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Shrinkage Is The Result

Remember this one very important point:  Shrinkage is the result, not the problem!

This is a simple statement but one that very few business managers have wrapped their head around.

Shrinkage is usually discovered on the day of an inventory count. Once calculated and found to be high, emotion sets in. When that happens management immediately looks for the problem.

But here is the important part, the problem could have been 6 months prior, so they are reacting to the result, NOT the problem. Therefore the energy to solve the problem is usually directed to the wrong area.

It is critical to do a root cause analysis, but it takes skill and discipline to discovery the contributing factors.

BUT there is always one common denominator…

“shrinkage is the result of failing to execute standard operating practice.”

If you do not see that language in a report by those tasked with determining the root cause of the shrinkage, then it is one of two things. Either the team did not actually find the problem, or your standard operating practice is just simply not effective.

So if failing to execute SOP is the problem, why not find that on the front side through an audit?

Treat an exception for what it is, and react accordingly, don’t wait for an inventory count to tell you that you have shrinkage.

Follow these steps to create your audit;

Determine the actions required to enable you to achieve positive business results.

You do not need to state every step, just the big ones, the milestones. In the case of a restaurant specializing in burgers, an example might be to make sure enough meat and buns were ordered in the morning.

Determine the actions that might cause a negative outcome.

Food service needs cold food to stay cold and hot food to stay hot. An example might be to check temperatures to makes sure the food is not in the temperature danger zone.

Document the critical control points

Once you have identified the steps, create a checklist of items that are key to determining the level of compliance. The points on the checklist should flow to make it as easy for the checker, try to avoid having them bouncing around from point to point.

Determine the level of frequency it would take to properly assess compliance

Some actions are daily, some may be hourly. In the case of the restaurant, because food products left at ambient temperatures for 4 hours or more is unsafe, the minimum you would want to check the temperature would be 4 hours.

1. Score it

Some items are more important than other. You may want to assign a weighted scale system. Even if you do not, make sure you track how many items on the checklist are compliant. This will allow you to measure compliance one week over the previous week and monitor progress.

2. Reward

Try to use the scoring system as a positive. In that way, the compliance level is used, not the deficiency. Always strive to improve. If you are 80% compliant, aim for 85% the following week.

3. Take action

Some time may be show stoppers. You might need 100% compliance on these ones, and any deficiency may require immediate and swift action. These items would likely be the legally required items. In the food business, cross contamination of food items may be the show stopper.

Once you have your checklist, execute.


The bottom line is this – if you are 100% compliant with your SOP, you will likely not have any surprises at the end of the year. And that should interpret to lower shrinkage and a better bottom line!

Hello, I'm Stephen O'Keefe. The information you read here is intended to help businesses answer some of the tough questions about everyday events in the retail environment. After spending over 3 decades in this industry we've seen a lot!
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About Stephen O'Keefe

As an independent consultant I leverage my experience and knowledge to help a number of companies achieve results. Clients range from non-retailers looking for guidance to serve their retail customer, to retailers looking for quick solutions to unique and costly problems, right to the Industry Association. Bottom line Matters!

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