How to Find and Reduce Inventory Shrinkage
By Ty Fisher, founder of Fisher Software
Shrinkage is the difference between the inventory your records say you have and the inventory physically available. Theft can cause shrinkage, but receiving mistakes, unrecorded damage, incorrect units, and checkout errors are also common.
Measure shrinkage consistently
Shrinkage rate = (recorded inventory value − physical inventory value) ÷ recorded inventory value × 100
Use the same cost basis and time period each time. Track both dollars and units so one expensive missing product does not hide a broader process problem.
Look for patterns
- Products, categories, locations, shifts, or suppliers with repeated discrepancies.
- Adjustments made without clear reasons.
- Damage or returns recorded outside the normal workflow.
- Case quantities entered as individual units—or the reverse.
Strengthen the process
- Limit sensitive adjustments to appropriate roles.
- Require a reason for every manual quantity change.
- Separate receiving, counting, and approval responsibilities when staffing allows.
- Count high-risk products more frequently and review their activity history.
Treat discrepancies as operational evidence
Avoid automatically blaming employees or writing every difference off as theft. Investigate the complete path—from ordering and receiving to storage, sales, returns, transfers, and disposal.