Demand & Inventory Planning

Understanding Inventory Shrinkage: 6 Prevention Tips

Demand & Inventory Planning
May 7, 2021
7 min read

Learn how the right technology and the right partnerships can safeguard your business against inventory shrinkage with these 6 tips.

What is Inventory Shrinkage?

Inventory shrinkage refers to the loss of inventory that occurs through theft, packages lost in transit, damage, or clerical errors. Inventory is most merchants’ greatest investment, and protecting that investment should be top priority to maintain margins and bottom line revenue growth.

The causes of inventory shrinkage and the latest trends

In the life cycle of production to consumer, the key factor that merchants must deliver on is a constant inventory. Fulfilling orders in a 2-click purchase marketplace is possible when you have good ground cover and reliable inventory, allowing your supply chain to move as fast as your digital sales channels. 

However, inventory shrinkage — lost inventory due to common factors like theft, fraud, and accounting errors — can lead to warehouse shortages, longer delivery times, and ultimately unhappy customers. While merchants have historically seen a 1% inventory shrink rate year-over-year, FY2019 inventory shrinkage hit an all-time high of 1.62% according to a recent report by The National Retail Foundation.

Still others are paying a much higher price, with 42.5% of merchants reporting an inventory shrink rate of 1.5% or higher, according to that same NRF data. In addition, Forbes reporting found that U.S. retailers lost $46.8B to inventory shrinkage in a single year alone. 

Real-World Inventory Shrinkage

Hydrogenated water brand, HyVIDA, was seeing a great deal of inventory shrinkage in the form of products being damaged in transit. As a high-end brand committed to using only the highest-quality ingredients, they couldn’t afford to sustain the average of 1 to 4 cans of damaged product per shipment they were seeing. Ultimately, they found that by finding a new fulfillment provider that developed a customer packout procedure to protect their product, they were able to eliminate inventory shrinkage due to damage. Not only were their inventory costs improved, but their customer experience was greatly improved, leading to positive customer reviews and increased brand equity.

How technology is solving — and causing — inventory shrinkage

While inventory management has evolved past handwritten records and phoning warehouses, the process still feels piecemealed together. A digital spreadsheet can be lost in an email inbox or desktop computer folder just as easily as it could be in a physical filing cabinet or trash bin. An accounting error can be made just as quickly with a keyboard stroke as it could be with the flick of a pen. In fact, according to a National Retail Federation report in 2017, “paper shrink” caused by human error accounted for 21.3% of all inventory shrinkage.

Meanwhile, top inventory shrinkage causes like theft, fraud, and the emergence of cyber attacks have merchants concerned about both historical threats and scrambling for solutions to new ones.

So, how can merchants maintain inventory and even lower their inventory shrink rate? Through the power of automation, machine learning, and data, SMB’s can use their natural inclinations for being nimble and adaptable to meet the moment and solve big problems.

6 Tips For Protecting Your Inventory And Reducing Inventory Shrinkage Immediately

1. Ask for data-back service level agreements (SLAs) 

SMBs often don’t get their fair shake when it comes to service level agreements (SLA’s). Larger retailers can use their influence to dominate space on warehouse shelves, but an inventory management system that uses big data and double-verification creates 99.5% cycle count accuracy. Not only does this reduce inventory shrinkage, it also creates accountability and a true partnership between merchants and 3PLs and 4PLs. 

When negotiating an SLA, make sure the terms are based on data like Average Daily Volume (ADV) and cycle count accuracy. If, like HyVIDA, you have a product that is easily damaged in transit, negotiate custom packout SOP’s that will guarantee the safe delivery of your product and eliminate inventory shrinkage due to damages.

Learn how Ware2Go negotiates top-tier SLA’s for merchants of all sizes

2. Create a streamlined vertical by integrating systems 

Patchworking together different technologies for every facet of warehousing and distribution can lead to inventory shrinkage. Just like physically losing inventory in the supply chain, data can also be lost, and managing a disconnected suit of systems adds a layer of work—time that could be spent on optimizing business. By combining a Warehouse Management System (WMS), Order Management System (OMS), and Transportation Management System (TMS) into one platform, merchants are able to accomplish seamless fulfillment management.

3. Automate time-consuming, detail-oriented tasks

Fulfillment workflow comes down to details that can reduce or increase inventory shrinkage. 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. By automating key touchpoints in fulfillment processes like order management, delivery tracking, and inventory management, merchants can ensure a more reliable fulfillment workflow and reduce inventory shrinkage.

4. Choose technology that’s as nimble as your business

For SMBs, flexibility is critical. Change happens, and when it does, merchants shouldn’t have to worry about their inventory or workflow being in jeopardy. No matter who your ecommerce fulfillment provider is or how your tech stack may change, the right inventory management system should be able to adapt with it, whether directly on a dashboard or running in the background. 

5. Shift to on-demand, holistic reporting

An accurate inventory count should be readily available at your fingertips. While automation and big data solve for fulfillment workflow optimization, being able to visually show success to team members and other internal stakeholders is critical in decision-making and executive buy-in. The right Warehouse Management System should allow merchants to monitor inventory, check fulfillment statuses, and access tracking information without any manual number crunching or having to make sense of isolated data sets from separate reports.  

6. Make inventory shrinkage a measurable KPI

While some inventory shrinkage is inevitable for every merchant, that doesn’t mean it has to go unchecked. Ask yourself: Do I know what my inventory shrink rate is today? If you’re like many merchants in the US, inventory shrinkage may be a growing problem. With automation to safeguard against common causes of “paper shrink” and inventory shrinkage, merchants can win back time to optimize other critical parts of their business without having to worry about their fulfillment workflow or being on the wrong side of shrinkage statistics.

Want to learn more about emerging trends for reducing inventory shrinkage and other industry best practices? Review some of the latest market research on Warehousing & Fulfillment or see real world examples of how warehousing is changing through the power of data, automation, and holistic management backed by smart technology.

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