Finance executives in the retail sales sector are concerned about a growing wave of theft which cuts into profits.

Shrinkage is the industry term for the difference between inventory on the books and what is physically on hand. In addition to theft, lost or damaged goods and inaccurate records also play a part in losses.

Accelerating shrinkage may also have been distorted by the effects of the pandemic and inflation, according to some analysts.

Shrink is now one of the most frequently discussed topics among management at Home Depot, according to its Chief Financial Officer. The issue has been a top priority for about two years now, despite some mitigation efforts, such as locking up certain items and using live-view parking lot cameras, are showing results.

The Atlanta-based home improvement chain reported that its gross profit for the first nine months of fiscal 2023 decreased 3.4 percent compared with the same period a year earlier. The decline was driven in part by shrink, it said.

According to a consumer equity research analyst at investment bank William Blair, U.S. retailers absorbed an estimated $142 billion in losses due to inventory shrink in 2023, up more than 25 percent from the previous year. "As Retailers Cite Rising Theft and Shrinkage, Analysts Want More Details" www.wsj.com (Jan. 09, 2024).

Commentary

Inventory theft, or shrinkage, affects all types of businesses, be it retail, service, or even ones with no public or retail exposure.

Whether you are implementing new loss prevention procedures or modifying and upgrading existing ones, consider these concepts.

Increasing the use of technology such as scanners, bar codes, and cameras allows you to keep real-time track of assets, from the time they are brought into your warehouse, job site, or supply closet, to the time they are sold, used, or discarded. A significant amount of shrinkage is actually due to lost, misplaced, misfiled, obsolete, spoiled, wasted, or displayed assets.

Keep warehouses, stockrooms, or supply depots secured. Only those employees directly involved in logistics or handling of inventory should be allowed into the area.

Train your teams, and provide reporting mechanisms. Stress that the average 35.8 percent of inventory shrinkage caused by employee theft results not only in immediate termination and possible criminal charges for perpetrators, but that honest employees suffer with limited pay increases, fewer opportunities for promotion, and possible layoffs.

Here are some additional best practices for preventing inventory shrinkage:

• Develop, distribute, and enforce a policy promoting honesty and integrity and prohibiting inventory theft. Have all employees acknowledge in writing their receipt and understanding of the policy
• Develop and enforce standards of checks and balances regarding inventory and inventory oversight
• Limit access to those who must access inventory in order to perform their job
• Perform due diligence on employees who will have access to inventory, including criminal background checks
• Do not provide access or oversight to employees with a history of embezzlement, fraud, theft, or other fidelity crimes
• Avoid providing authority over inventory to one person without oversight and frequent review
• Create a system of oversight so multiple people can view and/or oversee how inventory is managed
• Select an up-to-date accounting software that allows you to account for and monitor inventory. Routinely monitor inventory levels including accounting for intake and purchases
• Routinely perform an "eyes on" inspection of inventory to make certain the online inventory data is correct
• Require warehouse managers to frequently walk and monitor the warehouse
• Monitor all areas of the inventory facility, including shipping and receiving bays, entrances, exits, shelves, lounge areas, and any other area where inventory may be hidden or later taken to leave the facility
• Pay special attention to employees who are starting their own business, have their own business, or work part-time for competitors
• Monitor the public online stores or sales of employees with access to inventory
• Monitor the promotions or activities of competitors for sale of inventory outside the norm of their business operations and your inventory
• If employees are permitted use of inventory for sales or promotions, make certain the inventory stays in your facility
• Conduct unannounced warehouse inspections by upper management or outside third parties
• Hire third parties to audit inventory in the warehouse and on the shelf
• Involve multiple employees in the intake process to ensure inventory is accounted for accurately upon purchase
• For tracking of access to inventory online, do not permit sharing of identities. Require each person with access to have their own unique user ID and password
• Train employees to secure their online identities including not writing down, changing, sharing, and/or employing weak passwords
• Lock expensive or high demand inventory in a secure area and require a management to access. Make sure all expensive and high demand inventory extraction is witnessed
• Use security cameras to visually monitor all activity surrounding and involving inventory
• Review security footage when investigating reasonable suspicions of theft or embezzlement
• Disclose to employees that workspace is visually recorded
• Securely lock all entrances and exits to your inventory facility and use tracking software to monitor access
• Make sure all employees who handle inventory take their allotted leave and allow others to perform their job duties during that time
• Prohibit storing or leaving stock near exits or loading bays for long periods of time
• Create a set time your inventory facility will open and close. Do not allow employees to work at the facility outside of those hours
• Prohibit visitors, vendors, or delivery drivers from loitering inside your inventory facility unattended. Provide a separate waiting area for them to use while visiting
• Provide a means for employees and others to report suspicions of wrongdoing - including inventory theft, employee embezzlement, and/or theft - easily, safely, and without retaliation
• Consider a third-party mechanism for employees and other workplace participants to anonymously report suspicions of wrongdoing, including inventory theft
• Promptly investigate complaints from employees, workplace participants, or vendors regarding inventory issues
• Investigate all suspicious or unusual inventory activity in a prompt, thorough, and objective manner
• If an investigation is warranted, use a person trained in investigating fidelity crimes and/or a person experienced in forensic accounting
• If inventory theft is detected or reasonably suspected, consult legal counsel immediately
• Do not terminate a person or make accusations of inventory theft or other fidelity crimes without seeking information from law enforcement and advice from an attorney