The world of retail has relied on the word “shrinkage” for more than 100 years to describe the losses companies experience as they go about their business. Shrinkage, however, is almost a euphemistic term describing a simple contraction in the size of the stock held by a company, without offering any real sense of what the cause might be.
In this way, the term is similar to “shoplifting”—a rather benign term often used by the industry to describe people actively engaging in criminal acts of theft in stores. For comparison’s sake, you rarely see burglars or robbers described as houselifters or purselifters.
Four buckets of loss tend to be included in survey descriptions of what shrinkage is: external theft, internal theft, administrative or process errors, and vendor fraud. The term “administrative error or process failures” is particularly vague; depending upon the type of retailer and the types of products sold, it can potentially cover an enormous array of types of loss, including damage, spoilage, product going out of date, and incorrect price adjustments.
A retailer selling food and using a shrinkage definition that includes food spoilage will have a different level of loss compared to a retailer selling clothing or auto parts; yet, many shrinkage surveys continue to combine this data together to generate an overall figure for the industry.
To date, there is no consistent, detailed definition or typology of shrinkage. It is a term that is used throughout the industry, but interpreted in different ways depending on the retail environment and the prevailing organizational culture and practices.
There is a constant desire to understand what the root causes of shrinkage are: Is it mainly external thieves? Is it the staff employed by retailers helping themselves to the stock? Is it due to organizational inefficiencies? Or is it caused by retail suppliers wrongly delivering on purpose or through error?
Surveys will often provide numbers that supposedly apportion the total shrinkage losses to each of these types of losses, with external theft frequently—but not exclusively—seen as causing the largest amount.
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