Inventory Loss: Causes and How to Prevent it (2024 Guide)

In this article, we cover what inventory loss is and uncover its common causes. We also share our simple 9-step process for preventing inventory loss. Read on to learn more. 

What is Inventory Loss?

Inventory loss pertains to the discrepancy between the recorded inventory quantity and the actual physical count which often results in a financial setback for businesses.

Example: At the end of the month, the electronics store's system indicated they had 100 headphones in stock, but a physical count revealed only 85 were actually present. This inventory loss not only meant a potential theft or misplacement of 15 headphones but also translated to a significant financial loss for the store.

Common Causes of Inventory Loss

Inventory loss often stems from a variety of factors. Here are some common causes that you need to know: 

1. Theft: 

Both external theft by shoplifters and internal theft by employees can significantly impact a business's bottom line.

Example: Upon reviewing the security footage, Globex Electronics found that a group of individuals had shoplifted several gadgets last weekend. The unforeseen theft led to a significant financial burden, given these products were not compensated for through sales.

2. Administrative Errors: 

Mistakes in paperwork, data entry errors, or miscommunications can lead to inconsistencies in inventory records.

Example: When reconciling the inventory at BeanHaven Coffeehouse, Jenna mistakenly recorded the arrival of 100 coffee bags instead of the actual 1,000 received. This oversight caused confusion in subsequent procurement strategies which can potentially result in overstocking.

3. Supplier Fraud: 

Suppliers may send fewer items than invoiced or may ship defective products that can't be sold.

Example: LuxeBag Boutique ordered 30 designer handbags from a new vendor, but upon inspection, 5 of them appeared to be of inferior quality. The boutique suffered a financial loss having anticipated genuine articles but receiving subpar items.

4. Damages: 

Items can get damaged during shipping, handling, or storage. If these items are not saleable, it results in inventory loss.

Example: During transportation to VinoCentral, a carton of premium wine bottles was mishandled and shattered several bottles. This unfortunate event meant the store faced inventory loss since the broken bottles couldn't be retailed.

5. Obsolete Inventory: 

Items that become outdated or obsolete can no longer be sold at their intended price.

Example: TechTitan Stores had heavily stocked up on the X-Phone 9, but with the swift launch of the X-Phone 10, their existing stock became less appealing. The unsold older phones signified a pronounced inventory loss as they depreciated in value.

6. Misplacement: 

Sometimes, items are simply misplaced in the warehouse or storage which makes them temporarily unavailable for sale.

Example: At the ToyVille Warehouse, a crate containing the latest action figures was mistakenly shelved in the board games section. The weeks it took to relocate them caused a system discrepancy and unavailability for eager customers.

9 Steps to Prevent Inventory Loss

Use our 9-step inventory loss prevention process to effectively manage your inventory. Simply follow the steps below:

1. Risk Assessment:

Evaluate current systems, procedures, and historical data to identify vulnerabilities and recurring issues in inventory management.

Example: After a quarterly review, FreshGreen Grocers found a 20% variance between their system-recorded stock of organic vegetables and actual sales. A deep dive into their historical data highlighted that this discrepancy was recurring, with summer months showing the largest gaps.

2. Enhanced Security Measures:

Implement CCTV cameras, security personnel, alarm systems, and use security tags for high-risk items.

Example: Following several reports of missing high-end headphones, ElectroHub Electronics spent $4,000 to install CCTV cameras in strategic spots around the store. They also invested in $1,000 worth of security tags for all products above $100, drastically reducing theft incidents.

3. Adopt an Advanced Inventory Management System:

Use real-time tracking software integrated with point-of-sale systems and set up alerts for discrepancies.

Example: With over 10,000 titles in stock, BookHaven switched to a cloud-based inventory management system at $3,000 annually. This system integrated with their POS, immediately alerting staff if a book sale didn't align with stock numbers.

4. Regular Audits and Physical Counts:

Schedule routine inventory counts and reconcile with system records to investigate any mismatches.

Example: At the close of every month, Glitz'n'Glam set aside a day to do a full inventory count. In one of these sessions, they identified a $5,500 discrepancy in designer wear, leading them to adjust their procurement strategy.

5. Employee Training and Awareness:

Equip staff with knowledge about inventory processes and foster a culture of accountability.

Example: Recognizing the frequent mismanagement of ingredients, GourmetBites invested $2,500 in training their chefs and kitchen staff on inventory processes. This ensured that ingredients were utilized efficiently which reduced wastage by 25%.

6. Optimized Layout and Storage:

Design store and warehouse layouts to minimize hidden spots and secure high-value items.

Example: With small auto parts often getting misplaced, AutoElite redesigned their warehouse to create zones for specific car models. This reduced the time spent looking for items by 40% and minimized misplaced stock.

7. Forge Strong Supplier Relationships:

Regularly assess supplier performance and verify the accuracy and quality of shipments.

Example: When CraftyCreations noticed inconsistent quality in paintbrush bristles, they held a series of meetings with the supplier. This collaboration resulted in a standardized quality check process and a 5% discount on bulk orders.

8. Establish Clear Policies and Address Obsolete Inventory:

Set guidelines for handling, receiving, and returning inventory, and use promotions to move slow-moving stock.

Example: TechGiant Electronics implemented a 'First-In-First-Out' policy for gadget sales. For items like older model smartphones, they bundled them with new accessories which generated an additional $10,000 in quarterly sales.

9. Leverage Technology and Feedback:

Employ RFID, barcoding, and predictive analytics, and encourage staff feedback for continuous improvement.

Example: Using RFID tags, PetsParadise precisely tracked their pet accessories. Their new feedback system revealed frequent returns of certain toys due to flaws that prompted product replacements and boosted customer satisfaction.

Case Study

StarryBrews Cafe is an upscale coffee shop with three branches in a metro area and offers coffee, pastries, and merchandise. Recently, they observed a $5,000 loss, mainly from their merchandise section. With the current challenge they face, here’s how they employed our inventory loss prevention process: 

1. Risk Assessment:

StarryBrews evaluated their sales data and found a 15% discrepancy in recorded vs. sold merchandise, especially at their downtown branch.

2. Enhanced Security Measures:

They invested $2,000 in CCTV cameras around the merchandise area and spent $500 on anti-theft tags for high-value items.

3. Adopt an Advanced Inventory Management System:

They transitioned to a cloud-based system for $1,500 annually, which allowed for real-time tracking and branch synchronization.

4. Regular Audits and Physical Counts:

They found a 12% discrepancy (about $600 in value) during the first month's merchandise count. This reinforced the urgency of their new strategy.

5. Employee Training and Awareness:

All staff underwent a $1,000 training program on inventory accuracy and theft prevention.

6. Optimized Layout and Storage:

By reorganizing, they noticed a 5% increase in sales of high-value items, now placed prominently near the cashier.

7. Forge Strong Supplier Relationships:

They negotiated better terms with suppliers that resulted in a 3% discount on bulk orders that helped them save roughly $300 quarterly.

8. Establish Clear Policies and Address Obsolete Inventory:

With new protocols, damaged merchandise claims dropped by 8%. Older merchandise sales generated an additional $1,200 in revenue due to promotional strategies.

9. Leverage Technology and Feedback:

The new employee app, developed for $1,500, led to 10 actionable feedback points in the first two months, helping refine the inventory process further.

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Outcome: After an initial investment of around $6,800 in improvements, StarryBrews Cafe managed to curb their quarterly losses by roughly $4,500. The return on investment was evident not only in reduced losses but also in the improved efficiency and morale. Within a year, the measures would more than pay for themselves and establish a sustainable, efficient operation.

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We hope you now have a better understanding of the common causes of inventory loss and how to prevent them using our process to optimize your operations.

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If you enjoyed this article, you might also like our article on warehousing inventory or our article on inventory receipt.