Understanding Demand to Prevent Shrinkage

In the retail world, inventory shrinkage refers to any loss of inventory that is not a result of sold stock. Shrinkage occurs when a retailer has fewer items in stock than in the inventory management system due to accounting errors or goods being lost, damaged or stolen between the point of manufacture to the point of sale or a misperception of product demand.

According to a study by the National Retail Federation, the average inventory shrink rate was 1.44 percent in 2017, costing the U.S. retail industry $48.9 billion and is expected to significantly increase by the year 2020. But how can inventory shrinkage be prevented?

Sophisticated Calculations

Today many retailers and manufacturers are still using a binary approach to calculate inventory — is it in stock or is it out-of-stock? When calculating inventory using historical data, the expected sales during different days of the week is measured. For example, retailers expect to sell more alcoholic beverages on the weekends rather than on the weekdays. When this kind of understanding of product demand is used as a part of inventory calculations, retailers can compare the level of expected inventory with actual inventory. The benefits of moving from a binary system to a more sophisticated calculation to determine the expected sales and replenishing more frequently means not only less shrinkage, but fewer chances of overstocks.

Understand Product Demand

In order to combat inventory shrinkage, it is important to understand consumer demand for the product. Understanding the demand helps retailers optimize their inventory — keeping enough products in stock to meet demand, but not too much they run into an overstock situation. When understanding the demand of a product, it is important to consider the shelf life of the product, so there is no lost inventory or revenue. For example, the holidays are a stimulant of seasonal inventory. As a best practice to be prepared for demand, stores stock up on ham, turkeys and stuffing in the weeks leading up to the Thanksgiving holiday. Not understanding consumer demand can lead to an overstock of these items. This results in retailers slashing prices and losing revenue, after the holiday season.

Additionally, in order to understand the true demand of a product, it is important to eliminate phantom inventory. Phantom inventory, according to Supply Chain Digest, is when goods show up in a management system as available, but are hidden from view because they have been misplaced. The misplacement of products often gives a misleading perception of how a store of produce is actually performing and leads to a high percentage of lost sales and inaccurate perpetual inventory levels leading to inaccurate demand forecasts.

Securing and Tracking Products

A common cause of inventory shrinkage is lost, damaged or stolen goods between the point of manufacture to the point of sale which can heavily impact your bottom line. In the warehouse or storage areas in stores, companies and retailers should store inventory in secure spacious areas so that it is not stolen or damaged. Goods and resources of the same or similar type should be kept in the same general area of the warehouse to minimize confusion and to ensure accurate counts. Additionally, integrating a cloud-based SCM system can provide access to current, accurate data throughout the supply chain reducing the risk for misplaced or lost items. In order to proactively secure and track products, it is fundamental for retailers to have operative management systems in place. These systems allow retailers to focus efforts on knowing where each product is stored at all times, thus eliminating phantom inventory and avoiding added expenditures.

Retail shrinkage ultimately results in lost profits that factor into their bottom lines and can negatively impact their success.  Understanding root causes of inventory shrinkage is a fundamental but crucial step to solving this issue. When retailers reduce inventory shrinkage, they ultimately increase revenue.