While inventory theft and shrinkage have always been problems for businesses with significant inventory, the past couple of years have been especially problematic for big box stores, small businesses, and SMEs.
Shrinkage occurs when a business’s 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. Small businesses can significantly reduce the risks associated with inventory theft and shrinkage by focusing on employee training, technological solutions, process optimization, and robust inventory management.
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 inventory management and theft prevention policies 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.
- 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 know the risks and 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: When placed in key areas such as entrances, exits, storerooms, and near high-value inventory, cameras serve as both a deterrent and a valuable tool for identifying theft.
- 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 visible to others, theft will likely be reduced.
- Alarms and sensors: Other means of deterring theft include installing door alarms, motion detectors, and RFID (Radio Frequency Identification) tags on valuable items.
- Locking high-risk items: 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 integrated with inventory management software provides real-time data on what is being sold (reducing errors from a manual entry system) and helps pinpoint where shrinkage might be occurring.
- Track returns and refunds: Returns and refunds are common ways 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 with 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 only be restricted to authorized personnel. All transactions for both incoming and outgoing inventory should be documented.
Conclusion
Inventory theft and shrinkage represent significant risks for small businesses, but these risks can be mitigated with the right strategies. Small businesses can protect their assets and reduce shrinkage by creating a theft-prevention culture, investing in security measures, and utilizing technology. The key to successful loss prevention is remaining proactive, vigilant, and consistent with policies.
