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In accounting, inventory shrinkage (sometimes shortened to shrinkage or shrink) is when a retailer has fewer items in stock than in the inventory list due to clerical error or goods being damaged, lost, or stolen between the point of manufacture (or purchase from a supplier) and the point of sale. This affects the level of profit margins a business will be able to make. If the amount of shrinkage is large, profits go down. This leads retailers to increase prices in order to make up for losses, effectively passing the cost of shrinkage onto paying customers.
In 2008, the retail industry in the United States experienced shrinkage rates around 1.52% of sales. During the same year, retailers in Europe and Asia Pacific reported average shrinkage of about 1.27% and 1.20% of sales, respectively.
According to the 2008 National Retail Security Survey conducted at the University of Florida shrinkage rate of 1.51% translates into $36.3 billion in annual loss ($15.5 billion to employee theft and $12.9 billion to shoplifters). Theft, both internal and external to the company, continues to be the driving force behind retail inventory shrinkage, at 78.3% of all shrink in 2008. Of that portion, 42.7% is attributed to employee (also known as Internal) theft and 35.6% was due to due external theft, (known as shoplifting.)
- Administrative errors such as shipping errors, warehouse discrepancies, and misplaced goods.
- Cashier or price-check errors in the customer's favour.
- Damage in transit or in the store.
- Paperwork errors.
- Perishable goods not sold within their shelf life.
- Vendor fraud.
Loss at the POS terminal
Shrinkage in retail that is caused by employee actions typically occurs at the point of sale (POS) terminal. There are different ways to manipulate a POS system, such as a cashier giving customers unauthorized discounts, creating fraudulent returns, or simply removing cash from the register. These transactions that differ from normal transactions are called POS exceptions. Traditionally POS fraud is fought by surveillance staff monitoring a POS terminal or by manually searching in surveillance video recordings. Modern POS systems can have automatic alerts when specific exceptions are detected. Also exception reports and listings based on employees, refunds, price overrides, terminals etc. are possible to detect with modern systems. Modern networked based POS systems can also include network video to POS exception listings, giving quick access to detailed information of what has happened.
In the United States, the National Retail Security Survey is published annually as part of the Security Research Project at the University of Florida. The Security Research Project endeavors to study various elements of workplace related crime and deviance with a special emphasis on the retail industry. Since theft is hidden, no study can be completely accurate. Employees are easier to monitor than customers, which may artificially inflate the percentage attributed to employee theft.
Retailers may choose to implement an inventory management solution offered by a third party vendor. These systems often allow for better control over inventory and will alert companies of the source of the inventory shrinkage. A more accurate account of inventory provides significant cost savings. With successful analysis, costs associated with stock-outs or excess inventory can be reduced.
Calculating shrinkage figures can be accomplished through the following formulas:
- Beginning Inventory + Purchases − (Sales + Adjustments) = Booked (Invoiced) Inventory
- Booked Inventory − Physical Counted Inventory = Shrinkage
- Shrinkage/Total Sales x 100 = Shrinkage Percent
- Acceptable loss
- Breakage, used for items which remain in inventory, but go unsold
- Retail loss prevention
- Surplus value, alternative interpretation of value and products
- Stock, Kyle; Pettypiece, Shannon (August 18, 2015), "Wal-Mart Is Getting Hit Hard by Thieves: The problem of shrinkage", Bloomberg, retrieved October 22, 2016
- Matthews, Chris (June 5, 2015), "Here's how much Walmart loses every year to theft", Fortune, retrieved October 22, 2016
- National Retail Security Survey (2009) University of Florida[full citation needed]
- Global Retail Theft Barometer 2008[full citation needed]