Retail loss prevention – how to evaluate and reduce inventory shrinkage

Shrinkage is the loss of inventory. It reflects the difference between the recorded value of inventory and its actual value. Some business owners mistakenly think that loss of goods is a part of the cost of doing business. While they have to factor loss into their bottom lines, it’s a costly problem, as margin and profitability of the operations will be negatively impacted. Inventory shrinkage levels vary by industry but generally keeping them in a range of 1 to 3 percent of sales is ideal. Understanding the principles of quantifying and reducing shrinkage is critical for the prosperity of hair and beauty businesses.

Common causes

• Theft – internal and external theft constitutes 80% of inventory loss. Retail displays and unsecured storage areas create temptations to shoplifters and even employees.
• Administrative wrongdoings – including shipping oversights, warehouse variances, cashier mistakes, misplaced inventory and paperwork.
• Frauds – intentional fake purchase and return fraud fall into this category.
• Expiry of perishable products – where goods kept past their expiry date lose their value.
• Inventory deterioration – this can take place in transportation or on site and may be a consequence of improper packaging, storage system etc.
• Unrecorded use of retail products in services – possibly due to the lack of monitoring product usage in services.
• Vendor scams – where vendors, intentionally or not, overcharge for lower value / undelivered goods.

Estimating shrinkage

The traditional way to determine shrinkage consists of several steps involving counting of goods in stock and performing manual calculations. You can also automate the process using a product management tool. Sure you can count supplies, establish inventory value and enable markdowns by hand, but there are more effective means of doing so.

Determining shrinkage using salon software: instead of calculating shrinkage manually, you can use appropriate beauty salon software. Make sure it has all the features you need. It should give you information on current inventory levels, shrinkage value, and other relevant data. Instant access to all this information will help you save time, while increased transparency will help you identify dishonest employees and reduce shrinkage.

How to Reduce Shrinkage

• Manage staff  – keeping your retail area well staffed will enable better customer service while reducing temptation for potential thieves. Also, make sure to keep tabs on their activity throughout the day.
• Check your products - initiate a stocktake or have one of your trusted staff do this. Compare your recorded and real stock levels.
• Instruct your team – inform your staff that shrinkage is a serious problem for the business. Make your employees aware that shrinkage affects them in many ways, such as your limited ability to offer pay rises or invest in marketing efforts, which in turn results in lower commissions.
• Utilise advanced salon software with POS features like real-time reports on inventory levels, product expenditure, sales history, staff activity and other relevant information that will help you keep shrinkage in check.

Importance of reducing inventory shrinkage

When your business faces shrinkage problems, you need to make a tough call by designing security measures that don’t negatively affect loyal customers and employees. Preserving a low shrinkage rate allows you to maintain quality customer service and high employee treatment standards. Motivated staff and effective operating procedures are core to success for any business in the hair and beauty industry.