-by or expiration date
  • Double-check to ensure that pricing is accurate and matches your invoice 

Most vendor fraud occurs when vendors are in your store or warehouse, so keep a close eye to ensure there are no errors or discrepancies in your inventory. 

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 ecommerce businesses. 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.

There are a few things to remember when conducting an inventory audit. You’ll want to ensure your audit is not only confirming the quantity of your inventory but also its condition. This will help you regularly identify any theft, misplacement, or damage occurring. 

First, your business should focus on auditing its stock levels regularly. This will help to ensure accuracy and prevent any potential errors. 

Second, your company should create a system for tracking inventory changes. This will help businesses to identify any discrepancies and take corrective action. 

Finally, you’ll want to focus on prevention. Businesses can reduce the risk of shrinkage and theft by implementing an effective inventory management system such as SkuVault Core.

An inventory audit is a valuable tool for ecommerce businesses. It can help to improve customer satisfaction, boost profits, and prevent shrinkage and theft. By following these tips, companies can ensure that their inventory audit is most effective.

Clarify your company policies

One of the most impactful things an ecommerce business can do to reduce inventory shrinkage is to clarify company policies. 

This means taking a close look at your internal procedures and communicating them clearly to your employees. 

First, you must identify the root causes of shrinkage in your business. This could be anything from employee theft to damaged goods. 

Once you know what’s causing the shrinkage, you can implement policies to help prevent it. 

For example, you might require employees to sign for all deliveries or conduct regular inventory checks. 

Additionally, you should communicate the consequences of employee theft. When your employees understand there are significant legal and employment consequences for theft against your business, including theft of goods or money and intellectual theft, they will be less inclined to steal from your company. 

Finally, video surveillance and signage indicating that your warehouse or store utilizes such can also help deter theft.

By clarifying your policies and procedures, you can help to reduce inventory shrinkage and keep your business running smoothly.

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 business and empower them with training, so they always know what to do if they suspect theft or fraud. 

Theft prevention training not only instills a sense of personal accountability in your employees but also gives them the confidence to effectively handle instances of theft as they arise. 

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.

In addition, many software programs can help you to track your inventory levels and manage your employees effectively. 

While it’s impossible to completely eliminate inventory shrinkage, a warehouse management software (WMS) like SkuVault Core can help you effectively reduce it. A WMS provides accurate and up-to-date information on your inventory levels, so you can quickly identify discrepancies. 

Additionally, a WMS can help to automate various aspects of your inventory management, such as receiving and putaway, which can help to reduce human error. Using a WMS, you can create a more efficient and effective inventory system that will help reduce your company’s shrinkage.

Employee management software can also be a valuable tool for implementing shrinkage reduction policies quickly. This software can make onboarding and anti-theft training seamless for new and existing employees. It can also provide your employees with daily tasks, checklists, and digital reporting of damaged or missing merchandise.

Final thoughts

Inventory shrinkage is a serious issue for businesses of all sizes, and it can impact everything from your bottom line to your customer base. In this post, we’ve outlined some steps to reduce your business’s inventory shrinkage. 

First and foremost, it’s essential to understand the causes of inventory shrinkage so that you can address them head-on. The leading causes are theft by employees or customers, errors made by employees, and damaged or lost products. 

Once you know the root causes of inventory shrinkage in your business, you can start taking steps to mitigate them. One key step is hiring a loss prevention manager responsible for implementing policies and procedures to prevent losses. You can also reduce human error with checklists and reports, conduct frequent inventory audits, clarify company policies, and train employees about theft prevention.  

Technology can also help you keep track of your inventory and detect discrepancies. 

Ultimately, it takes a concerted effort from everyone in the organization to reduce inventory shrinkage – from top management down. 

By following the tips in this post, you can put yourself on the path toward reducing this costly problem for your business.