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How to Prevent Inventory Shrinkage in Your Supply Chain

iStock_000038365094 Inventory shrinkage is one of the biggest challenges faced by retail businesses. The loss of your goods means the loss of your company’s money and damage to your bottom line. The National Retail Federation (NRF) reported that in 2014 . More than half of it was the result of internal theft, administrative errors or unknown causes. Much of this can be avoided; unfortunately, many companies fail to invest in affordable and effective inventory management that can help them reduce this shrinkage. Excel or spreadsheet-based software systems won’t work. Many small business owners are familiar with Excel because of its use as a must-have accounting business application, and as a result, they often try to use it for inventory tracking. Unfortunately, Excel and other spreadsheet programs weren’t designed for that purpose. They can’t offer accountability or security when it comes to monitoring your inventory because they are so easy to manipulate, don’t track users and don’t update in real-time. [su_divider top="no" size="2"]

Related Article: 8 Ways Excel Fails at Inventory Management

[su_divider top="no" size="2"] The only way to effectively fight inventory shrinkage is to use an effective inventory management system and 2D barcode technology. These tools allow you to get at the heart of the issues behind the losses. Advanced inventory tracking software eliminates opportunities for employee theft and significantly reduces administrative errors. The overall improved management by these tools can also mean less inventory missing for unknown causes. Let’s take a look at some of the reasons behind inventory shrinkage and learn more about how some best practices can improve your stockroom and inventory management.

Employee Theft

The NRF study revealed internal theft alone accounts for 34.5% of inventory shrinkage. Employee theft and fraud are often the result of a combination of factors. It isn’t as simple as bad versus good. Even good employees can end up stealing or committing fraud under the right circumstances. When employees know that a company is using an ineffective inventory tracking system that doesn’t provide accountability, they have the opportunity for theft. At that point, all they need is the motivation and the ability to rationalize their behavior, both of which can be surprisingly easy to find. Small-scale theft can be one of the most damaging forms of inventory shrinkage because on the surface it seems so  innocuous, and in many stockrooms, incredibly easy. Employees in the stockroom often have access to your entire inventory, they know how much is there, and they can quickly learn which items won’t be noticed or missed. If you are using an Excel or spreadsheet-based system, it’s easy for people to fudge numbers or simply blame it on an input error. Many employees also learn there are a variety of legitimate reasons an item can go missing, and these legitimate reasons can be hard to verify. The picture isn’t hard to draw. If you don’t have an effective inventory tracking system in place, employees will know that they can get away with small-scale theft, and it’s easy to for them rationalize their stealing with thoughts such as, “Taking one computer won’t hurt the company, but it will help me a lot.”  The company will be out of business if enough employees follow that path.

The Risks Of Using Excel: Easy to Manipulate, Easy to Steal More

Spreadsheets don’t just enable small-scale theft; they can also make it much easier for the wrong employee in the right position to commit large-scale inventory fraud. An Albuquerque, New Mexico beauty supply store and embezzled roughly $170,000 from his employer over a four-year period. [su_divider top="no" size="2"]

“You will never be able to control an employee’s motivation and rationalization for theft or fraud, but you can work to eliminate opportunity and make it less likely.”

[su_divider top="no" size="2"] Excel and spreadsheets create additional risk because they are often easily manipulated.  Even a lone employee who gains access to the system can make damaging changes that allow them to steal large amounts of inventory. Excel can create a fraudster's paradise because it doesn’t allow real-time inventory tracking or the tracking of users and data changes. iStock_000017897715

The Solution To Combat Employee Theft

You will never be able to control an employee’s motivation and rationalization for theft or fraud, but you can work to eliminate opportunity and make it less likely. To do so, you need a system that tracks items’ location, quantity, and pinpoints who had them last. Inventory tracking software and barcode technology make it easy for a company to track its inventory and assets from the moment they produce or receive an item to the moment it leaves the stockroom. When both your company’s leadership and employees have this information, the risk for theft and fraud decreases.

Administrative Errors

Administrative errors made up 16.5% of inventory shrinkage in the 2014 NRF study.  This shrinkage can be attributed to human data entry error or ineffective inventory tracking systems that led to administrative mistakes. Using Excel or spreadsheet-based systems can compound these problems. [Tweet "Administrative errors made up 16.5% of inventory shrinkage."]

The Risks of Using Excel: Data Entry Mistakes

Mistakes will be made and these types of mistakes can be almost impossible to catch once entered into a spreadsheet. This can lead to lost inventory and time wasted tracking down missing items.  

The Solution to Combat Administrative Errors

This can eliminate that risk because it is virtually free of human error, which can save your company time and money it would have spent on searching for lost items and troubleshooting unwieldy spreadsheet files. When you implement an inventory management system, it tracks where your inventory is in real-time with a searchable, user-friendly database. This means you always know where your inventory is and there are no questions about if an item is in transit, in the stockroom or sold. Without real-time updates, you simply don’t know what you actually have, thus, it is easier for questions and administrative errors to pop up.

The Bottom Line: Inventory Management Software Reduces Inventory Shrinkage

There is no way for a company to completely eliminate inventory shrinkage and things will always go missing; however, you can lessen the losses. The most effective way to do this is to invest in an effective inventory management system that will save your company time and money while protecting your inventory assets.