What are the most effective metrics for measuring inventory shrinkage?

1 Inventory Shrinkage Rate

The inventory shrinkage rate is the percentage of inventory loss over a period of time, usually a year. It is calculated by dividing the difference between the recorded and actual inventory value by the recorded inventory value. For example, if your recorded inventory value is $100,000 and your actual inventory value is $95,000, your inventory shrinkage rate is 5%. A lower shrinkage rate indicates better inventory control and accuracy.

2 Cost of Goods Sold to Sales Ratio

The cost of goods sold (COGS) to sales ratio is the percentage of sales revenue that goes to cover the cost of the products sold. It is calculated by dividing the COGS by the sales revenue. For example, if your COGS is $50,000 and your sales revenue is $100,000, your COGS to sales ratio is 50%. A higher ratio means lower profit margins and higher inventory shrinkage. A lower ratio means higher profit margins and lower inventory shrinkage.

3 Inventory Turnover Ratio

The inventory turnover ratio is the number of times the inventory is sold and replaced in a period of time, usually a year. It is calculated by dividing the COGS by the average inventory value. For example, if your COGS is $50,000 and your average inventory value is $25,000, your inventory turnover ratio is 2. A higher turnover ratio means faster inventory movement and lower inventory shrinkage. A lower turnover ratio means slower inventory movement and higher inventory shrinkage.

4 Days Sales of Inventory

The days sales of inventory (DSI) is the number of days it takes to sell the inventory on hand. It is calculated by dividing the average inventory value by the daily COGS. For example, if your average inventory value is $25,000 and your daily COGS is $500, your DSI is 50. A lower DSI means shorter inventory holding period and lower inventory shrinkage. A higher DSI means longer inventory holding period and higher inventory shrinkage.

5 Gross Margin Return on Investment

The gross margin return on investment (GMROI) is the ratio of gross profit to inventory investment. It is calculated by multiplying the gross margin percentage by the inventory turnover ratio. For example, if your gross margin percentage is 50% and your inventory turnover ratio is 2, your GMROI is 1. A higher GMROI means higher return on inventory investment and lower inventory shrinkage. A lower GMROI means lower return on inventory investment and higher inventory shrinkage.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?