Retail shrinkage, sometimes referred to as “retail shrink”, is the difference between the amount of inventory that a company owns, and the results of the physical count of that inventory. Put in simpler terms, it’s the difference between the ideal income generated from product sales, and the actual income that’s realized after accounting for various forms of loss.
Shrinkage occurs when you have less inventory than you should, and it affects every stage of the supply chain.
Most often, retail shrinkage refers to the percentage loss resulting from the damage, expiration or theft of unsold products.
If retail shrinkage is high, it means reduced profits. If it’s well managed, profits increase. Simple as that!
Calculating retail shrinkage is fairly straightforward: take the optimal income you could make from retail merchandise, and subtract the actual income realized from that merchandise.
While retail shrinkage is often measured in terms of total dollars lost it’s, again, better expressed as a percentage of company sales. To do this, dividing your total losses by total sales will yield your percentage of retail shrinkage.
Formula for Retail Shrinkage Percentage
(Value of Lost Stock/ Total Sales in the same time period) * 100
Retail shrinkage can occur virtually anywhere in product and sales processes: in factories, in transit, or onsite.
Shrinkage is primarily caused by operational inefficiencies, but there are many factors that contribute. These include many things but are most often from theft, waste, damage, human error, and vendor fraud. The reasons can be broadly categorized as operational issues (think data entry errors, receiving oversights, shipping problems, etc.), external factors (including theft, vendor disputes, etc.), or internal factors (theft from employees or administrative oversights).
As is probably evident, it's difficult to entirely avoid retail shrinkage. When inventory is, for example, stolen, it’s not just that theft that impacts a business. It’s about (a lot) more than simply accounting for theft and profit loss. Managing retail shrinkage is an integral part of inventory management and supply chain operations. If you improve shrinkage control, you can either: lower prices and sell more than you’d otherwise be able to, or you can keep prices the same and sell what you should have been able to in the first place.
Some strategies for reducing shrinkage include:
Tightening up security: think better security systems, guards, and scanners
Automating: automating your inventory and reporting processes helps reduce account errors, payment issues, and so so much more.
Improving re-order points: this will help you optimize the inventory you have on hand to make sure you meet demand, without having too much product sitting there taking up valuable shelf space.
Training your team better: if you standardize your processes in a way that enables your team to understand their role in the inventory management process, it can significantly reduce retail shrinkage.
Taking inventory more frequently: this one speaks for itself!