How to reduce inventory shrinkage and reduce warehouse theft

They say more money, more problems.

Same goes for inventory management. The more inventory moving in and out—the more staff, warehouse square-footage, customers, orders, and returns—the greater the chances that stock items are misplaced, damaged, or worse, stolen.

In other words: inventory shrinkage.

The cost of shrinkage might be negligible at first and may just be written off as the cost of doing business. Over time however, it will have a snowball effect, one that will become a persistent headache that stands in the way of sustained, healthy growth and scalability—especially in the retail world.

Here’s a closer look at how to spot and reduce inventory shrinkage.

What is inventory shrinkage?

Put simply, inventory shrinkage refers to the loss, theft, miscounting, or damage of goods in the warehouse. Though shrinkage is most commonly the result of lost and damaged goods or outright employee theft, it can also be the result of incorrect outgoing inventory.

Sending the wrong item to a customer, for example, or an incorrect internal transfer, can have a cascading effect that leads to shrinkage. First and foremost, sending the wrong item increases the probability that that item is returned (by a lot). This is where most retailers waste the most capital.

Why? Well, let’s think about it. First you sent the wrong item to the destination. Now you have to pay for that item to be returned AND you now have to pay the shipping for the correct item to be sent to the correct destination. I hope you can see how quickly that adds up, because understanding that and minimizing that effect can save you hundreds of thousands of dollars.

Then to make matters worse, that requested inventory (the correct item) will likely be decremented in the inventory count, which creates an inventory discrepancy for the wrong item that was actually sent to the customer by mistake.

It’s sinister and cunning, our old friend inventory shrinkage. It can be like a slow leak under the floorboards, one that quietly inflates costs, creates mold, and be difficult to trace if not properly addressed.

How to prevent warehouse theft

One of the main culprits contributing to inventory shrinkage is warehouse theft. in fact, 42.7% of inventory shrinkage is attributed to employee theft. So, as much as we’d like to trust every employee, the truth of the matter is that warehouse theft can and will occur.

“Unfortunately, we had a major theft before RetailOps. We had no trackability of inventory. For us, that was a huge part of deciding to have new visibility in the warehouse.” – Zack Silverman, COO JustBrand Limited

So what can you do to stop it?

Short of a McCarthy-like policing and monitoring campaign (which would probably do more damage than good), here are a couple practical strategies to reduce warehouse theft.

1. Require credential badges

Many warehouses require that employees carry scannable credential badges at all times. These badges can be tied to software that tracks what employees do, where they go, and manages their permissions. A badge can, for example, be scanned whenever an employee moves inventory. It can also control which employees can view or audit inventory levels, a tactic that some thieves use to cook the numbers and disguise theft.

2. Control and limit warehouse permissions

You can significantly limit exposure to theft risk by closely controlling which employees can do what—and access what—in the warehouse. Only certain employees, for example, should only be able to view or edit inventory, like the warehouse manager or upper management.

When auditing permissions, it’s important to consider an employee’s scope of work. Should a temporary employee or non-manager really have access to your operations beyond what they need to do their job effectively? You would never give a temp employee the company bank account number, so why should you give them the ability to modify inventory levels?

3. Track the movement of inventory and who moved it

It’s one of the most common scams in the game: an employee will intentionally send the wrong item to a customer, while pocketing the correct item for themselves. Then when that customer reaches out to customer service to request the correct item, the organization will send the correct item to them, thinking it was an honest mistake and that their inventory levels should match once the wrong item is returned. So now you have to pay for shipping for the correct item to be sent to the customer but you also have a loss on inventory as well. Ouch.

To combat this tactic, you can require employees to scan their badges whenever they receive, move, or fulfill orders. In addition, one employee should not handle the full process or have software that checks to make sure the item going out matches the order through barcode scanning. Again, all of these scans can be tracked, monitored, and audited using inventory management software.

4. Do frequent cycle counts with double-blind counting

Conducting frequent cycle counts is an effective way to reveal and address inventory discrepancies. To target shrinkage and employee theft specifically, assign cycle counts and data entry tasks at random. Besides helping to reduce favoritism and bias, double-blind counting can limit opportunities for gaming the system and exploiting the inventory count process to their advantage. Read our guide to cycle counting.

5. Require persons check in when arriving or leaving the warehouse

Farbeit from us to recommend measures that might impact employee morale or create a warehouse environment with rampant trust issues. But many larger retail operations, including those with high seasonal turnover, will ask that employees check in when arriving or leaving the warehouse.

This is yet another way for warehouse managers to get a feel for who is coming in and out and spot any irregularities that could indicate theft. To avoid employees feeling unwelcome or untrusted, many retailers opt to make check-in/check-out optional (but encouraged).

6. Give employees a way to anonymously report theft

No one likes a rat. But not many people like working in an environment where their colleagues are engaged in illegal behavior, either—behavior that damages the employer and opens up other parties to liability. An effective way to combat this behavior is to provide employees with an anonymous way to report any theft, scamming, or suspicious behavior in the warehouse. Anonymity is key, as it allows employees who would otherwise hesitate to come forward and share information.

Automate inventory management, limit shrinkage

Efficiencies, discrepancies, mistakes, and outright theft are so much easier—happen so much more often—in traditional or smaller retail operations that use traditional, old-school, highly manual inventory management best practices.

Inventory management software keeps track of all inventory processes, and makes it easier to implement some of our tips above, such as scans, permissioning, inventory updates, and cycle counting. Maybe most importantly, this kind of software provides detailed tracking and a trail data markers that can be used to find the root cause of shrinkage within the supply chain.