In accounting, inventory shrinkage (sometimes shortened to shrinkage or shrink) occurs when a retailer has fewer items in stock than what is represented on their financial balance sheet. This difference in the physical count and the expected inventory is the shrinkage. This discrepancy may be due to procedural errors, goods being damaged, lost, or stolen. Shrinkage directly affects profits and ultimately can impact the success or failure of a business.
The 2020 National Retail Security Survey finds shrink at an all-time high, accounting for 1.62% of a retailer’s bottom line — costing the industry $61.7 billion. If your optical is producing $1 million each year in sales then that is $16,200 off the bottom line. Many estimate that optical is on the higher end of the averages and may be as much as 7% which translates to $70,000.
So, do you have shrinkage? The answer is likely – Yes! The real question is how much shrinkage do you have and how can you lower that amount bringing more money to your bottom line.
Where does shrinkage happen?
- Poorly defined operational procedures and standards
- Breakage
- External theft
- Internal theft
- Warranty or other replacements that don’t generate sales
- Stale and unsellable product
By defining where shrinkage happens we can look at how to solve or reduce the instances. For example, if we know shrinkage is happening due to external theft then security cameras would be a deterrent. RFID tags with doorway portals can also help prevent external theft. The tags will alarm as they pass through the doorway. Internal signage alerting your customers to your security system might make them think twice.
This is a terrible story but I’m going to tell it anyway. Once a year where my husband practices, a group of highly organized and professional thieves show up in the optical. They come in with a crowd. A couple of them have lots of questions and tie up all of the employee’s attention while the others are putting frames in sweatshirt pockets and large purses. The whole encounter takes less than 10 minutes and they are gone and on to their next target. I think the most they have gotten is 20 frames. They target the higher priced items so this is a $1500 or more event.It happens once a year because this is a travelling group that moves from city to city. The staff are aware of it and watch for them but are still unable to prevent it.
Most external theft isn’t this blatant or organized. It’s 2 or 3 frames dropped in a pocket or purse. If this happens only once a month, that is still a loss of 24 or more frames per year!
Let’s talk a minute about stale inventory. Stale inventory is on the verge of becoming shrinkage and therefore a loss to your business. I bring this up because so many of our Wave RFID clients have struggled. In more than 50% of our installs our clients have FOUND frames. Where, you ask? Under counters in boxes, in the back room, in the lab… you get the idea. Why were they tucked away in these hidden places? In some cases they weren’t selling so they got pulled from the board and others were REP RETURNS never sent back. I’ll be following up with another blog on stale inventory, how to prevent it and how to manage it.
How can you reduce external shrinkage? Here are some ideas…
- Cameras
- Signage to bring awareness to your security measures
- Display frames in a way that makes it obvious if something is missing – for example always make sure every spot on your board is filled
- Locked cabinets for more expensive product
- Barcoding with your POS system
- RFID tags and doorway security
- Audit regularly – at least once a month
- Staff education
- Make sure each patient/ customer is accompanied by a staff member
Internal shrinkage is something no one likes to talk about. In my role as consultant I have been contacted to discuss many sad stories. It’s hard to believe that the people that we share so much of our lives with would do something that hurts us or our businesses. My best advice is always the same – put systems in place that keep people honest. The honest people won’t mind.
Some thoughts on how to reduce internal shrinkage
- Separation of duties – don’t have the same person placing orders that receives the orders
- Limit the number of people who can place orders to vendors
- Require a purchase order for every purchase with a reason for the order
- Inventory software that accounts for ALL frames, orders, returns, etc.
- Anonymous reporting – provide an easy way for employees to report an issue without being identified
The bottom line is that without an active inventory process, you are hurting YOUR bottom line.