How retailers can combat the four sources of inventory shrink

According to the 2010 National Retail Security Survey, US retailers lose over $37 Billion dollars a year to inventory shrink.  That accounts for approximately 2% of sales revenue, and for many retailers, that lost profit, and the implications it has for cash flow, is the difference between making a profit or going out of business. 

There are the four major sources of inventory shrinkage in retail.  Let’s look at them in descending order in terms of impact on your business:

1. Employee Theft

According to the National Retail Security Survey (NRSS), the number one source of shrinkage for a retail business is internal theft.  It is estimated that as many as 75% of US employees steal from their employers at one point or another and this amounts to almost $16 Billion in lost profits.  At retail, employees will often try to hide their crimes by using the store’s POS system through fake refunds, false voids, and processing fraudulent credit card sales.  Retailers also need to be wary of excessive discounting and inventory manipulation along with straight out cash or merchandise theft.

2. External Theft and Shoplifting

Coming in at a close second is shoplifting.  The NRSS estimates this totals $12.1 Billion in annual loss.  There are over 600,000 shoplifting incidents each and every day in North America and the average theft is $549!  Customer theft can occur through concealment, altering or swapping price tags, or transfer from one container to another.  It should also be noted that it is common for employees to collude with shoplifters.  The good news is that through implementing effective retail operations training and good customer service skills much of this can be deterred and prevented. 

3. Administrative Error

Administrative and paperwork errors make up approximately 13% of shrinkage.  This totals almost $5 Billion dollars of lost profit due to pricing mistakes, failure to check in orders properly, failure to complete freight claims, bad inventory counts, spoilage, and more.  Training your retail team members on proper procedures as well as focusing on retail manager development is critical to eliminating these issues.

4. Vendor Fraud

The smallest percentage of inventory shrink – about $2 Billion – is due to vendor fraud.  The majority of this is due to vendor employees pilfering shipments.  For example, you may find that a master carton of 24 products only has 23 because the vendor’s employee is stealing small quantities.  In other cases you may have vendor employees who assist with setting up displays or training team members.  The people can easily be tempted to steal and because they are in your stores regularly they are not screened with appropriate diligence.

Education, involvement, discipline, deterrence, and prosecution are the keys to controlling – and hopefully eliminating inventory shrink. 

There are any number of resources – including Internet content, trade associations, retail consulting firms, and retail training and development companies who can assist you with identifying and eliminating your inventory shrink problems.  But the key is to take action sooner rather than later!

–          David Goodwin is the Principal of the Retail Advocacy Group.  As a 30 year veteran of the retail industry he has hired, trained, and performance managed thousands of retail sales representatives and retail managers.  You can learn more about instructor-led and e-learning training solutions for retailers at