8 Best Practices in Inventory Management to Minimize Shrinkage

by Corey Philip //  November 4, 2022

American businesses lose more than 40 billion dollars to inventory shrinkage. In other words, that issue could bankrupt your business if you don’t keep it under control. So, what are the best practices in inventory management to minimize shrinkage?

To minimize shrinkage, employers should adopt vetting and security measures to reduce employee theft and human error. Scheduled and surprise audits help deal with this issue the same way educating employees and splitting inventory responsibilities does.

Inventory issues happen for a lot of reasons, so attacking this problem from multiple angles is vital for your business. Doing so at the right time (and not at random) is also fundamental to making these best practices work.

How to Minimize Shrink in Inventory Management

30 to 40% of shrinkage comes from employee theft, and human error also plays a big part in profit loss. For that reason, looking for best practices to deal with this issue is vital to keep your business running and making a profit.

If you’re worried about inventory shrinkage, surprise audits may work as a silver bullet.

1. Start doing Surprise Audits

The best way to improve your results (and reduce shrinkage) is to keep everyone on their toes. To make that happen, you need to start doing surprise audits. You should also continue to schedule regular audits, though having a few surprise inspections will show you better results.

Why is that? Because scheduling audits allows employees to fix any issues you may have in storage. In other words, if they have a month until the next audit, they’ll probably wait two or three weeks to deal with any issues.

However, if they know a surprise audit may happen at any time, employees will know they have to fix issues as soon as possible.

2. Automate Inventory Management

Computers make it easy to track your inventory. There’s no need to pace around your storage room with a pad and a pen. Inventory management software will alert you when something is missing without effort.

At the same time, that very same software will help you get information on how much you’re losing to shrinkage and, if you’re lucky enough, shed light on when these issues take place, helping you narrow down the list of culprits.

A lot of business owners believe buying software is too expensive. However, the bigger your business is, the more you’ll need to automate processes. Otherwise, you’ll lose too much time dealing with problems a computer can handle in one second.

3. Schedule Inventory Counts

Inventory management software and surprise audits will help you a great deal as long as you’re employing traditional measures, like regular inventory counts. Having management stop by on a regular basis to check things out will do wonders in reducing shrinkage.

Of course, a scheduled audit isn’t a magic fix. In fact, it’s laying the foundation to implement other practices. Take surprise audits, for example. Scheduling an inventory count for the 30th and then suddenly pushing it to a week before that date is a great strategy to keep everyone alert and away from trouble.

However, regular audits shouldn’t be a tool to fool employees, but rather something you trust that’ll help you reduce shrinkage (because it truly does).

4. Recruit Responsibly

A business is as good as its workers are. Remember, 1/3 of shrinkage is due to employee theft, which is a big number to leave unattended. Fortunately, you can nip the problem in the bud if you’re smart about it.

Asking for a background check and employer references is a good way to start the vetting process. It’d be even better if you could interview would-be employees yourself. Of course, the HR department can deal with that too. Lastly, training should be a big part of the first few months of a new employee. That way, you’ll reduce the amount of shrinkage due to human error.

5. Educate your Employees

Shrinkage sounds like an owner’s issue, but it affects everyone in the company, including employees. However obvious that may sound to you, it’s far from your workers’ minds, so it’s your job to explain the situation.

In other words, letting your employees know how shrinkage affects promotions, profit shares, and paychecks will help them become more conscious of this problem, which may solve the issue altogether or at least limit it.

6. Distribute the Responsibility

Close to 90% of all employee theft cases have people trying and hide their actions. In other words, stealing will never happen in plain sight, so you have to make sure you have many eyes on your inventory, shining light on any issues.

Shrinkage is bound to happen if you have one or two employees handling your entire inventory. Humans are often tempted by opportunities, no matter how unethical they may be.

However, it’s your duty to prevent that from happening. Having several employees in charge of different areas of inventory management will reduce the chances of someone feeling bold enough to steal.

7. Implement Security Checks

Security checks should be mandatory for anyone working in inventory management. However, business owners and managers often shy away from implementing these measures out of a sense of guilt or fear of employee opposition.

Nevertheless, installing security cameras, locking small items in cupboards, and employing manual patdowns should be non-negotiable, especially if you’re losing a lot to shrinkage. Sometimes, announcing the start of patdowns after each shift is enough to drastically reduce this issue.

8. Track Shrinkage Rates

You need to keep track of your inventory, which includes shrinkage rates too. Before you employ any of these measures, find out how much you’re losing to shrinkage every month and every quarter.

Once you have the data, start using these best practices one by one. That way, you can pinpoint your critical problems. Otherwise, you’re shooting in the dark, and that won’t help you reduce shrinkage.

Final Thoughts

The best way to deal with shrinkage is to reduce the possibility of employee theft and human error from happening. Vetting and training employees, as well as employing security measures, is vital to accomplish that goal.

About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

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