First Person: The Invisible Thieves That Cause Inventory Shrink

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My career includes sales and marketing positions in all sizes of businesses, including my own small business. I have seen these six invisible thieves shrink inventory value, which means your inventory is worth less than what you paid for it.

Changing Technology

My Radio Shack Computer Center was both the first retail store I managed and my introduction to inventory shrink due to changing technology.

In 1982, I had to carry a package of Bisync communications software to enable the Model II/12 to be used as terminals to an IBM mainframe. After technology advanced rapidly, Radio Shack recalled these packages. Provided they were unopened, they accept the software back. Because my package was opened, I had a $1,000 inventory write-off.

Aging

Often your inventory aging is due to carrying the wrong products, like my office supply store client which carried cuddly toys. Although they sold some as impulse items, customers looked elsewhere when they wanted toys. This meant that some of my client's cuddly toys aged, looking worn and discolored.

When they dropped the price enough to move them, some products were sold below cost. Thus inventory shrink stole value from their small business. Their cost to buy wasn't all of what they paid to purchase these toys. The loss to this client included freight.

Failure to Return RMAs on Time

At the small business where I first became vice president of sales and marketing, we lost money on RMAs (returns authorized by vendor) that weren't returned on time. We had built up an inventory of Compaq equipment that needed to be returned. We almost lost $400,000 worth of returns because we had exceeded the allowed time frame to send them back.

Public Tastes Change

Although common in businesses dealing with fashion, cars and toys, taste changes can affect every small business. For instance, you can now get your laptops with different colored cases from Dell.

When the marketplace fascination with that color disappears, you will have to drop your price to get rid of any remaining stock. If you fail to catch the turning point in consumer interest, you will end up going below your costs to sell what remains thereby freeing up your capital to buy what customers want.

Shrink During Preparation/Manufacturing

I first heard about this from a small business customer. He wasn't getting the number of servings of prime rib he expected at his restaurant. The meat shrunk more in cooking because he received a lower grade than he ordered, which meant more fat

In manufacturing, some industries have built in shrinkage. When you buy wood, you buy the length you need resulting in scrap too small to sell. In manufacturing clothes and furniture, you also end up having scraps of fabric too small to sell.

Parts Not Invoiced

My printer service company dealt with this but to a lesser degree because most of our products were on contract. However, I had clients who performed billable parts and labor jobs. At one client, we tested a stack of invoices. The two master electricians looked at the invoices and, based on the jobs, marked what parts they knew the technician would have needed.

They then listed out the items that were missing. I had the woman in charge of purchasing price out the missing items. Over a year, we projected several thousand dollars in inventory shrink because the technician never placed these parts on the invoice. There was also the other issue of the profit that was missed from not charging for parts used.

These six invisible thieves cause inventory shrink. They're invisible because there is no person deliberately stealing from you. They are facts of life, like fashion changes or technology changes. Suddenly you need to drop your price even below your cost to move those products out while someone still is willing to buy them. Other things steal value from your inventory, like not returning defective products on time to get credit for them. Remember, a dollar of shrink prevented is a dollar of profit gained back.

*Note: This was written by a Yahoo! contributor. Do you have a small business story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.

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