Inventory Shrinkage: What to Look for to Minimize Your Store’s Losses

By / 3 months ago

Inventory shrinkage is alive and well among building supply businesses. Inventory shrink can usually be traced to two primary factors: 1.) Too few systems and procedures, or no one is monitoring the systems and procedures that are in place, and 2.) Theft. While the first usually results from honest mistakes, the second is usually the result of dishonesty on the part of an employee or customer.

We recommend that our clients budget no more than one half of one percent of sales for inventory shrink. In an industry where optimal earnings are only 5% to 6% before taxes, there’s little room for controllable losses.

In our experience, most inventory variances are the result of failure on the part of employees to follow established procedures. They either are not trained properly, or over the years, they have developed some bad habits. Managers often set up sound systems and procedures, but make the classic management mistake of failing to inspect what they expect.

Inter-yard transfers, shipping and receiving, material pulled from inventory for use in the company shop, purchase order/inventory control and special orders are the most common areas where there is typically a need for stricter controls. In fact, no procedure at all is better than relying on a procedure that’s not monitored or spot-checked.

Commodity Inventory
Cycle inventory counts, especially on commodity products, is another procedure that is highly recommended. This is where the most dollars of inventory are, and cycle counts identify snafus before they get out of hand.

Theft wears many costumes. Most thieves are able to somehow justify their dishonesty, especially thieves who happen to be on your own payroll.

My old colleague, Tom Dyar, the best loss-prevention man in the history of our industry, used to have a motto: Before the Fact Prevention Rather than After the Fact Apprehension. It’s far less expensive to spend the time necessary to fine-tune and monitor your systems and procedures than it is to allow theft to go undetected.

Clues to Theft
Employee education is another effective deterrent to theft. When your employees are trained in what to look for, they become great watchdogs:
• An employee who is using drugs. Few drug users earn enough to support their habit.
• Employees who live beyond their means, especially those who are being harassed by loan companies.
• Employees who arrive to work early enough to get a good parking space and make frequent trips to their car during the day.
• Customers who refuse to do business unless a certain employee handles the transaction. Watch both!
• A well-adjusted employee who begins suffering from a lot of anxiety.
• Employees who are frequently observed holding secretive conversations with customers or fellow employees.
• An employee who resists taking vacation time, days off or otherwise being away from the business.
• An employee who complains often that he’s underpaid.
• Employees who possess a negative or anti-management attitude.
• Employees who are overly inquisitive about the security features of the company’s computer system.
• An employee who has been terminated from a previous job because of theft.
• Customers who insist on loading their own truck and resist assistance from a company employee.

Management Best Practices
• Make it a practice to randomly observe employees in the process of receiving incoming inventory. Are they following receiving procedures? Failure to follow receiving procedures is frequently the culprit.
• Verify that all pick tickets are converted into invoices at least daily.
• Receive against the P.O., not against the vendor’s shipping documents.
• Pre-list all products in inventory prior to taking a physical inventory.
• Periodically spot-check returned material to make sure it is resellable.
• A copy of the P.O., inventory receipt and vendor’s shipping papers should accompany the A/P check when given to management to sign.

Bill Lee

Bill Lee has nearly 40 years of experience in the construction supply industry. A seminar leader and consultant, he is the author of two books: Gross Margin and 30 Ways Managers Shoot Themselves in the Foot. You can reach Bill at, or 800.277.7888.