What Is Inventory Shrinkage? Causes, Examples, and Prevention

The goal is to always be on top of your inventory reconciliation to catch shrinkage as it happens. If you have inventory that’s at particular risk for theft, such as batteries or low-cost accessories, consider focusing multiple cycle counts in a row on those SKUs. Vendors can be subject to the same administrative errors as retailers, which can contribute to shrinkage. Both you and your vendors can the risk of human entry error by using online B2B platforms like NuORDER.

Third-party logistics or 3PL providers are professional fulfillment companies that help ecommerce businesses store inventory in the 3PL’s fulfillment center to pack and ship orders. They take precautions to keep your inventory safe and secure while allowing merchants to outsource fulfillment, which is often costly and unproductive to manage in-house. Tracking items isn’t hard and can help you see whether a piece of inventory disappeared out of the warehouse or the retail floor.

Administration Error

Periodic inventory checks allow a business to estimate the losses and expenses caused by the inventory. Now subtract total inventory in the stock from inventory mentioned in the books. Several businesses invest in goods with the purpose to sell and make a profit.

  • A powerful inventory management software platform with the latest features and tools will help you get more organized and less likely to lose track of inventory.
  • Most often vendor fraud takes advantage of the sheer numbers of commercial ordering and skims a little off the top by shorting the quantity delivered.
  • When a business discovers a shrinkage in its inventory, any discrepancies should be accounted for to reconcile the records with the physical inventory count.
  • When dealing with perishable products that last a few days, waste and spoilage can significantly cause retail shrinkage.

That’s because when inventory is lost, stolen, or damaged, your business’s productivity and profitability can really suffer. Flowspace’s inventory planning and forecasting software gives brands real-time insights and recommendations for inventory optimization. Having access to real-time data allows brands to perform those all-important surprise audits on physical inventory without alerting employees. Actionable inventory data can also help brands make informed safety stock decisions to avoid an out-of-stock situation.


Expressed as a percentage (i.e., multiplying the quotient by 100), your total inventory shrinkage is 2.5%. While barcodes and QR codes are all you need to track inventory quickly, RFID technology can help reduce the risk of shoplifting. That’s because RFID tags allow businesses to keep an eye on inventory as it moves around the store—and can even trigger an alarm when exiting the premises.

Inventory shrinkage is a concept in business that can be won over with the implementation of the right measures. Some businesses may yet not know they can reduce the extra loss they are suffering with. The products coming in tiny packages are easy to swipe inside a bag or underneath clothes. Conduct a physical count of each item present in the inventory in the outlet/warehouse.

Perform unannounced inventory counts

To reduce such errors, inventory should be physically counted and re-counted even when the business relies on automated systems. When a business discovers a shrinkage in its inventory, any discrepancies should be accounted for to reconcile the records with the physical inventory count. The matching principle requires that inventory shrinkage should be recorded as an expense in the financial period in which it occurred to match it against the revenues for that year. A shrinkage expense account will be recorded under the Cost of Goods Sold (COGS) account. For retailers, shrinkage averages around 2% of total sales. This percentage seems small at first glance, but for big box retailers like Walmart, it accounts for millions of dollars in loss.

Administrative and Paperwork Errors

Brands can also educate employees on the impact of inventory shrinkage because they might not fully understand how small theft impacts the bottom line and, ultimately, their jobs. Using a 3PL that partners with fulfillment warehouses and has measures in place to prevent theft can also decrease inventory shrinkage. Employees have direct access to all a brand’s products, and poor inventory count, warehouse management and security can result in employee theft. Employee theft can be a bigger concern for ecommerce businesses without a retail store — which limits shoplifting. When running a business, you likely face setbacks due to unforeseen costs. Unplanned expenses, like inventory shrinkage, can lead to a drop in profits and require you to alter your accounting books.

When dealing with products that last a matter of days, spoilage can be a significant cause of retail shrinkage. Those 598 cases of wine are loaded onto a truck, driven to the wholesaler’s warehouse, and unloaded. The wholesaler stocks it, scans it, inventories it, sells it, and ships it to hundreds of individual retailers. According to a study from the National Retail Foundation, retail businesses lost $62 billion from “shrink” in 2019, amounting to an average of 1.6% of sales. Sometimes, inventory may disappear off the shelves and cannot be matched to any of the other causes of inventory shrinkage. Unknown causes represent about six percent of the total inventory shrinkage.

Every retailer across every industry is impacted by shrink, with organized retail crime being one of the industry’s prime concerns (but not, notably, the only cause of shrink). Every piece of inventory that’s missing is essentially lost sales and money for your business, and should be considered an expense. Like most other business losses, inventory shrinkage how to calculate amortization impacts your bottom line. In order to discover precisely how inventory shrinkage has affected your business, you’ll need to calculate, track, and monitor it over time. Your inventory shrinkage rate is 10%, which means you lost 10% of your inventory value to shrinkage. Then, multiply your inventory shrinkage rate by 100 to convert it into a percentage.

However, Warehouse Management Systems often put the onus of those details on merchants—but with smart technology, more inventory and demand for products doesn’t mean more work. Flowspace partners with ecommerce brands to optimize logistics, including ordering, processing, picking, packing, loading, shipping, and more. Flowspace’s OmniFlow Visibility Suite gives brands real-time visibility and the ability to track inventory management KPIs like inventory shrinkage.

When staff is operating lockstep with standard operating procedures, it lowers shrinkage significantly. Train your staff on your inventory pipeline, their role in it, and how to work efficiently. Often that means teaching them to interact with inventory management software and that software’s recommendations and analyses. A better way to look at acceptable levels of retail inventory shrinkage is the median 2018 reported shrinkage. The median is the point in which half the numbers are above it and half below.

Doing this on a regular basis in a pattern can cut down on the time it takes. Inventory shrinkage is calculated by first subtracting actual inventory from recorded inventory and then dividing it by recorded inventory. You can convert that into a percentage by multiplying the result by 100. There can be a few more reasons accountable for inventory shrinkage.