Monday, September 10, 2007

Sources of Retail Inventory Shrink

Before jumping too quickly to try to implement a shrink reduction program it is important to understand what is the source of the inventory shrink.

Although there is some variation depending on the type of retail store, most retailers' inventory shrink rate should be in the neighborhood of 1.5%-2%. Anything over this usually indicates a problem.

The following is the industry average for the source of inventory shrink in the retail industry:
  1. Internal Theft 45%

  2. Shoplifting 35%

  3. Admin/Paperwork Errors 15%

  4. Vendor Fraud 5%

Internal Theft
Based on the above breakdown, much of the shrink reduction program should emphasize internal controls & processes related to damages and write-offs. Also, cross-store and employee comparison of refunds and unauthorized discounts should be done to ensure that some of the shrink is not happening at the till. Parcel/Bag checks is a bit more extreme but some retailers do implement this.

Shoplifting
Customer Service is the best way to thwart customer theft. Acknowledging and servicing customers can avert many planned thefts. Also, signage indicating shoplifters will be prosecuted and arranging product so that low value items are near the doorway and expensive items are near the cash desk or under lock and key helps reduce easy shoplifting opportunities

Admin/Paperwork Errors
This is the inventory shrink category that you have the most control over. Review current procedures for receiving, transfers, pricing and write-offs to ensure they are being followed and to identify areas for improvement.

Vendor Fraud
This is most common when vendors are used to re-stock items directly in a store – usually this occurs only in larger department stores where vendor managed programs are in place.

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