Reduce Inventory Shrinkage

Inventory shrinkage simply refers to a loss of inventory. Shrinkage typically occurs due to theft, damage/spoilage, or errors by administration. Though inventory shrinkage can be a big problem for businesses which carry goods, the issue can be greatly reduced by putting in place proper monitors and controls.

Steps

Preventing Employee Theft

1. Educate and train employees properly. Run training and loss-prevention programs which clearly discuss the implications of theft with employees, such as limited pay increases, fewer opportunities for promotion, and layoffs due to the company’s financial instability.
   • Loss-prevention programs show employees that you are paying attention to theft and that the company takes the issue seriously.
   • In addition, these programs can help employees learn how to spot theft, whether among other employees or customers.
2. Secure your storeroom. The easiest way to reduce the risk of employee theft is to restrict access to your inventory. Only those employees directly involved with handling inventory should have access to inventory areas. If you have some goods that are particularly valuable, consider further restricting access to the areas where these are kept.
3. Tighten your receiving practices. The receiving area of a warehouse is where a large amount of inventory theft takes place. Employees might mark shipments as short or spoiled when they are not and claim the good for themselves. You can prevent this by requiring an inspection of spoiled or damaged goods before they are thrown out. You should also have an employee that works outside of receiving perform these inspections, along with a recount of the items received.
4. Install surveillance cameras. Installing visible security cameras throughout the store and workroom is a proven deterrent to crime. Let your employees know in a subtle manner that the security cameras are working and checked often. In addition, review the security cameras each night to monitor odd behavior associated with theft or shoplifting. Cameras should be reviewed at least weekly, even if there are no indications of shrinkage.
   • For instance, while training employees, you can clearly show them where all cameras are located, show them the live recordings, and emphasize that the tapes are checked daily.
   • You can also post signs in the store and workroom warning against theft and the penalties associated with it.
5. Monitor valuables closely. Reduce the urge to steal by storing higher value items (whether goods or currency) in locations that require higher levels of authorization or access.
   • For example, store high priced items under lock and key and only provide keys to trusted managers or supervisors.
6. Separate duties among more than one employee. Don’t allow the same person to handle inventory management, processing of receipts, and recording of receipts. Having one person in charge of inventory and income makes it easier for theft to go unnoticed. Instead, spread the duties among multiple people to have a “checks and balances” system that will deter theft.
7. Utilize an efficient point-of-sale (POS) system. Require each employee to sign into the POS terminal with a unique password and username and review daily transactions through the POS terminal for suspicious behavior. Study your daily profit margins report to locate questionable losses. If there are substantial losses in one department regularly, you might need to investigate that department for employee theft.
   • Examples of suspicious behavior include unnecessary and excessive access to the cash drawer, recorded refunds in small amounts, and product returns not matching the product.
   • Look for fake sales which is where an employee enters in a discount in order to pocket the money paid by the customer at full-price. Set thresholds for discounts so that transactions will not go through if the discount appears to be too drastic.
   • Limit what each employee is able to do when signed in to the terminal. For example, you might require employees to call a manager to perform voids or product returns.
   • The failure to match posted prices with cashier prices can result in civil penalties and class action law suits.

Decreasing Customer Theft

1. Locate cashiers to prevent shoplifting. Place cash registers near the entrance/exit to the store. Instruct your cashiers to welcome customers as they come through the doors. Keep sight lines open from the cashier to the rest of the store. Locate your most valuable items close to the cashier and have them monitor this area. Shoplifters are less likely to go through with the theft if they are being watched closely.
2. Use security cameras and mirrors. A shopper is less likely to shoplift if they know they are being actively monitored. Install highly visible cameras, mirrors, and warning signs to let shoppers know that the store takes theft seriously, and will enforce penalties against all violators.
   • Place mirrors in corners or obscure areas that are more likely to be a hiding spot for theft.
3. Raise employee awareness and visibility. Employees should not only be trained to recognize petty theft, but they should also be prepared to put their skills into practice daily. At the Loss Prevention Research Council Annual Session, professional shoplifters noted that employee visibility was the #1 deterrent to theft. Ensure that employees remain aware by walking the floor, assisting customers, monitoring the dressing room, etc.
   • Employees should be looking for shoppers who: avoid eye contact, appear nervous, seem to wander aimlessly, leave and return to the store repeatedly, constantly eye other customers or employees, and linger in obscure areas.
   • Make sure employees remain vocal by greeting all customers, and asking lingering customers if they require assistance.
   • Set up a policy that forbids physical contact or restraint of shoplifters, due to possible lawsuits and complaints. Make sure your employees know that it is also illegal to profile customers based upon race, gender, ethnicity, age, or disability.
4. Implement store policies that will cut down on theft. There are certain policies that will make shoplifting difficult for thieves. Implement policies regarding bringing in shopping bags, and implement dressing room policies if you have a retail store that sells clothing or shoes.
   • Implement a policy regarding shopping bags brought in by customers. For instance, have them leave bags at the checkout counter, and give them a number that allows them to retrieve their items upon leaving.
   • Keep dressing room doors locked and have a dressing room attendant that monitors the number of garments taken into the fitting room by each shopper.
   • Exits for emergencies should be alarmed or locked, but remain in compliance with fire code.
5. Ensure employees are aware of scams. Make sure that employees are up to date on on store policies regarding discounts, returns, and coupons. Cashiers should be familiar with item prices in order to be aware of price tag switching, current coupon scams, and bad promotion codes. Bad coupons and codes can affect the profit margin of stores because if the coupon or code is considered invalid by the manufacturer, the store may not be reimbursed.
   • Employees should be aware of a large quantity of coupons being redeemed, or a larger than average redemption value.
   • Avoid scams on returned goods by always requiring an original receipt. If customers don’t have a receipt, you can implement a 20% restocking fee to deter would be scammers.
6. Keep your store clean and well-organized. When your store is kept neat, it is much easier to notice if something is out of place or missing. Keep all merchandise “faced,” which means pulling all products to the edge of the shelf to form a solid wall of merchandise.

Avoiding Administrative Errors

1. Be aware of the most common types of administrative errors. Typical administrative errors that lead to inventory shrinkage include Universal Product Code (UPC) ticketing errors, point of sale (POS) ringing errors, return processing errors, and inadequately trained staff. By being aware of these common errors, you can be more mindful of avoiding them in the future.
   • Avoid UPC errors by ensuring that items have the correct barcode, and that items are being scanned and logged appropriately. Creating clear labels for items, bins, and shelves will create an organized system that will cut down on human scanning errors.
2. Conduct audits consistently. The goal in auditing is to know where every piece of inventory is located. The most efficient method to audit inventory is to conduct cycle counting, where you count a small amount of inventory each day until you’ve cycled through the entire lot.
   • You should conduct at least two complete audits, per location, per year.
   • Another method for tracking inventory is through barcode scanners or mobile devices which track inventory from the dock to the register, but thieves can find a way around this.
   • An additional method is to count each piece of inventory by hand.
   • For more on keeping inventory, see how to keep inventory.
3. Automate your inventory through a software solution. By using software to track inventory, you are able to standardize the system, and able to more accurately track information. Not only does it help prevent fraudulent activity, but it also makes inventory adjustments easier since it is done outside of the accounting system.
   • For instance, a system like in Flow Inventory is able to provide an overview of the entire inventory process, and allows you to create an audit trail of all transactions (even down to separate user accounts).
4. Pay attention to spoiled or broken items. Try to limit the amount of inventory that goes to waste by ordering the proper number of items during purchasing, and ensuring careful handling of items in the store’s stock room. Occasionally, you will receive spoiled or broken items from the warehouse. Be sure to validate shipments and to carefully inspect items that are said to be damaged or spoiled to avoid scams.

Tips

• Allow your employees to witness you reviewing daily transactions. If employees see a manager or owner taking the time to keep careful track of sales, potential thieves might be dissuaded.
• “Spot” audits are also helpful in catching employees or customers who are guilty of theft off guard.

Warning

• Never accuse a customer of shoplifting if they are suspected of theft. Ask them if they need any assistance, ask them if they are ready to checkout, or call security.
• Ensure every employees knows the company procedures for dealing with suspected thieves.

Related Articles

• Prevent Late Payments from Customers

Sources and Citations

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