Inventory Shrinkage Rate is a KPI used to measure the rate at which the value of inventory has been reduced due to loss, theft, or inaccurate record keeping. It is calculated by subtracting the value of the inventory from the expected value of the inventory and then dividing this difference by the expected value of the inventory. The value of the inventory is the value of the inventory after a physical count was obtained. The expected value of the inventory is the amount the inventory was recorded prior to any adjustments due to the physical inventory count.
Depending on the industry, acceptable levels of inventory shrinkage rates can differ. However, it is ideal for the inventory shrinkage rate to be as close to zero as possible. Tracked over time this rate can indicate whether actions taken to prevent inventory losses are effective. A company that experiences an increasing trend or sudden spike in the inventory shrinkage rate should investigate what the cause or causes might be and take actions in order to resolve the issues. Identifying how much is due to theft, how much is due to reporting discrepancies, and how much is due to other factors, such as the misplacement of product, is an important step. It is important to identify the root causes of the loss. Processes or systems may need to be adjusted or added in order to correct the issues.
Once the issues with inventory loss have been identified and a solution implemented, it is important to continue to track the trend of the inventory shrinkage rate. This will give valuable insight into the effectiveness of the solutions as well as provide an indicator of future issues that may occur.
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