47. Shrinkage and How to Control It

 

47. Shrinkage and How to Control It

Protecting Your Inventory — and Your Profit Margins

What Is Shrinkage in Warehousing and Logistics?

Shrinkage means the loss of inventory before it can be sold, due to theft, damage, errors, spoilage, or fraud. It’s the difference between the inventory numbers in your system and the actual number of products physically available.

Even if no sales happen, shrinkage still reduces your profit — because you’ve paid for goods you can no longer sell.

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Main Causes of Shrinkage

1. Theft

   • Internal: warehouse staff, delivery drivers

   • External: break-ins, stolen shipments

2. Damage

   • Poor handling, bad packaging, unsafe stacking, or weak pallets

3. Administrative errors

   • Wrong item scanning, wrong SKU input, mistakes in picking or receiving

4. Vendor fraud or misdelivery

   • Supplier sends fewer products than invoiced, or sends defective goods

5. Spoilage or expiry

   • Especially in food, cosmetics, or pharmaceuticals

6. Misplaced goods

   • Items lost inside the warehouse due to bad organization or human error

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Why Shrinkage Matters

• Reduces available stock

• Wastes money on unsellable goods

• Causes delays, backorders, and lost customer trust

• Affects inventory accuracy and demand planning

• In regulated sectors, it may create legal risks (pharma, chemicals)

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How to Calculate Shrinkage

The shrinkage rate shows what percentage of inventory has been lost.

The formula is:

Shrinkage (%) = [(Recorded Inventory – Actual Inventory) ÷ Recorded Inventory] × 100

Example:
If your system says you have 10,000 items, but you only find 9,700 during a physical count:

(10,000 – 9,700) ÷ 10,000 = 0.03 → 0.03 × 100 = 3% shrinkage

In most industries, a shrinkage rate under 1% is acceptable. Over 2% often signals a deeper issue.

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How to Prevent or Reduce Shrinkage

1. Secure the warehouse

• Install cameras and limit access to key zones

• Use employee badges and controlled doors

• Seal boxes and pallets to prevent tampering

2. Train your staff

• Teach correct scanning and packing methods

• Promote accuracy over speed

• Rotate employees across zones to reduce opportunities for internal theft

3. Improve inventory control

• Use barcode or RFID tracking for all movements

• Organize inventory by zones and keep labels clear

• Use a Warehouse Management System (WMS) to track real-time stock

4. Do regular audits

• Use cycle counting (small sections of inventory counted often)

• Compare system numbers with real stock weekly or monthly

• Investigate all variances immediately

5. Apply FIFO or FEFO

• Use First-In, First-Out (FIFO) to reduce product expiration

• Use First-Expiry, First-Out (FEFO) for perishable or dated items

6. Control returns

• Inspect every returned item

• Decide quickly whether to restock, refurbish, or discard

• Track return-related losses separately

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Key Metrics to Monitor

• Shrinkage % per SKU, zone, or employee shift

• Value of lost inventory in € or $

• Accuracy of picking and packing

• Rate of damages during storage

• Number of receiving or shipping errors

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Real Example

A beauty product company runs a warehouse with 5,000 SKUs. After a full physical audit, they discover that over 2,000 lipsticks are missing.

They:

• Installed cameras in packing zones

• Switched to RFID scanning

• Improved training for seasonal workers

• Started weekly cycle counts

After 2 months, their shrinkage dropped from 2.6% to 0.8%.

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Summary

Shrinkage eats your profits silently. Whether due to theft, error, or spoilage, each missing unit represents wasted money.

The solution is not just tighter security, but a complete system of visibility, accountability, and prevention. By investing in training, smart technology, and regular audits, you protect your inventory — and build a more profitable, efficient business.

Lesson 48