Editor's Note: This post was originally published in April 2014 and has been updated for freshness, accuracy, and comprehensiveness.

Inventory shrinkage doesn’t indicate that your inventory got physically smaller in size – it means that its value on your books shrank. More specifically, your inventory has experienced “shrinkage” when products exist in your records but not in your actual, physical inventory. Inventory shrinkage is a big profit killer.

Inventory shrinkage happens for many reasons, including:

Theft

The most common reason for inventory shrinkage, theft, is nearly unavoidable. Retail businesses lose inventory to shoplifting, and both business to business and business to consumer companies experience inventory shrinkage due to employee theft.

Remote Work Sites

Even honest employees can inadvertently cause inventory shrinkage. This frequently occurs when telecommuting employees take supplies to use at their home offices. If they remove items from an inventory-tracked location to a location where inventory isn’t tracked without logging the removal, it’s causing inventory shrinkage.

Vendor/Supplier Fraud

Dishonest vendors might bill you for “X” amount of product but only ship “Y” amount of product.

Lost Product

Moving inventory is a common cause of inventory shrinkage. Relocating product within a facility or transferring it between warehouses is an easy way to lose inventory items.

Accidents

Accidents cause inventory loss through damage and include human error, such as breaking items, or Mother Nature error, such as natural disasters like floods or earthquakes. Fire is another big cause of inventory shrinkage, accidental or otherwise.

As you can imagine, inventory shrinkage is unavoidable. You can lower your instances of inventory shrinkage, however, by having a strong handle on your inventory management – keeping accurate counts at all locations and always verifying the quantity of items in your shipments, for example.

Lost product and accidents are frequently known as “honest” shrinkage, and good inventory control software and a fully integrated ERP/accounting system will help you avoid it. Scanning technology and barcodes can help even more. Hiring trustworthy employees and having transparent, methodical standard operating procedures in regards to your inventory management will help reduce inventory lost through dishonesty.

If you’re interested in learning more about reducing your inventory shrinkage and improving your inventory management overall, contact Southeast Computer Solutions today.