Inventory Theft and Shrinkage: A Problem For Small Businesses

October 14, 2024

While inventory theft and shrinkage has always been a problem for businesses with significant amounts of inventory, the past couple of years have been especially problematic for big box stores as well as small businesses and SMEs.

Shrinkage occurs when a business’s actual inventory levels do not match its recorded amounts, often due to theft, errors, or fraud. For small businesses, where margins are typically tight and resources limited at times, the impact of inventory loss can be devastating. 

Addressing shrinkage requires a proactive approach, including implementing comprehensive strategies to mitigate shrinkage, protect assets, and ultimately improve a business’s bottom line. By focusing on employee training, technological solutions, process optimization, and robust inventory management, small businesses can significantly reduce the risks associated with inventory theft and shrinkage.

Understanding the Causes of Shrinkage

Shrinkage in small businesses generally arises from three main sources:

  • Employee theft: Unfortunately, internal theft can be a contributor to shrinkage. 
  • Shoplifting and external theft: Small businesses, particularly those in retail, face the constant threat of external theft with shoplifters targeting businesses that lack adequate security measures.
  • Administrative and operational errors: Mistakes in counting inventory, recording purchases, or tracking shipments can lead to discrepancies (human oversight or inadequate systems).

Creating a Theft-Prevention Culture

The foundation of any effective shrinkage reduction strategy begins with cultivating a culture that actively discourages theft. Employees should feel invested in the business and understand that preventing loss is a shared responsibility. Small businesses can foster this culture by:

  • Establishing clear policies: Clear and consistent policies regarding inventory management and theft prevention are crucial. Employees must know the expectations and consequences related to inventory theft. 
  • Conducting pre-employment background checks: Hiring trustworthy employees is one of the first steps in preventing internal theft. 
  • Having regular prevention training: Employees should be trained to recognize and prevent shrinkage. Regular training on security measures, proper inventory handling, and loss prevention techniques ensures that all employees are aware of the risks and understand how to mitigate them. 
  • Promoting employee engagement and motivation: Creating a positive workplace environment that values employees can reduce the temptation for internal theft. Employees who feel valued also are more likely to report suspicious activities.

Implementing Security Measures

Security is a critical aspect of reducing theft, both from employees and customers. While small businesses may not have the budget for advanced security systems that large corporations use, there are affordable and effective security measures that can be implemented such as:

  • Surveillance cameras: Cameras serve as both a deterrent and a valuable tool for identifying theft when placed in key areas such as entrances, exits, storerooms, and near high-value inventory. 
  • Mirrors and visibility: Installing convex mirrors and maintaining good visibility in all parts of the store or warehouse can help deter theft. If people know they are being watched or are visible to others, theft is likely to be reduced. 
  • Alarms and sensors: Installing door alarms, motion detectors, and placing RFID (Radio Frequency Identification) tags on valuable items are other means of deterring theft. 
  • Locking high-risk items: Obviously, some items due to size, value, or popularity are more vulnerable to theft and must be protected. 

Inventory Management Systems

Inaccurate inventory records make it harder to spot shrinkage and take corrective action. Modern inventory management systems are key to maintaining accurate records and help identify discrepancies quickly.

  • Use barcode or RFID technology: Barcode or RFID technology can streamline inventory management, allowing for faster and more accurate tracking of stock levels. 
  • Regular periodic inventory counts: By conducting periodic inventory counts, discrepancies caused by errors or theft can be identified sooner rather than later.
  • Integrate point-of-sale (POS) systems: A POS system that is integrated with inventory management software provides real-time data on what is being sold (reduces errors from a manual entry system) and helps pinpoint where shrinkage might be occurring.
  • Track returns and refunds: Returns and refunds are common ways that both employees and customers exploit small businesses. Companies should limit the number of individuals authorized to approve returns, require receipts for all return transactions, and ensure that employees follow proper procedures. 

Secure Supply Chain Practices

Shrinkage doesn’t always happen at a business’s location. It can also occur during the shipment and delivery process. Small businesses should take proactive steps to secure their supply chains by:

  • Choosing trustworthy suppliers: Establishing strong relationships with suppliers that have a reputation for accuracy and trustworthiness ensures they prioritize their customers and will resolve any potential issues quickly. 
  • Verifying deliveries: When receiving shipments, it is essential to verify the contents immediately for accuracy and quality. 
  • Controlling access to inventory: Access to inventory storage areas should be restricted to authorized personnel only. All transactions should be documented for both incoming and outgoing inventory.

Conclusion

Inventory theft and shrinkage represent a significant risk for small businesses, but with the right strategies in place, these risks can be mitigated. By creating a theft-prevention culture, investing in security measures, and utilizing technology, small businesses can protect their assets and reduce shrinkage. The key to successful loss prevention is remaining proactive, being vigilant, and consistent with loss prevention policies. 

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