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What are the most important metrics for preventing inventory shrinkage?

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Inventory shrinkage is the loss of products or materials due to theft, damage, error, or waste. It can have a significant impact on your profitability, customer satisfaction, and operational efficiency. To prevent inventory shrinkage, you need to measure and monitor some key metrics that can help you identify the root causes, implement corrective actions, and improve your inventory management practices. In this article, we will discuss the most important metrics for preventing inventory shrinkage and how to use them effectively.

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1 Shrinkage rate

The shrinkage rate is the percentage of inventory that is lost or unaccounted for during a specific period. It is calculated by dividing the difference between the expected and actual inventory by the expected inventory. A high shrinkage rate indicates that you have a serious problem with your inventory control and security. You should aim to keep your shrinkage rate as low as possible, preferably below 2%. To reduce your shrinkage rate, you need to conduct regular and accurate inventory counts, audit your inventory records, track your inventory movements, and prevent theft and fraud.

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2 Inventory turnover

The inventory turnover is the number of times you sell and replace your inventory in a given period. It is calculated by dividing the cost of goods sold by the average inventory. A high inventory turnover means that you have a high demand for your products and a low inventory holding cost. A low inventory turnover means that you have a low demand for your products and a high inventory holding cost. It also increases the risk of inventory shrinkage due to obsolescence, spoilage, or damage. You should aim to optimize your inventory turnover by forecasting your demand, managing your replenishment, and adjusting your pricing and promotion strategies.

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3 Inventory accuracy

The inventory accuracy is the degree of match between your physical inventory and your inventory records. It is calculated by dividing the number of correct inventory counts by the total number of inventory counts. A high inventory accuracy means that you have a reliable and updated inventory information system that supports your decision making and planning. A low inventory accuracy means that you have a faulty or outdated inventory information system that leads to errors, discrepancies, and inefficiencies. You should aim to improve your inventory accuracy by using barcodes, scanners, or RFID tags, implementing cycle counting, and training your staff.

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Tamara Rueth

Clearance with Department of Defense thru 2026, SAP TM , Oil & Gas , Energy Services , Chemical Manufacturing ,Supply Chain Logistics, Chemical Industry ,
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Knowledge of the items that are counted. Detail recons that tie order to order physically /systematically Most financial systems have rounding errors that are set only to convert exact when you have a physical range specification per item it is impossible to tie physical to perpetual without variances. When there are high volumes you will have big swings if a system is not maintained / set up with actual item chemical properties. When recons are done by departments that are not experienced with the properties of items and use only system conversions you will have unreal swings they cannot explain. Best advise is the person reconciling inventory must have knowledge physically , systematically and of all conversions / inversions

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4 Fill rate

The fill rate is the percentage of customer orders that are fulfilled from your available inventory without backorders or delays. It is calculated by dividing the number of orders that are shipped on time and in full by the total number of orders. A high fill rate means that you have a high customer satisfaction and loyalty, and a low lost sales opportunity. A low fill rate means that you have a low customer satisfaction and loyalty, and a high lost sales opportunity. It also indicates that you have a poor inventory availability or allocation. You should aim to increase your fill rate by balancing your inventory levels, prioritizing your orders, and communicating with your customers.

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5 Inventory carrying cost

The inventory carrying cost is the total cost of holding and maintaining your inventory. It includes the cost of storage, insurance, taxes, depreciation, obsolescence, and capital. It is calculated by multiplying the average inventory by the annual carrying cost percentage. A high inventory carrying cost means that you have a high inventory investment and a low return on investment. A low inventory carrying cost means that you have a low inventory investment and a high return on investment. It also reduces the likelihood of inventory shrinkage due to overstocking or aging. You should aim to minimize your inventory carrying cost by reducing your inventory levels, optimizing your inventory location, and negotiating with your suppliers.

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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?

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KUNAL BHAT , PMP

SAP S4/HANA Solution Architect | SAP MM IBP FI PP | Supply Chain Expert | Drove 40% Process Efficiency with SAP IBP and APO | Process Re-engineering & SAP Integration | Process Optimization & System Integration
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The most crucial metrics for preventing inventory shrinkage include inventory turnover ratio, shrinkage rate, and accuracy of demand forecasting. A high turnover ratio indicates efficient inventory management, reducing the likelihood of theft or errors. Monitoring the shrinkage rate helps identify potential losses, prompting timely investigation and intervention. Accurate demand forecasting ensures optimal stock levels, minimizing overstock or stockouts that can lead to discrepancies. Employing technologies like RFID and regular audits further enhance visibility and control. Integrating these metrics enables businesses to proactively address vulnerabilities and maintain tighter control over their inventory, mitigating the risk of shrinkage.

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Thomas Dent, CPIM, CSCP, CPSM, CPSD

Director of Program Management
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Consider the Inventory Health metric, which sheds light on stock age and turnover, helping to prevent stock from becoming obsolete. Another critical but often overlooked metric is the Gross Margin Return on ROI), which evaluates the profitability of your inventory, highlighting how effectively your investment converts into sales. Also, keep an eye on the Stock-to-Sales Ratio; it's pivotal for balancing your inventory levels with sales trends, ensuring you're neither overstocked nor understocked.

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What are the most important metrics for preventing inventory shrinkage?

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3

4

5

6

1 Shrinkage rate

2 Inventory turnover

3 Inventory accuracy

4 Fill rate

5 Inventory carrying cost

6 Here’s what else to consider

Inventory Management

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What are the most important metrics for preventing inventory shrinkage?

1

2

3

4

5

6

1 Shrinkage rate

2 Inventory turnover

3 Inventory accuracy

4 Fill rate

5 Inventory carrying cost

6 Here’s what else to consider

Inventory Management

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