Retail Inventory Management Best Practices: Inventory Shrinkage

Inventory shrinkage is one of the major problems in retail distribution, and most NetSuite retail companies do not have a good idea as to why. The truth is: Without putting proper processes and procedures in place, you will never be able to understand where your inventory disappears - and will continue to see an eroding of your bottom line.  Every dollar of inventory you lose requires many more dollars of sales to recover.

Inventory Shrinkage

What causes Inventory Shrinkage 

So what should you do? To start, let’s break down the root problems behind inventory shrinkage. There are three major problem areas:

  1. Poor business processes and procedures
  2. Employee theft
  3. And in a retail environment, shoplifting

Many retailers have programs in place to reduce shoplifting, but it’s actually the first two areas that result in the most dollars lost. If these are your main concerns, what ways can you reduce inventory shrinkage and improve your bottom line?

Processes and Procedures

First, let’s look at processes and procedures, which need to be implemented from the time you receive items until they are sold. A good receipt process is the first area of defense against inventory shrinkage. It requires you to validate every item that is received. Most distribution operations do a good job in validating items at receiving, but many stores just assume what is on the packing slip is correct and don't verify what is actually received.

Many companies now use a mobile Retail Inventory Management solution to scan in these receipts, a process that is very easy to implement in a retail operation as well. Catching errors in receiving not only validates the actual quantity you received, but also that it’s the correct item (either from your own distribution center or directly from a vendor). 

Scanning items at receipt makes this process much easier, faster and more accurate. Another bonus: This process will provide better inventory control to avoid those unexpected stock outs (caused by short shipments or different items being shipped and received) and having a customer try to buy an item that is not in your inventory (wrong item shipped and received).

If you have a large physical environment and move inventory once it’s received, then each time your inventory is touch, it needs to be tracked. This is a process that is often times overlooked because without data collection, it is very time consuming. The good news is an automated system can make this process easy, quick – and realistic. And keeps track of all of your inventory after it has been received. 

Employee Accountability

When it comes to employee theft, inventory movement where the physical and system transaction is not performed at the same time is the second leading area where inventory is lost.

Another benefit of having an employee scan items with each movement is accountability. Now you know who and when the movement was processed. This not only makes your employee more aware of what they are doing, but provides an audit trail when errors are found.

These are a few best practices that can help you answer “Where did my inventory go?”  and greatly reduce it. If you add these processes to an inventory counting program, you will see a significant improvement in inventory accuracy, which will help drive down inventory cost and provide better customer service.