How to Reduce Inventory Shrinkage in 4 Simple Steps

Mila Budeva
Mila Budeva
Sep 18, 2017

In 2016, inventory shrinkage cost US retailers $49 billion with 47% of retailers surveyed reporting annual increase in overall inventory shrinkage [1].


What is inventory shrinkage?

Inventory shrinkage is when there is a mismatch between the inventory listed in the accounting records and the physical count of merchandise or stock.

 What are the main causes?

According to the National Retail Security Service there are five main sources of inventory shrink [2]:

  1. Shoplifting (38%)
  2. Internal theft (34.5%)
  3. Administrative and paperwork errors (16.5%)
  4. Vendor fraud or error (6.8%)
  5. Unknown loss (6.1%)

So, how can retailers counter those causes?

  1. Keeping stores secured and organised

Installing security cameras and mirrors, posting warning signs against theft, strategically locating cashiers where they have the greatest visibility in-store all help to deter shoplifting.

Store associates should be trained to identify and stop theft among customers by being cautious of suspicious behaviours and aware of coupon and return scams. Keeping the shop tidy makes it easier to notice such suspicious behaviour and missing products.

In addition, ensuring that all products are correctly displayed and labelled helps to prevent universal product code errors – when items have the wrong barcode and are not scanned and logged properly, contributing to the inventory mismatch.


  1. Education, Training and Task Delegation

To help prevent internal theft, store associates need to be educated on the implications of stealing such as greater financial instability for the company, more discharged employees, fewer pay increases and promotion opportunities.

Restricting store room access to fewer employees also provides better traceability of inventory discrepancies.

In addition, delegating tasks such as inventory management, processing of receipts and recording of receipts to several employees instead of a single person puts a system of checks and balances in place, reducing the likelihood of internal theft.


  1. Automation

In a survey of 400 retail employees, Software Advice found that 22% of those working without inventory management software stole products [3]. Manually entering, tracking and counting inventory increases the likelihood of inaccuracies and theft. Instead, retailers should use software to track inventory at every stage – from dock to checkout. Implementing a single system is preferable to multiple solutions at every stage as it enables the standardisation of the entire inventory process and provides end to end visibility.


  1. Continuous auditing

Biannual complete inventory audits are essential to reducing inventory shrinkage and so are monthly cycle counts and daily reviews.

Monthly cycle counts provide continuous visibility over inventory accuracy. Less disruptive and quicker to implement than a complete inventory audit, cycle counts enable the focus on a specific subset of inventory every month and enable the capturing of discrepancies as they occur.

Daily transaction reviews in front of store associates offer another way to identify inaccuracies, detect theft or the need for better training. For example, a daily transaction review might reveal that certain employees are not familiar enough with the POS terminal to be processing voids or product returns in the absence of a manager.

Fraudulent employee activity can also be deterred by validating shipments and inspecting items reported to be spoiled or broken to ensure that staff are not just claiming them for themselves.


Learn more about perfecting store operations with Zaptic