Shrinkage

Shrinkage refers to the loss of inventory that occurs outside of planned transactions such as sales or returns. It can result from theft, administrative errors, damaged goods, or supplier fraud. For businesses dealing with physical products, shrinkage can directly impact the bottom line, making effective inventory management essential to minimizing losses.

Rackbeat February 19, 2025

What Causes Shrinkage?

Shrinkage can have multiple causes, with the most common being:

Theft – Internal or external theft is one of the biggest sources of shrinkage. Employees may take items without recording them, or external parties may steal from the warehouse.
Misregistration – Without an inventory management system, errors can occur during goods reception, picking or shipping, leading to discrepancies in stock levels.
Damaged goods – If items break during transport or storage without being recorded as discarded, the discrepancy between actual and registered inventory increases.
Supplier fraud – If a supplier delivers fewer goods than invoiced, it creates shrinkage in your system.
Expiration or obsolescence – Products that become outdated or expire often need to be discarded, which also counts as shrinkage.

How to Minimize Shrinkage?

Reducing shrinkage requires effective inventory management systems and well-structured processes. Here are some of the best strategies:

Use a WMS (Warehouse Management System) – A digital inventory management system provides real-time stock insights and reduces misregistration risks.
Conduct regular stock counts – Performing inventory counts helps detect shrinkage early. With Rackbeat, you can easily conduct and log stock counts to stay on top of inventory discrepancies.
Scan items using a mobile app – By scanning products with a mobile warehouse app or barcode scanner, you ensure all item movements are recorded correctly, reducing shrinkage risks.
Streamline order management – Accurate order management prevents confusion in stock movements, reducing errors and shrinkage.
Organized inventory management – A well-structured warehouse and clear procedures for receiving, picking, and shipping make it easier to keep track of stock and minimize shrinkage.
Increase security – Surveillance, restricted access, and clear responsibilities help reduce theft and shrinkage.

How to Calculate Shrinkage?

Shrinkage can be calculated using the following formulas:

Shrinkage in units

$\[ \text{Shrinkage} = \text{Expected inventory} - \text{Actual inventory} \$

Shrinkage as a percentage of revenue

$\[ \text{Shrinkage percentage} = \frac{\text{Shrinkage value}}{\text{Revenue}} \times 100 \$

Shrinkage as a percentage of inventory value

$\[ \text{Shrinkage percentage} = \frac{\text{Shrinkage value}}{\text{Expected inventory value}} \times 100 \$

Example Shrinkage Calculation

A company expects to have 1,000 units of a product in stock, but after counting, only 950 units are found.

Shrinkage in units

$\[ 1,000 - 950 = 50 \text{ units} \$

If each unit costs 100 currency units, the shrinkage value is:

$\[ 50 \times 100 = 5,000 \text{ currency units} \$

If the company’s annual revenue is 500,000 currency units, the shrinkage percentage is calculated as:

$\[ \frac{5,000}{500,000} \times 100 = 1\% \$

Shrinkage and Rackbeat

With Rackbeat WMS, you can easily monitor your inventory levels and minimize shrinkage. By scanning items with our mobile app, you ensure accurate tracking of stock movements, while easy inventory counts help detect and resolve discrepancies quickly.

Effective inventory management is the key to reducing shrinkage and running a profitable business. Rackbeat’s inventory management system gives you full control over your stock and helps you optimize your order management—all to protect your bottom line.

Want to reduce shrinkage in your business? 🚀 Try Rackbeat for free today!