Inventory Shrinkage: Preventing Loss and Theft by Managing Inventory

What is Shrinkage?

Inventory shrinkage means the number of products in stock falls below the number indicated on the inventory list. The discrepancy could be caused by clerical errors, damaged or lost products, or theft from the point of purchase to the point of sale.

What are the Main Causes of Inventory Shrinkage?

There are different causes of inventory shrinkage depending on the type of business. In retail environments, these are some of the most common that contribute to inventory shrinkage:

  1. Employee theft and customer theft/shoplifting
  2. Administrative error
  3. Damaged or expired products

Missing items in the supply chain can be caused by a lot of factors. Inventory shrinkage in logistics and warehouses is caused by the factors listed above as well as the following:

  1. Over shipments and short-receipts 
  2. Substitution of good items to subquality items
  3. Re-classifications of goods

Employee Theft

Employee theft is one of the causes of inventory shrinkage. It refers to stealing or misuse of business property for personal reasons without documentation or authorization.

This is very damaging in every business. It happens every step along the process from manufacturing to shipping to warehousing to retail.

Employee Theft affects a lot of aspects of the business and primarily costs. To recoup the losses, businesses may try to increase orders to reach the ideal profit margin or increase the price of products. But with this method, they are putting more finances into acquiring goods to sell and might also lose price-sensitive consumers looking elsewhere to find similar products with lower prices. 

The things that are commonly stolen are not just money, it can also be the following:
  • Supplies Theft. Employees take office supplies such as items for manufacturing, computer peripherals, notebooks, and other small items that are still big in cost when accumulated
  • Merchandise theft. When employees are stealing items that are supposed to be sold to the customers.
  • Information and Time Theft. Information theft is trading a company’s private information or selling company designs and time theft is when an employee is not working while on the clock and still being paid.

Why Do Employees Steal?

Theft can be encouraged by several factors but the common factors are motivation and opportunity. One of the motives for people to take stuff is because they are underpaid. Employees may be overworked, therefore stealing something, whether it’s time or money, is acceptable since they believe it’s owed to them. 

The opportunity to steal is another contributor to employee theft. If the company’s security is lax, there will always be an opportunity to steal, which will motivate those employees who already have ulterior motives.

Why Does Employee Theft Matter?

If you’re wondering if employee theft is an expense, the answer is a big YES! and it’s a huge expense especially when it accumulates over time.

Though it may be costly to protect valuable assets and investigate employee theft, there are several reasons why businesses need to do so. Here are some of the negative results of employee theft:

Profit loss

Suppose a business loses inventory due to employee theft. In that case, it will be unable to recover the cost of the inventory because there will be no inventory to sell or return to the vendor.

Losing customers over the price increase

Some businesses try to recover losses by increasing the price of available goods to account for the losses in inventory. This means the customers will be the ones to shoulder the costs and this has a huge impact especially when the customers have a sensitive budget where a slight change in price affects their buying behavior, worst is when they try to look for other merchants for alternatives.

Problems in business operations

Because of theft losses, businesses may allocate more funds to other areas such as security. They invest in more security guards, CCTVs, and other technology just to decrease the occurrence. This results in a further decrease in profits and also a decrease in purchasing capacity.

How to Prevent Employee Theft?

Given the numerous negative effects of theft on every business, we must take action to minimize it. The following are the simple yet effective ways to reduce shrinkage:

  1. Tighten security.
  2. Hire and assign reliable employees.
  3. Check transactions each day.
  4. Reduce or eliminate human errors by using a system.
  5. Keeping a record of the losses.

Use of Inventory Management System

Human errors and omissions can be avoided by automating the inventory management process. A dedicated inventory management system can assist in reducing human stock handling and inventory shrinkage.

All people participating in the inventory management process will be held accountable by the software. It will track the inventory’s location from point to point and provide logs for all users that made adjustments to the inventory.

Aside from reducing risks of shrinkage, inventory management systems also offer other features that can optimize inventory processes. One of these features is inventory visibility which makes it easier to locate things in your inventory and make sure inventory levels are at the optimal level.


Because there are so many ways for one person to steal, organizations must make good use of resources to effectively protect the most valuable items. Using inventory management software is one method to reduce the risk of employee theft and inventory shrinkage in general, but you should also consider if employees feel appreciated and whether your gratitude for their efforts is reflected in their pay. This will eliminate any thoughts of resentment, which might lead to the motivation to steal goods they believe they are owed.

Published by Claude.Rivera

I have a passion for new things. It excites and challenges me. Reading and writing take me to different worlds. Literally, escape. I'm a dancer wannabe and a not-so-pro gamer.

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