Tuesday, January 28, 2014

Inventory Sampling – An efficient way to handle Inventory Shrinkage

Inventory shrinkage may be a combination of employee theft, shoplifting, vendor fraud , administrative error or loss of inventory. This has become a growing concern among companies. According to the 2012-2013 Global Retail Theft Barometer, inventory shrink cost the retail industry more than $112 billion globally last year, and represented 1.4 percent of retail sales, on average.

According to the study, shrink is on the rise in most countries with increases noted in shoplifting, employee theft and organized retail crime. The lowest shrink rates were recorded in Japan (1 percent of retail sales), followed by Hong Kong, Australia and Germany (1.1 percent). The U.S. came in at 1.5 percent of retail sales. The highest rates were recorded in Brazil and Mexico (1.6 percent). As per Euromonitor International, shrink is a multi-dimensional threat for retailers across the globe, with shoplifting and employee theft, including organized crime, on the rise. Growing shrink concerns have put loss prevention high on the agenda of retailers and companies are keen to invest in effective and proven loss prevention methods.

Several huge companies have been facing this problem on a frequent basis. In a news article published last year, Sylvester Johnson, former Walmart District manager accused the company of widespread inventory manipulation. Johnson claimed that during his tenure as a Walmart district manager he was pressured by the company’s high command to hide losses due to shrinkage in order for stores to appear more profitable than they really were. In July 2013, Ms. Lederhaas-Okun, a former executive at the internationally renowned jewelry company, Tiffany & Co., was accused of stealing diamond bracelets and rings with precious stones worth $1.3 million. Approximately 165 pieces of jewelry vanished from Tiffany’s inventory,which made her one of the biggest jewelry thieves.

Given these concerns, it is critically imperative for a cost effective solution that companies should adopt. While I was going over a few articles on inventory management, I came across a useful technique called inventory sampling which can be used to prevent these issues. Inventory sampling replicates the traditional counting and stocktaking mechanism. Through using the inventory sampling method you only need to count a small number of your most expensive items. All the other items are then distributed into several zones, from which samples are taken. The sample results are then extrapolated to the respective zones. By doing so, you are only required to count between 5 and 15 % of the actual stock. In automated warehouses, where inventory reliability is naturally very high, you could count as few as 30 items through utilizing a slightly varied method.

But is extrapolation really that accurate? When evaluating large numbers, inventory sampling is even more accurate than manually counting each individual item. As the size of the warehouse and the number of people involved increases, traditional counting processes become more exposed to human error.  Performing a controlling inventory based on inventory sampling provides the right tool to check your stock on a regular basis with minimal effort. Companies can conduct controlling inventories as often as they want, deciding for themselves how large the sample to be counted should be. The sample results are extrapolated across the whole warehouse inventory and can provide early hints when something seems off.Because you are in control of the sample size, you can decide for yourself how much effort you want to put into counting inventory and allocate personnel resources accordingly. Even with small sample sizes in relation to your total stock, you can achieve a very valid estimation of your current inventory accuracy.

Having said the above, we do see that inventory sampling is one of the most efficient and cheapest ways to handle the issue of shrinkage. But one thing that we all will have to contemplate about is: Will companies be willing to adopt this technique when there’s a wide range of available technologies like RFID or security cameras to prevent disappearance of goods?


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