Stop thief! How inventory sampling can prevent inventory shrinkage

A few weeks ago, the story of a high-profile theft made the headlines. Ms. Lederhaas-Okun, a former executive at the internationally renowned jewelry company, Tiffany & Co., was accused of stealing diamond bracelets and rings with precious stones worth $1.3 million. Originally in charge of showing product designs to possible manufacturers, the executive reported the items rendered “unusable” and, according to company policy, was able to “write off” the valuables from the total stock value. Over time, approximately 165 pieces of jewelry vanished from Tiffany’s inventory which turned Ms. Lederhaas-Okun into one of the more successful jewelry thieves in recent times. Sadly for her, an inventory review in February 2013 (after she left the company due to downsizing) revealed the unusual transactions which led to her arrest. She is currently facing a prison sentence of 20 years on the fraud charge.

Inventory shrinkage is a common issue

For most retail companies, yearly physical inventory counts reveal this type of fraudulent activity. Apart from the high costs of the process itself, the results frequently show that some portion of the warehouse stock mysteriously disappeared. In most cases, other than a creative undermining of company policies like at Tiffany, the inventory counting results simply do not match the book figures. Inventory shrinkage is an issue that companies continually have to deal with. According to the Global Retail Theft Barometer, the global financial damage resulting from inventory shrinkage in the retail industry totaled over $119 billion in 2011.

Employee theft is however only one source of inventory shrinkage. Shoplifting is in fact the main contributor amounting to $51 billion (42,2 % of total losses) in 2011. Other major reasons for the disappearance of items include vendor fraud and administrative errors. Whatever the source, missing inventory can damage a company financially and result in the inability to meet customer demands. Poor inventory accuracy resulting from inventory shrinkage means you pay twice: you pay for the value of the stolen goods as well as the customers you lose.

How to combat inventory shrinkage

While there are a myriad of technical options (like RFID or cameras) or other security measures to prevent the unwanted disappearance of goods, most of them turn your warehouse into a prison-like facility, leaving the majority of your innocent employees under unnecessary scrutiny.  And since most of your employees know precisely about the security measures, the more criminally inclined will find ways to circumvent them. So what is the alternative to `Big Brother´ and some mean-looking watchdogs?  For Tiffany, a simple inventory count revealed the crime, even if that meant a long and drawn-out counting process.

The ability to detect shrinkage fast may be the most efficient way to prevent it from occurring in the first place. But how is a fast detection in a warehouse with thousands of lines even possible?  As a full physical inventory is – due to its high costs – only done maybe once a year and even prominent alternatives like cycle-counting prove to be very time-consuming and expensive, most companies lack the ability to detect theft shortly after it was committed.

Although Tiffany does conduct daily inventory counts, only items worth more than $25,000 are subject to these procedures. It can be safely assumed, that Tiffany has this value in place for efficiency purposes. With this policy in mind, Ms. Lederhaas-Okun only checked out items worth less than $10.000 and thus could continue her illicit activities undetected.

A controlling inventory is the most efficient measure

So, what is the most efficient and the cheapest way to detect inventory shrinkage on a more frequent basis? The answer is: inventory sampling. If you are a regular reader of our blog, you might have come across a few articles describing the benefits of this inventory counting procedure. I already covered the principles of inventory sampling as well as the two major procedures: estimation and testing. So I will only refer to these articles at this point and highlight a variant of the estimation procedure I did not mention previously: Controlling inventory counts.

Performing a controlling inventory based on inventory sampling provides the right tool to check your stock on a regular basis with minimal effort. Companies can conduct controlling inventories as often as they want, deciding for themselves how large the sample to be counted should be. The sample results are extrapolated across the whole warehouse inventory and can provide early hints when something seems off.

Because you are in control of the sample size, you can decide for yourself how much effort you want to put into counting inventory and allocate personnel resources accordingly. Even with small sample sizes in relation to your total stock, you can achieve a very valid estimation of your current inventory accuracy.

Conclusion: Trust but verify. While I personally would put more than some effort into ensuring inventory accuracy when running a high-end jewelry company (a lot of A-items!), most warehouses can prevent inventory shrinkage without security guards and achieve/maintain high inventory accuracy.

Inventory Sampling

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