Inventory shrinkage costs retailers billions of dollars each year. Learn about the four main causes of inventory shrinkage and find out what you can do to prevent them.
Inventory shrinkage costs the retail industry worldwide at least $100 billion annually, according to Retail Dive. That’s a big problem, and for most retailers, these numbers mean the potential loss of revenue and challenges to measuring or defining inventory turnover. This is just one reason why it’s critical to develop and implement loss prevention strategies to track and deter inventory loss.
To successfully reduce shrinkage in your retail stores, you need to have a solid understanding of what causes inventory shrinkage — especially if it’s a problem your business is already experiencing. This will be your basis for implementing the most effective solutions to solve the shrinkage problems your business may be facing.
Four Leading Causes of Inventory Shrinkage
Shoplifting, employee theft, return fraud, and administrative errors are four of the leading causes of inventory shrinkage issues for a business. In the following article, we’ll look at each of these causes as well as the steps you can take to address them.
Shoplifting alone accounts for 36.5% of annual losses resulting from inventory shrinkage. Considering that it’s a common occurrence that can take many forms, retailers and staff need to be prepared to handle any and all cases of shoplifting on the spot, as well as creating general shoplifting policies and procedures that should be communicated clearly across the store. Shoplifters may work alone or coordinate efforts as a group.
Here are some steps to help you mitigate the potential of shoplifting in your store:
- Invest in video surveillance and signage – One of the best ways to secure your retail store from both internal and external threats is to install security cameras to monitor your retail store during and after operational hours. Installing video surveillance cameras in open areas will make it clear to customers that their actions are monitored Strategically-placed surveillance signs and signage warning customers of shoplifting and prosecution will also work as a deterrent against such behavior
- Offer great customer service – Encourage your retail store workers to greet customers when they enter your store and offer guidance when looking around. Having staff around your store at any given time will discourage shoplifters. Manning areas like fitting rooms and blind spots like corners will also deter shoplifters.
- Ensure proper store organization – Most shoplifters will target retail stores with layouts that have unmonitored areas, disorganized goods, overflowing inventory, and blind spots hidden from employees’ view. These factors make it easier to shoplift, so take the necessary steps to plan your retail store layout, ensure proper lighting, and employ enough staff to man critical areas while keeping an eye on customer movements.
Employee theft accounts for 30% of the annual losses that retailers make, making it one of the biggest concerns. Employee theft can happen in the form of employees stealing merchandise directly from the stores, ringing up fake returns, offering “free” items to family or friends, stealing from the cash drawer, or giving out fraudulent gift cards.
To stop employee theft, you can install surveillance systems like hidden cameras to monitor POS points and employee working areas, post signage that employees are being monitored, and check employees’ bags before leaving. While these steps can be effective, they can affect morale in the workplace. Here are more practical measures to prevent employee theft:
- Ensure proper employee training – To stop employee theft, you need to have the right team in place and train them on how to handle operations and mitigate any errors that can potentially contribute to losses. This involves identifying fraud, shoplifting, and implement steps to bring down retail shrinkage rate. With well-trained employees, you’re halfway down the road. You should also have strict policies in place to ensure that employees are aware of the steps that will be taken to bring down employee theft.
- Re-evaluate employee hiring practices – It’s important to hire the right people, from the top managers (who will act as the frontline partners against loss prevention) to store employees (who should be vetted for integrity and free of any criminal records.) Improve your employee hiring practices to build the right team.
- Consider your workplace culture – Every business is driven by workplace culture. It’s what defines how the business operates and serves its clients. Retail businesses, in particular, rely on employees to ensure success. You need to have a collaborative team effort and appreciate every single employee by offering incentives and engaging in community work so you can build loyalty and ensure employees stay longer. Nurturing a positive workplace culture will result in reduced cases of employee theft.
While shoplifting, employee theft, and administrative errors can be easy to identify, return fraud is a complex issue that most retailers overlook. Typically, its significant effect is only realized after an extended period of time has gone by. Fraud takes different forms, including using counterfeit receipts to return merchandise, returning used or stolen merchandise, or returning goods purchased with counterfeit money for valid legal tender or store credit.
The key to resolving return fraud issues is having a strong and up-to-date return and exchange policy. Train your employees on how to enforce it to the maximum and take these extra steps:
- Equip your employees well – One of the initial steps to help stop return fraud is training your employees to spot and stop this form of fraud. Every employee should undergo the program so that implementation can be effective.
- Request receipts for all cash returns – Make it a requirement that all customers returning merchandise show verifiable receipts before any cash is returned. If no receipt is shown, only an item exchange or a store credit can be offered. This policy must be enforced 100% of the time in order for it to be effective.
- Request valid identification when tracking returns – Even with staff training and return policies in place, some fraudulent receipts may still pass through your systems. Ensure that all customers returning or exchanging merchandise produce a valid ID so you can identify anything off-the-books or frequent return patterns.
Proper inventory management is key to improving cash flow, and sometimes when your business takes a hit, the losses may be a result of administrative errors. Unfortunately, this may stem from illegal behavior from managers, well-planned malicious acts, or even genuine administrative errors — all of which are preventable with proper inventory management. Administrative errors account for 21.3% of annual inventory shrinkage.
Implementing the right inventory management policies and systems plays a critical role in accurately tracking your retail inventory and sales. Simple mistakes like accounting errors, mislabeling of merchandise, and incorrect markdowns can cause major losses. Here’s how to avoid such problems:
- Invest in inventory management and POS monitoring – The core pillar of any retail business is having a comprehensive POS (Point of Sale) and inventory management system. Combining these two will help you track inventory and transactions as they happen, helping avoid errors and identify potential fraud and theft. Having a multiple video surveillance system at POS points and areas like warehouses and stores, as mentioned earlier, will help you keep an eye on everything.
- Consider additional administrative training – Again, training employees on how to handle effectively carry out administrative tasks will help reduce errors that end up causing losses. In addition to that, conduct regular inventory audits to ensure everything is running smoothly.
Stay on Top of Shrinkage
While inventory shrinkage is part of the retail industry, taking these steps will help you reduce avoidable losses each year. Understanding why and how it happens will help you develop an effective prevention strategy for your retail store or franchise.
About the Author:
Aaron Smith is a technical writer and content strategist from Los Angeles, CA. He works with technology companies such as CCTV Security Pros to cover emerging trends in the tech sector and how they impact the security of business both physically and digitally.