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What Is Inventory Shrinkage?

By Tara Barnett
Updated May 17, 2024
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Inventory shrinkage, sometimes simply called shrinkage when the context is clear, is a term used to talk about loss of products between the time when they are made and when they are sold. Quite simply, it is the amount of products that are not sold due to any number of reasons, including theft, faulty manufacturing, and loss during transportation. A business aims to operate with a low degree of inventory shrinkage, but some businesses suffer more from this problem than others. In some cases, this problem can cause business owners to raise the prices of goods in order to compensate for profits lost.

One of the main causes of inventory shrinkage is employee theft. It is difficult to determine precisely how much loss of inventory is due to theft, but the statistics are surprisingly high in many industries. Businesses that pay their employees well and treat them fairly are often less likely to suffer from this type of inventory shrinkage, but almost all large businesses experience employee theft at some point.

Shoplifting is another major cause of inventory shrinkage. This type of loss can be prevented by good security. Some types of items, such as small inexpensive items, are often more vulnerable to theft of this type. When a store sells expensive items, security is often better, thereby reducing theft.

Other types of inventory shrinkage can also be prevented. Many businesses take detailed accounts of items that have been purchased by the company in order to make sure nothing has been lost in transit. Making sure that all items are of an adequate quality is important as well, particularly in the case of food, where damage is very common. Proper stocking procedures can prevent items from expiring or otherwise being wasted. Minimizing this type of shrinkage is a good strategy for any business and can save money in the long run.

The effects of shrinkage on a business depend on the severity of the loss and the time in which it occurs. Businesses typically plan for some amount of shrinkage and price items accordingly, but when shrinkage grows, prices must increase as well. In some populations, like college campus stores or small town markets, making the potential effects of shrinkage clear to customers can reduce the amount of loss due to theft. Various other strategies can be used by large businesses to prevent shrinkage, and depending on the severity of the loss, it may be worthwhile to invest in somewhat involved measures to prevent theft, even if these seem expensive when compared to the cost of individual items.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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