Monday, September 24, 2012

Inventory Shrinkage

Inventory Shrinkage

According to a report from Ernst&Young[1], retailers lose close to $46 billion annually due to Inventory shrinkage. But, what is this inventory shrinkage?

Inventory shrinkage is the term given to the loss of goods or products after they have been manufactured and before they can be sold to customers[2]. As the inventory shrinkage increases, profits for a retailer store decrease. Supply chain management does not end once the product leaves a manufacturer, but ends when the product reaches the customer. A good supply chain management practice to be followed is to keep a check on the inventory shrinkage. Ideally, if “X” number of products are manufatured and sent to a store, then the same “X” number of products should reach customers. This does not happen. So what are the causes for this inventory shinkage? Where are the lost products going?

Employee theft and shoplifting contribute to 80% of inventory shrinkage. 75% of the employees atleast steal once[3]. Poor work conditions, low wages, frequent lay-offs are some of the reasons for employees to steal items that they have direct access to. Shoplifting has always been an issue for retailers, especially during the holiday season when the stores are heavily crowded. Surveys point out that it is easier to recover items stolen by employees than items stolen by shopliting. Administrative errors and vendor frauds also contribute majorly to inventory shrinkage. Employees, unknowingly, can make mistakes while entering data when items are received from vendors or when sent to customers. What is being done to counter these practices?

There has been a decrease in employee theft and shoplifting owing to the wide increase in the use of video and survelliance cameras at all areas of a retail store including warehouses. Administrative errors and vendor frauds have seen a significant decrease because of enhanced implementation of computer systems. Periodic checking of the inventory has helpen erradicate the problem to a certain extent. Is this enough to stop thefts and save billions of dollars? No, absolutely not.

Recently I read a news article regarding shoplifting of toys worth $2 Million at Toys R Us stores across 27 states in USA[4]. The icing on the cake is the fact that a mother-son duo alone was responsible for the thefts. They visited stores, picked large boxes containing inexpensive items, replaced the contents with expensive toys and sold the stolen items on e-commerce websites. All they spent was $7000 for buying the inexpensive(expensive) toys. Have you seen or heard of such “modern” thefts? Any new innovative ideas on how inventory shrinkage can be monitored?


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