Most retail businesses take a physical inventory of stock only once or twice a year, and when the count is completed, the difference between the inventory on hand and what it should be according to purchase and sales records is called shrinkage (Im going to pass on the puns for this one€?.?Shrinkage is due to employee theft, shoplifting, and paperwork error, pure and simple.?

The way I hear it, the typical annual rate of inventory shrinkage in the retail industry is in the order of 3 to 5% - lets split the difference and say 4%.  Industry Experts (whoever they are€? suggest that of that total inventory shrinkage, 50% is due to external theft; 30% is due to internal theft; and 20% is due to messed up paperwork. (Some suggest that the internal theft rate is even more than 50%, depending on the industry).?Other reasons for business losses, such as breakage, robbery, spoilage, and vandalism, are separate problems that were not going to deal with here.?

Do the math in your head  whats 4% of all the stock youve ordered this year worth??Pretty grim numbers.?If youre still with me, Id like to suggest a way to reduce these figures by almost half  a way to reduce inventory shrinkage to a more manageable 2%!?I work for a company that develops an integrated point of sale software system that ties together the front end point of sale with inventory control and back-end accounting, so it should come as no surprise that Im going to suggest such a system as a solution to reduce inventory shrinkage.?Many of our clients have reported a dramatic savings, enough to pay for the software and then some in less than a year.?

What Im not going to do is suggest that our Windward System Five is the only quality product that does what Im going to cover  so do your homework and consider any POS system that measures up.?A good Point of Sale system can help eliminate internal theft and messed up paperwork that accounts for 50% of the total inventory shrinkage.

Internal Theft Prevention

Why would my staff steal from me! you say? The retail industry attracts unskilled workers, often at minimum wage. Some will be tempted steal, for whatever reasons. What we will try to do is shift the Risk/Benefit ratio to a point where the risk of being promptly caught is much greater than the minimal benefits they can gain. Think of it as the ol carrot and the stick approach. The carrot includes things like fair compensation, a good working environment, employer-sponsored activities that improve morale, good communication and concern for the success of a company. The only way to reach some employees is through a stick of an effective security program and a straightforward policy of prosecuting any employee caught stealing. A good Point of Sale system should balance between carrots and sticks.

Note: Any additional cost from carrots will be more than made up by savings from reduced inventory shrinkage.

 Carrots

• Reward good salespeople by paying commissions.?Even a small percentage sends a good message.?Your Point of Sale system should be able to easily track and report on commission sales

• People like discounts, and to save yourself from the five fingered discounts, set an Employee pricing level for some or all of your inventory.? Your POS should help identify the profitability of inventory items, letting you set a variety of pricing levels.?You can even expand on this by allowing staff to sell a certain amount of inventory at Employee discounts to friends and family (it does wonders for their ego).?Monitor these amounts through your POS

• Move old stock and improve staff morale with the use of SPIFs (Sales Promotion Incentive Fund).?A couple of movie tickets or a gift certificate awarded with a little bit of ceremony can go a long way.?Any cost is more than made up by having moved stale inventory.?Your POS should be able to easily report on specified SPIF-eligible sales

• Profit sharing is the quickest way to make all staff feel they have a vested interest in making the company profitable.?Think about re-investing the money saved from a successful inventory shrinkage reduction program back in to the company in the way of a profit sharing program.?Your POS system should integrate fully with an Accounting backend, so profit can be monitored on an ongoing basis, rather than a month or two after year-end

• Good communication goes a long way to make staff feel theyre part of the company.?Use the CRM part of your POS to keep track of employee birthdays and special events.?Use the e-mail features to keep in touch with all the staff

 Sticks

• Each employee should have a username and password required to log on to the Point of Sale system.?This promotes accountability, especially if they know that transactions can be immediately traced back to an individual

• Run frequent Administrator Reports  daily or at least once a week.?By keeping a close eye on sales and inventory and by immediately following up on discrepancies, staff will soon learn that nothing gets by ol Eagle-eye

• Prevent unauthorized markdowns by setting security levels to reflect what the individual needs to do.?Frontline salespeople dont need to access the Accounting backend, and only those responsible for receiving inventory should be able to adjust stock levels.?Your POS should have complete flexibility to customize security access and clone settings, so all Salespeople have similar security access

• There will always be situations where Salespeople may need to offer a discount to make a sale.?Make sure your POS can handle predetermined sales discounts on a per item basis  with or without a Managers Override required

• Brazen theft of cash from the cash register is reduced when your POS can give real-time reconciliations simply and quickly, and with the complete itemized list of who did what transactions

• Refunds are often an area of vulnerability that is open to employee abuse.? Your POS should be able to quickly access the original sale based on the item being returned.?A complete sales history of both the customer and the inventory item, coupled with the salesperson involved, can also identify any suspicious activity

• Receiving and Shipping are also areas prone to potential mishandling.?Your POS should automatically handle Purchase Orders, generate Receiving forms, and easily handle short-shipped and backordered items.?All this information should be immediately and easily available for spot checks