Business success or failure is often determined by very small margins on goods sold or services delivered. If you’re able to set aside some company revenues in a contingency fund at the end of the quarter, you probably chalk that up as success.

You paid the bills, made payroll, survived another three months – that’s success. However, although you may have shown a profit for that three-month period, could that profit have been a point or two higher? It might have been, except for the fact that your inventory is shrinking right under your nose.

Inventory Shrinkage

No employer or manager wants to think that members of the team are stealing, but it happens every day. Experts at the National Retailers Federation put inventory shrinkage at nearly $47 billion dollars a year.1

That’s billion with a “b”. It can mean the difference between long-term business success or failure. 1.5% of your company’s net earnings are disappearing.

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. Your 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 stock
  • misplaced stock
  • recordkeeping errors
  • undetected delivery shortages
  • order fulfillment errors


The National Retail Security Survey (NRSS) of 2018

For more than 25 years, The National Retail Federation, in conjunction with the University of Florida, has published the results of retail surveys of business owners and managers. The numbers from the latest survey indicate that inventory shrinkage rises and falls, but it still adds to the cost of other items sold by a retail outlet.

According to the National Retail Security Survey (NRSS)1:

  • 36.5% of inventory shrinkage is caused by shoplifters.
  • Employee/internal theft accounts for 30.0% of shrinkage.
  • Administrative errors cost your business 21.3% of shrinkage losses.
  • Vendor fraud or error accounts for 5.4% of inventory shrinkage.
  • Unknown or unrecorded losses are estimated to be around 6.8%.

Don’t assume that shrinkage is the result of employee theft. Instead, take a more expansive approach to protecting your inventory.

Tighten Business Security Policies

It doesn’t cost a great deal of money to add security cameras in vulnerable locations. “Smart doors” across an entire corporate campus can record who enters which door at what time – all monitored by a single employee in the security office.

Change locks on protected merchandise. If you keep the high-end inventory in a separate location, change locks on storage room doors frequently.

Give only higher-level employees access to storage, and institute a policy of requiring a second approval to access high-priced inventory.

Review existing access policies for weaknesses. If the kid you hired last week has access to high-end electronics inventory, the temptation to slip something out of the store may be too much to resist.

Employee Theft

Yes, not all shrinkage is caused by employee theft, but it’s a good place to start operations to secure inventory. And it doesn’t have to be a morale buster.

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.

Conduct an internal audit to review and evaluate current processes and look for areas of risk. Click here for an article on why and how to conduct an internal audit. Then, create operational procedures that deter theft. 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. Most of your employees are honest, reliable business assets who want company success right along with you.

Post your company’s anti-theft policies where they can be seen, and never make exceptions.

Customer Theft

Customers come and go all through the day. You don’t know them or their intentions. 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.

Look for false accounts – phantom companies that invoice your business for items never ordered or received. Order payment goes into a hidden account accessible only by the criminal-employee.

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, increasing store’s margins by up to 1.5%

Shrinkage is a part of many business – stores, restaurants, car dealerships, product manufacturers – the disappearance of inventory crosses all industry verticals.

The best way to shrink shrinkage? Take a pro-active stance and invest in security hardware like CCTV cameras on all store access and egress points.

Boost profits by eliminating inventory shrinkage.