Shrinkage can only be a bad thing for the retail industry, eating into your profits unnecessarily and creating more work for your employees. According to the National Retail Security Survey of 2018, the average shrink rate for the industry is increasing, and was 1.33 percent in 2017.

Better inventory tracking can help you control this figure, maximizing your profitability; but, why is tracking so impactful, and how can you best execute this strategy?

Identifying Sources of Retail Shrinkage

One of the biggest advantages of better tracking is giving you the opportunity to determine where the losses are coming from. According to the National Retail Security Survey, the breakdown of "typical" retail shrinkage goes something like this:

• 5 percent is attributable to shoplifting and external sources of theft

• 30 percent is attributable to internal theft (i.e., employee theft)

• 3 percent is attributable to administrative errors.

• 4 percent is attributable to vendor fraud or vendor errors

• 8 percent is attributable to unknown factors

If you perfect your administrative processes and perfect the art of inventory tracking, you can eliminate that 21.3 percent of shrinkage attributable to administrative errors immediately-at least, in an ideal world. From there, your inventory tracking should enable you to narrow down the source of the shrinkage, at which point you can employ specific countermeasures.

What Effective Inventory Tracking Looks Like

There are many effective formats for tracking inventory, and no single approach is going to work perfectly for every business. For example, the best inventory tracking method for a small local business isn't going to work for an international corporation with thousands of locations.

No matter what, you can improve your tracking system to account for shrinkage with the following strategies:

• Be consistent.No matter what systems you employ or processes you require, you have to be consistent if it's going to work. If your employees are using different methods for inventory tracking, you're not going to have reliable data. If you skip a check-in occasionally, inventory is going to go missing, and you won't know when or how.

• Track products with SKUs and UPCs.It helps to have both SKUs and UPCs for all your products logged and recorded, and preferably created with a system that makes logical sense. This will make it easier to lookup specific product trends, especially if you're using a VLOOKUP function in Excel or something similar, plus will be a useful tool for communicating with employees about problems specific to a given product.

• Have a system to identify outliers.You'll need to keep watch for outliers as you track inventory. Ideally, you'll have a way to trigger a red flag whenever the most recent inventory level mismatches with the previous recorded inventory level. There are many ways to do this, such as making an employee accountable for this measurement, but any method you choose is acceptable, so long as it brings problem points to your attention.

• Automate whatever you can.The more automated your inventory tracking process is, the less it can be disrupted or compromised by human error. Using RFID chips in combination with scanners, or similar strategies, can ensure there are fewer counting errors in your system.

• Have double-checks in place.Even the best processes can go wrong; a piece of inventory can be hidden from view, equipment can malfunction, and employees can have "off" days. Accordingly, it's a good idea to have redundancy in your inventory tracking; in other words, you need processes to double-check each other's work. It might take a few extra hours of work for each reporting period, but you can be more confident in your figures when they're verified multiple times.

• Track inventory at every stage. Finally, make sure you're taking inventory counts at every stage of the process, from the time you receive it from your vendors to the time it is stocked on the shelves, and on a regular basis thereafter.

Other Strategies

Other strategies you use to reduce shrinkage should depend on the insights you gather with your inventory tracking system. As long as your tracking system is working effectively, you should be able to identify the root causes of your shrinkage. For example, if you notice that most of your inventory goes missing before it hits the shelves, you're likely dealing with a vendor or employee problem; from there, you can put in stricter requirements for your employees and vet your vendors more thoroughly. If shoplifting seems to be the main culprit, you can hire more loss prevention staff.

Shrinkage is a problem that will never fully go away, but you can reduce it to a minimum to avoid compromising your profitability. Once you have a solid inventory tracking method in place, everything should get easier.

About the writer: Larry Alton is an independent business consultant specializing in tech, social media trends, business, and entrepreneurship. Follow him on Twitter @LarryAlton3 and on LinkedIn.

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