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What Is Inventory Shrinkage And How To Prevent It?

What Is Inventory Shrinkage And How To Prevent It?

Managing a business has never been an easy job. It comprises so many processes and activities that frauds and errors can happen at any time in any operation. One of the most challenging problems yet hard to deal with is inventory shrinkage. So what exactly is inventory shrinkage? And how to tackle this problem? In today’s article, we’ll assist you in answering these questions. 

Inventory shrinkage definition

Inventory shrinkage refers to the excess amount of inventory that is shown in the records but no longer exists in the actual inventory in reality. Excessive shrinkage is a serious problem, yet hard to address with many businesses, particularly retail businesses. Inventory shrinkage can indicate a poor inventory management system, insufficient security level, and other problems in business operations. 

To measure the amount of inventory shrinkage, it’s simply to conduct a physical count of the inventory and calculate its cost, and subtract this cost from the cost in the accounting records. The difference is then divided by the amount in the records to have the inventory shrinkage percentage.

Main reasons for inventory shrinkage
Main reasons for inventory shrinkage according to the annual National Retail Security 2017 Survey by National Retail Federation

Ways to prevent inventory shrinkage efficiently

Addressing external factors

Improve security

The first measurement that businesses can take is to improve the security level.  Implementing a strict security protocol to control access to the warehouse will help prevent unwanted entry. In addition, business owners should also invest in a CCTV system with security cameras allocated around the stock locations like warehouses or storage rooms inside physical shops. By monitoring inventory carefully, retailers can spot any suspicious behavior to prevent any theft before it happens. The footage can also be reviewed when any stock loss occurs later on. 

How to prevent inventory shrinkage: invest in a CCTV system

Get rid of fake promotion codes

Preventing fake promotion codes is what retailers usually fail to think about when it comes to inventory shrinkage. Even though promotions benefit your retail businesses in many ways, they are also a potential breach that scammers can take advantage of. Nowadays, with increasing promotion offers, many scammers circulate fake manufacturer coupons online to obtain free merchandise. To deal with this, business owners and operators need to ensure that their employees are up-to-date with the current online promotions your store is running. It’s also necessary to conduct training on how to detect promotional coupon frauds for all of your employees. 

Reduce temptation

Lastly, retailers should find ways to reduce temptation. To prevent on-premise theft in retail stores, high-value items should be stored in secure areas that require a store employee’s authorization to access them. For example, some accessory stores stock their premium items in glass display cases with a lock. If a customer wants to feel the product or purchase, a store employee will assist them with that. This discourages shoplifters and makes it harder for them to target valuable items in your stores. 

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How to prevent inventory shrinkage: reduce temptation

Dealing with internal factors

Eliminate sales frauds

Firstly, sales frauds need to be eliminated. There are many ways that sales fraud can take place like giving excess discounts. Below are several ways to tackle this issue so that retailers can avoid inventory shrinkage:

  • Assign a few individuals for important tasks or key processes. That way, it reduces the chance of one individual making mistakes or committing any fraud.
  • Restrict access where only a certain group of people can view or adjust some kinds of transactions. With that being so, employees can’t have the freedom and access to manipulate and cheat the system.
  • Conduct regular audits to keep your internal business operations on track always. You also might want to look into any suspicion in close relationships between your employees and your suppliers or customers. 
How to prevent inventory shrinkage: eliminate sales frauds

Be aware of fulfillment frauds

Another way to minimize inventory shrinkage is to get rid of fulfillment fraud activities. To avoid fraud, check and inspect carefully the products that are claimed to be “defective.” For these items, you need to ensure a proper inspection process to verify those claims before disposing or giving them away. Also, it’s beneficial to keep these inspection reports so that when you detect any strange patterns later on, you can totally review the records for further analysis. 

Eliminating administrative and paperwork errors

Adopting an inventory management system to automate and manage your inventory can reduce human mistakes. Thereby, it helps eliminate administration and paperwork errors to prevent inventory shrinkage. When having your workflow well-organized, you can easily monitor and maintain your inventory movements accurately. Moreover, it’s more convenient and effective to manage your inventory with a centralized, integrated system in comparison with having to switch between all your different accounting, shipping, and manual spreadsheets. Doing so will reduce the chances of duplicate or miss information due to asynchronous sets of data. 

How to prevent inventory shrinkage: adopt an inventory management system

Secure your retail businesses with ConnectPOS

As we have discussed earlier, technology can help a lot when it comes to managing inventory to prevent inventory shrinkage. Adopting inventory management software is great, however, it’s even better when having a POS system that comes with a built-in inventory management feature so that there’s no need for additional software. And retailers like you can count on ConnectPOS for that. The inventory management feature of ConnectPOS is robust as retailers can manage multiple warehouses simultaneously. 

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Should you have any questions or need further assistance, don’t hesitate to contact us!


ConnectPOS is the retail pos system in the ecosystem. ConnectPOS gladly presents a comprehensive training guide ebook tailor-made for cashiers in the retail business.

About the Author

Hann P.

Hann P.

Hann P. is a digital marketing executive at ConnectPOS. Being fascinated with Fintech and E-commerce, she has been keeping an eye on particularly how technology has been changing the game in the fields.

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