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March 18, 2023

Method for calculating shrinkage

Theft, data entry and counting errors, etc. To be able to prevent stock loss, it’s essential to be able to quantify it accurately. That’s why shrinkage calculation is so important for any retail business. Once you’ve calculated your stock loss, we, at Veesion, will tell you how you can implement the appropriate solutions to effectively combat it.


>> Case Study: How to reduce shrinkage by 50% in your store?

What exactly is shrinkage?

The term shrinkage is used in retail to refer to the difference between the amount of goods theoretically available in stock and the actual amount in stock.

Shrinkage can have a number of causes, such as losses due to shoplifting, stock counting errors, damaged or out-of-date products, customer returns and delivery errors.

Shrinkage has a direct adverse impact on retailers’ profit margins, as it reduces the amount of saleable products available, which can ultimately result in financial losses.

There are two types of shrinkage, known shrinkage, which relates to explainable or explained losses (such as expired products and customer returns), and unknown shrinkage, which relates to unexplained losses (such as theft, etc.).

The main causes of shrinkage

The main cause of shrinkage is theft. Whether it be shoplifting, employee theft or supplier fraud, all levels of the supply chain are affected. It’s estimated that 75% of shrinkage-related loss is due to theft.

Other causes of unexplained losses include:

  • Errors when entering data into the computer system.
  • Counting errors during stocktaking.
  • Products damaged or destroyed accidentally.

How to calculate your store’s shrinkage

The method for calculating shrinkage is relatively simple. Start by determining the actual amount of stock. To do this, make a complete inventory of all your goods.

Next, calculate the theoretical stock, i.e. the number of goods that should be on the shelves in your store. The calculation is as follows:

To determine what your level of shrinkage is, simply use the formula:

Calculating the shrinkage rate

By calculating the rate of shrinkage, you can gain an overview of changes in unexplained losses over time. To do this, just divide the value of unexplained losses by the total value of sales, then multiply the result by 100 to obtain a percentage.

Why calculate your shrinkage?

Knowing your precise shrinkage has several advantages for your business strategy. Here they are in detail.

Reduce stock loss

With an accurate view of your shrinkage, you’ll be able to identify the main causes of shrinkage and thus take steps to reduce it.

Improve inventory management

If you keep a regular eye on your store’s shrinkage, you’ll be able to identify which products get damaged the most and which ones are most likely to be stolen. You’ll then be able to take extra care with regard to the transport, movement, management and security of those products.

Improve profitability

By reducing stock loss, you’ll undoubtedly improve your profitability, as you’ll increase your profit margins. This extra profit can then be invested in other areas or be used to boost growth.

Improve customer satisfaction

By reducing stock loss, you can ensure that certain products are available for shoppers who want to buy them. This will help increase customer satisfaction and build customer loyalty.

What are the solutions to shrinkage?

Losses due to shrinkage are not inevitable. By implementing the right security, training and loss identification solutions, you’ll be able to drastically reduce your shrinkage rate. 

Improve your security with Veesion monitoring software

To combat unexplained losses due to theft, the Veesion surveillance system is by far the perfect solution. The software is AI-based and compatible with most surveillance cameras models currently on the market. By monitoring shoppers’ body movements and gestures and detecting shoplifting in real time, the Veesion system has been shown to reduce theft-related losses by 60%.

Staff training

Employees must be trained to recognise the warning signs of theft, and know how to react properly. Proper training also helps to prevent counting errors during stocktaking procedures.

Identifying the causes of shrinkage

Be sure to carry out analyses to identify the causes of shrinkage in your store. Once you’ve identified the causes of shrinkage, it’ll be easier to implement specific solutions to combat the problem.

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