Shrinkage
Definition
The loss of inventory between receipt and sale from causes such as theft, damage, spoilage, administrative error, or vendor fraud. It appears as the gap between recorded and actual stock.
In Practice
Shrinkage is inventory that vanishes without a corresponding sale. Retail benchmarks put it around 1.5 to 2 percent of sales, driven by external theft, employee theft, process and paperwork errors, damage, and spoilage. In warehouses, mis-picks, unrecorded damage, and receiving errors dominate.
Planners care because shrinkage silently corrupts the numbers replenishment relies on: the system believes stock exists, so no order is triggered, and the first signal is an empty shelf or a failed pick. Persistent unexplained variances found in cycle counts are usually the first measurable evidence of a shrinkage problem worth investigating.
Example: a beverage DC notices cycle counts on one premium spirits SKU are short every month. Investigation finds cases damaged in receiving were being discarded without transactions. Adding a scan-based damage write-off step cuts the SKU's unexplained variance to near zero and restores trust in its reorder point.
Related Calculators
Related Terms
The degree to which recorded inventory matches what is physically present, measured by comparing system records to physical counts. It is usually expressed as the percentage of records that match within tolerance.
Cycle CountingThe practice of counting a small subset of inventory locations or SKUs on a rotating schedule instead of shutting down for a full physical inventory. Discrepancies are investigated and corrected continuously.
Dead StockInventory with no recorded sales or usage over an extended period and no realistic expectation of future demand. It occupies space and capital while generating no return.