AML Blog - The Scan

Understanding and Preventing Inventory Shrinkage

Every business that sells or manages products must have an inventory. Simply having an inventory, though, is pointless if it is poorly managed. Understanding which products go where, or how much of a product is in stock, is crucial to the operation of a warehouse. If miscommunication occurs at any level, it can cost a business money and hurt its reputation. Inventory shrinkage is just one example of a miscommunication.

Inventory shrinkage is the result of the physical inventory having a count that is lower than the count recorded in the company’s documentation. Essentially, it means having less than you think/say you have. Inventory shrinkage happens in a variety of ways:

  • Miscounting: It is entirely possible for an employee to make a mistake when counting inventory. Although precautions can be taken, human error will appear every now and then.
  • Damage: Inventory can be damaged in numerous ways. When damage occurs, and products are no longer usable, the physical inventory may be much lower than recorded inventory.
  • Theft: Thievery has been, and always will be, a problem. Employees might take some products home without paying. Then, your inventory is depleted and there is no record of those items leaving your facility.

Inventory shrinkage is a problem because it creates discord within your business, but it also makes your company look like it’s worth more than it really is. False inventory records can lead to a business being charged with accounting fraud. It is important for businesses to regularly take inventory, and record any discrepancies that occur.

In addition to regularly taking inventory, there are a few things companies can do to ensure inventory shrinkage doesn’t occur.

Maintaining the warehouse can prevent products from being damaged. Buildings that are old or poorly built are a hazard, not only to employees, but to inventory as well. Leaky roofs can damage products or cause them to rust. Updating the structural integrity of an older building or ensuring that the wiring is not deteriorated can prevent collapses and fires. Water damage and electrical fires could damage much more than just inventory, so it is important to make sure both are prevented.

Preventing employees from making mistakes when counting can be tough. For the most part, mistakes won’t be made. However, pinpointing how and when they are made can be tough. A good way to prevent miscounting is by implementing a barcoding system. Unlike people, a barcode scanner will not make mistakes. Using a barcode scanner to track inventory is the most foolproof way to prevent miscounting and shrinkage.

Installing precautions like an alarm system and putting anti-theft tags on your products should greatly deter thieves. Security cameras and mirrors can also be useful for keeping an eye on employees and any others who may enter your warehouse. Most employees would refrain from stealing when cameras are watching them. Performing background checks and in-depth interviews can also help businesses hire honest employees.

Inventory shrinkage can be a dangerous problem. When physical and recorded inventory don’t match up, problems arise in all facets of a business. If these problems reach the customer, then your business has failed. Although it may be impossible to completely eliminate inventory shrinkage, there is much that can be done to prevent it.

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