Shrinkage: Definition, Causes, Impacts, and How to Overcome It

Manual inventory management processes are prone to various issues and can make companies less responsive to dynamic market demands. One of the problems that can cause financial losses for companies is shrinkage.

Definition of Shrinkage

Shrinkage is one of the challenges in warehouse management that occurs when there is a difference or discrepancy between the quantity of physical stock available and the stock quantity recorded in the system. This data discrepancy prevents companies from fulfilling customer demand.

In warehouse management, shrinkage often refers to unexpected inventory losses. It is generally caused by several factors such as theft, damage, recording errors, or even missing items during the shipping process.

Causes of Shrinkage

As mentioned above, shrinkage in warehouse management can be caused by several factors, including:

1. Theft

This is one of the most common causes of shrinkage. Theft can be committed by anyone, especially when warehouse security is inadequate. Both internal employees and external parties may gain access to inventory, leading to theft during shipping or delivery from the warehouse to the customer.

2. Recording Errors

Errors in recording inventory data, counting physical stock, or processing inbound and outbound goods can cause discrepancies between the actual and recorded stock. This often happens due to manual processes and can lead to shrinkage.

3. Damaged Stock

Inventory damage during storage, whether due to poor handling, natural disasters, or unsuitable environmental conditions (such as improper humidity or temperature), can cause shrinkage.

4. Expired or Unsellable Stock

Products that have exceeded their shelf life or expiration date become unsellable. This results in losses for the company because the products remain in storage for too long without being sold.

5. Missing or Misplaced Items

Errors in inventory location within the warehouse can lead to shrinkage. When stock items are stored in the wrong locations and not properly recorded, it causes discrepancies and losses for the company.

Impact of Shrinkage on Business

Shrinkage can have negative impacts on businesses, especially when the shrinkage rate is high. Some of the major impacts include:

1. Decreased Profit and Customer Satisfaction

Losing inventory means losing potential profit from the sale of those goods. Additionally, shrinkage can lower customer satisfaction.

2. Increased Operational Costs

Shrinkage can increase operational costs because companies must replace or repurchase lost or damaged inventory.

3. Delayed Deliveries

Missing or damaged stock leads to shipping delays or product unavailability. Ultimately, if shrinkage is not addressed promptly, it can affect customer satisfaction due to prolonged waiting times.

How to Overcome Shrinkage

To reduce shrinkage, companies can implement several strategies, such as:

1. Implementing a Warehouse Management System (WMS)

A WMS helps companies track inventory in real time, identify stock discrepancies, and minimize recording errors through automatic and accurate stock-taking processes.

2. Enhancing Security

Companies can improve warehouse security by installing surveillance cameras (CCTV), using security tools, and conducting regular inspections through the WMS to help prevent stock losses.

3. Warehouse Staff Training

To minimize shrinkage during inventory management, companies can provide training to warehouse staff on proper inventory handling procedures and the importance of maintaining inventory quality and management.

4. Regular Stock Audits

Conducting regular stock audits is crucial so that companies can easily identify shrinkage and take corrective actions more quickly and accurately.

5. Inventory Management for Expired Goods

Managing inventory with short shelf lives more effectively can minimize losses. This can be done through sales strategies such as bundling or discounting products nearing expiration to avoid dead stock that causes financial losses.

Use Prieds Inventory Management System to Overcome Shrinkage

Through an inventory management system, stock management is automated once customer orders are received by the company. In addition, the system allows more accurate and routine inventory recording. The purpose of implementing an inventory management system is not only to improve warehouse operations but also to serve as a solution for common inventory management issues such as shrinkage.

By integrating technology like the Prieds Inventory Management System, companies can improve inventory management accuracy and minimize losses caused by shrinkage.

Learn more about solutions to overcome shrinkage in inventory management through consultation with our expert team. Get software equipped with complete features, top-level security, and user-friendly functionality tailored to your company’s needs with Prieds.