Inventory shrinkage in a retail outlet, restaurant, factory, or other business occurs when you take a physical count of goods on hand and discover that the reality of your business doesn’t fit the numbers. Experts at the National Retailers Federation estimated the cost of inventory shrinkage in 2021 at nearly $50.6 billion dollars a year.1 That’s billion with a “b”. Statistically, about 1.4% of your company’s net earnings may be disappearing due to inventory shrinkage, and that may mean the difference between long-term business success or failure.

Suppose your inventory records show 107 HD TVs in the warehouse. Your hands-on physical count shows 105 TVs. Something happened to two flat screen TVs, and you don’t know what.

Your inventory count and numbers may be out of sync for several reasons:

  • employee theft
  • customer theft (shoplifting)
  • conspiracies between employees and non-employees
  • mislabeled or misplaced stock
  • recordkeeping errors
  • undetected delivery shortages
  • order fulfillment errors

Don’t assume that shrinkage is the result of employee theft. Instead, take a more expansive approach to protecting your inventory. For a larger company, it might be wise to hire a security expert to identify risk exposure to shrinkage, both internal and external. However, even small businesses can take steps to help mitigate the threat.

Help Protect Your Business From Employee Theft

Although not all shrinkage is caused by employee theft, it’s a good place to start your project of helping to secure your assets.

Employees can steal “things” – from laptops to inventory. Other employees, with computer access, can steal proprietary information, valuable patents and in-house systems. Access to both actual and digital assets should be (1) monitored and (2) limited to an “as needed” basis.

  • Conduct an internal audit to review and evaluate current processes and look for areas of risk. 
  • Create separate digital accounts for each employee and set permissions – the information that can, and cannot be accessed by each employee.
  • Vet new employees. Conduct a background check and verify references, and all other resume information.
  • Create an employee theft policy – a zero-tolerance policy – and put it in writing as part of the employee manual given to new hires. Post your company’s anti-theft policies where they can be seen, and never make exceptions. Have your policy reviewed by legal experts for compliance with legal and workplace regulations.
  • Record entries and exits from sensitive areas of your physical business. Use security cards, and even bio-metrics if you can afford them.
  • Security cameras are routine, and signs that state “This room is under video surveillance” won’t offend honest, reliable employees.
  • Put high-end inventory in a closed chain link cage or other secure location, making it more difficult to gain access to expensive products.
  • Conduct random searches of trash and use see-through bags to prevent an item from leaving the premises for the dumpster for pick-up later.
  • Divide warehouse and record-keeping duties so no single person controls the processes (except you).
  • Provide your team with an easy-to-use, anonymous system to report employee theft.

Prevention of employee theft is an on-going process of refinement and redundancy. Adding layers of security may ultimately lower the incidence of employee theft in your company.

Customer Theft

Customers come and go all through the day. You don’t know them or their intentions. Take precautions to help protect yourself.

  • Monitor your store’s check-out area to detect scams involving a cashier and an accomplice. The accomplice brings high-priced items to the check-out. The cashier rings up a much lower price, and you’ve been robbed. If you suspect an “inside job” check that register’s recorded transactions against the surveillance video.
  • A variation of this scam is the item return scam. The accomplice returns a low-priced item to his accomplice at the returns desk, and receives a wad of cash for a low-priced item. To help prevent this scam, original receipts should be generated, even on returns. If the customer doesn’t have a receipt for the gift she received, implement a restocking fee to discourage this kind of cooperative fraud.
  • Hire secret shoppers. These security professionals look like customers pushing a cart down a store aisle. They’ve also been trained to detect suspicious customer behavior.
  • Track the activities of your buyers. A buyer may inflate projected demand and steal your surplus inventory. Even high-level management can be responsible for shrinkage.
  • Vendor kick-backs are also a means for high-level buyers and managers to shrink your inventory and your margins. A vendor offers a buyer a dollar amount to gain shelf space. The buyer pockets the payoff, and you have new product that isn’t moving off the shelves.
  • Finally, conduct surprise inventory counts. Do a hand inventory with every item recorded in your system using bar code or smart tag readers. It may look like an expensive business activity, but if these checks and balances cut inventory shrinkage, it can actually be profitable.

Shrinkage is a part of many businesses – stores, restaurants, car dealerships, product manufacturers – the disappearance of inventory crosses all industry verticals. The best way to help shrink shrinkage? Take a pro-active stance.