Inventory Shrinkage

Inventory Shrinkage

KPI Details

Inventory Shrinkage measures the portion of a company's inventory that is lost and does not generate any revenue. High Inventory Shrinkage may be a result of inventory theft, inventory damage, miscounting, supplier fraud, accounting errors, misplacement or expiration. Inventory Shrinkage is costly to the company not only in terms of lost inventory, but managers may need to spend money on heightened security to prevent future shrinkage. Inventory Shrinkage may also foster an environment of mistrust between management and employees, which can reduce productivity and efficiency.

KPI Definition

The total cost related to inventory shrinkage (broken, pilfered, spoiled, or stolen inventory) divided by the average dollar value of inventory on hand, as a percentage.

KPI Best Practices

• Install surveillance cameras and other security equipment to reduce instances of theft
• Train employees on proper storage and handling practices to minimize damaged inventory
• Compare invoice quantities to actual quantities received to identify any discrepancies in supplier shipments

KPI Calculation Instructions Inventory Shrinkage?

Two values are used to calculate this KPI: (1) the total cost related to inventory shrinkage, and (2) the average dollar value of inventory on hand during the same measurement period. The total cost of inventory shrinkage is defined as the dollar amount of any loss of inventory due to clerical error, lost goods, stolen goods, damaged goods, expired goods, etc. The average dollar amount of inventory on-hand can be calculated by taking the sum of the inventory value on hand at the beginning and end of the measurement period and dividing that value by 2.

KPI Formula :

(Total Inventory Shrinkage Related Cost / Total Value of Inventory) * 100