Reduce Inventory Shrinkage - Put 2% of Your Annual Inventory Cost in Your Pocket Using

By: Jim Hawkins

The way I hear it, the “typical” annual rate of inventory shrinkage in the retail industry is in the order of 3 to 5% - let’s split the difference and say 4%. “Industry Experts” (whoever they are…) suggest that of that total inventory shrinkage, 50% is due to external theft; 30% is due to internal theft; and 20% is due to “messed up paperwork”. Other reasons for business losses, such as breakage, robbery, and vandalism, are separate problems that we’re not going to deal with here.

Do the math in your head – what’s 4% of all the stock you’ve ordered this year worth? Pretty grim numbers. If you’re still with me, I’d like to suggest a way to reduce these figures by almost half – a way to reduce inventory shrinkage to a more manageable 2%! I work for a company that develops an integrated point of sale software system that ties together the front end point of sale with inventory control and back-end accounting, so it should come as no surprise that I’m going to suggest such a system as a solution to reduce inventory shrinkage. Many of our clients have reported a dramatic savings, enough to pay for the software and then some in less than a year.

What I’m not going to do is suggest that our Windward System Five is the only quality product that does what I’m going to cover – so do your homework and consider any POS system that measures up. A good Point of Sale system can help eliminate internal theft and “messed up paperwork” that accounts for 50% of the total inventory shrinkage.

In this article, I’m going to show how a Point of Sale system can be used to reduce internal theft by using various positive measures. Following articles will deal with reducing internal theft through increased security measures, while the last article will address how eliminating the “paperwork mess” can help reduce inventory shrinkage.

“Why would my staff steal from me!” you say? The retail industry attracts unskilled workers, often at minimum wage. Some will be tempted steal, for whatever reasons. What we will try to do is shift the Risk/Benefit ratio to a point where the risk of being promptly caught is much greater than the minimal benefits they can gain. Think of it as the ol’ “carrot and the stick” approach. The “carrot” includes things like fair compensation, a good working environment, employer-sponsored activities that improve morale, good communication and concern for the success of a company.

The only way to reach some employees is through a “stick” of an effective security program and a straightforward policy of prosecuting any employee caught stealing. A good Point of Sale system should balance between carrots and sticks. This article will out line some carrots, while the next in the series will be the sticks. Note: Any additional cost from “carrots” will be more than made up by savings from reduced inventory shrinkage.

• Reward good salespeople by paying commissions. Even a small percentage sends a good message. Your Point of Sale system should be able to easily track and report on commission sales
• People like discounts, and to save yourself from the “five fingered discounts”, set an Employee pricing level for some or all of your inventory. Your POS should help identify the profitability of inventory items, letting you set a variety of pricing levels. You can even expand on this by allowing staff to sell a certain amount of inventory at Employee discounts to friends and family (it does wonders for their ego). Monitor these amounts through your POS
• Move old stock and improve staff morale with the use of SPIFs (Sales Promotion Incentive Fund). A couple of movie tickets or a gift certificate awarded with a little bit of ceremony can go a long way. Any cost is more than made up by having moved stale inventory. Your POS should be able to easily report on specified SPIF-eligible sales
• Profit sharing is the quickest way to make all staff feel they have a vested interest in making the company profitable. Think about re-investing the money saved from a successful inventory shrinkage reduction program back in to the company in the way of a profit sharing program. Your POS system should integrate fully with an Accounting backend, so profit can be monitored on an ongoing basis, rather than a month or two after year-end
• Good communication goes a long way to make staff feel they’re part of the company. Use the CRM part of your POS to keep track of employee birthdays and special events. Use the e-mail features to keep in touch with all the staff

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Jim Hawkins works at Windward Software, developers of Point of Sale software, and is passionate about promoting "best practices" in business. For more information about how Windward Software can help your business impr

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