How to Reduce Retail Inventory Shrink

November 10, 2023 · READ

There’s nothing small about retail inventory shrink. Retailers, both brick-and-mortar and online, grapple with the financial repercussions of shrinkage. Losses from theft, whether by internal or external forces, can be mitigated through cutting-edge technologies and astute management practices.

How big is retail inventory shrink, really? It was reported that the industry-wide average annual shrinkage rate for 2022 was at 1.6% — meaning retail losses are estimated at $112 billion that year. While traditional shrink prevention tactics have played a role, evolving threats and complexities demand innovative strategies and tools. But how effective are typical shrink prevention tactics — both at a store level and organization-wide? And is there anything that can be done to make them more effective?

Sources of retail inventory shrink

Shrinkage, by definition, is an inconsistency between what the inventory should be and the actual number on hand. Though theft is the largest contributing factor to retail inventory shrink — between 65% and 70% in some sectors — it’s not the only culprit. While there are always extenuating circumstances surrounding shrink, the main factors include:

  1. Shoplifting: Both internal and external theft accounts for the highest amount of shrink in retail. This includes organized retail crime (ORC), which is said to have become more violent in recent years. 
  2. Clerical errors: When items are damaged, incorrectly priced or inaccurately scanned, reductions are not properly entered into the system, shipments are misdirected, or accounting and record-keeping documents are not filled out properly, the results can be costly.
  3. Fraud: As with each category, fraud comes in many forms. In this case, it’s vendor fraud and return fraud. Vendor fraud can result from a shorted or overcharged invoice, or even vendor theft. Return fraud can include a customer bringing back ineligible, stolen, and possibly cheaper items to receive payment. 

How to prevent inventory shrink 

From the aisles of physical stores to the virtual cart of online shopping, you can implement strategies to effectively combat retail inventory shrink. One tactic involves implementing data analytics to not only expose patterns of shrinkage, but empower retailers to proactively prevent it. Below are a few specific examples of retail inventory shrink and how you can work to mitigate them in your store:

External theft

Traditional tactics such as maintaining an organized store, good lighting, and friendly staff remain essential in reducing retail inventory shrink. However, combating organized retail crime requires a mix of low and high-tech solutions. Electronic Article Surveillance (EAS) tags and CCTV cameras are staples, but recent advancements in video analytics and facial recognition technology can significantly enhance surveillance capabilities.

As self-checkout becomes more prevalent in stores, it introduces a unique set of challenges for retailers. Implementing a proactive oversight system for self-checkout areas can significantly reduce shrinkage. Assign dedicated staff or use technology like video analytics to monitor self-checkout transactions, ensuring that customers are scanning and paying for all items accurately.

Internal theft

Implementing comprehensive point-of-sale (POS) system policies and controls, along with avoiding solitary work shifts, can deter internal theft. Additionally, leveraging data analytics can uncover correlations between certain shifts or employees and increased instances of theft, enabling proactive intervention.

Integrating loss prevention software enables efficient data consolidation and analysis. By utilizing artificial intelligence (AI) for pattern recognition, retailers can identify trends, enabling more targeted prevention strategies for all types of theft. For instance, software can unveil unusual pricing patterns or recurring theft incidents that might go unnoticed through manual monitoring. Systems using submission portals can allow employees to safely and anonymously report suspicious activity to assist with internal investigations. 

Submission portal for retail inventory shrink

Resolver’s Submission Portal

Data analytics for online shopping

With the growth of online shopping, leveraging data analytics becomes crucial. Analyzing online purchase patterns, return rates, and customer behaviors can reveal insights into potential fraudulent activities. Implementing machine learning algorithms can enhance the ability to predict and prevent retail inventory shrinkage in the e-commerce space.

Extending the use of Electronic Article Surveillance (EAS) tags to online orders ensures that high-value items are equipped with EAS tags before shipping can deter theft during the delivery process. Additionally, implementing a secure packaging system and collaborating with delivery services to track and authenticate deliveries can minimize the risk of theft at the customer’s doorstep.

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Administrative and paperwork errors

Addressing “paper shrink” necessitates collaboration across departments. Integrating loss prevention with finance, accounting, inventory control, IT, and HR can streamline procedures and reduce errors. Automation tools and machine learning algorithms can enhance accuracy in inventory management, reducing the impact of administrative errors on shrinkage.

Training store-level employees on proper procedures and establishing clear accountabilities for error prevention can significantly minimize shrink stemming from administrative mistakes. Regular audits and reconciliations, powered by data analytics, can catch discrepancies early on.

Vendor fraud

Vendor fraud often requires physical solutions like truck searches and delivery audits to mitigate. Embracing emerging technologies such as blockchain can provide transparent and traceable supply chain transactions, minimizing opportunities for fraud which ultimately reduces retail inventory shrink.

Enhancing receiving procedures with clear divisions of responsibilities between staff handling goods, invoices, and payments adds an extra layer of security. Continuous monitoring through data analytics can flag irregularities in vendor transactions, enabling swift responses to potential fraudulent activities.

Supply chain transparency

Enhance visibility into the entire supply chain to minimize opportunities for theft at various stages. Collaborate with suppliers to implement transparent and secure shipping and receiving processes. Blockchain technology, known for its transparency and traceability, can be integrated to create an immutable record of transactions, reducing the risk of vendor fraud.

Radio-Frequency Identification (RFID) technology also provides a more sophisticated way to track and manage inventory. Embedding RFID tags in products allows for real-time tracking throughout the supply chain. This technology not only aids in preventing shoplifting but also helps in identifying and addressing internal errors, such as misplacements or discrepancies in inventory counts.

Let Resolver make your shrink reduction tactics more effective

By incorporating data-driven strategies, predictive analytics, and emerging technologies, retailers can fortify their defenses against evolving threats and mitigate the financial impact of inventory shrinkage. The integration of innovative tools enhances the effectiveness of existing prevention measures while allowing you to adapt to challenges as they emerge. 

Even the most well-known tactics can be made more effective when they’re linked to data, metrics, and controls that you manage with software. When you use software to track your tactics as loss prevention controls — such as, in this case, comparing POS prices to prices assigned at the inventory level — you’re then able to better manage those controls. And you’ll more easily see patterns in the data that you would have otherwise missed. Not to mention, you’ll be able to instantly measure their effectiveness and make better decisions about where to allocate resources.

Ready to fortify your retail business against retail inventory shrink? Resolver’s Incident Management software seamlessly integrates innovative solutions into your loss prevention strategy, combining data analytics, real-time insights, and efficient incident resolution.Take the first step towards a more secure retail future – explore Resolver’s Incident Management Software today and safeguard your inventory with confidence!

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This content was originally published on October 27, 2016
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