Update: We originally published this article in 2012 with five ways to reduce inventory theft. Theft remains one possible cause of missing stock, but it is not the only one. This updated guide looks more broadly at inventory shrinkage, including receiving mistakes, damage, misplaced products, unauthorized adjustments, supplier discrepancies, and theft.
When the quantity recorded in an inventory system does not match what is physically available, the business has an inventory discrepancy. When those missing products can no longer be accounted for or sold, the loss may be considered inventory shrinkage.
Shrinkage affects more than the value of the missing items. It can lead to overselling, unnecessary purchasing, fulfillment delays, inaccurate financial records, and less confidence in inventory data.
Preventing it starts with understanding where inventory differences come from and building controls into every stage of the workflow.
What Is Inventory Shrinkage?
Inventory shrinkage is the difference between the inventory a business expects to have and what it can physically account for.
Theft may contribute to that difference, but shrinkage can also result from administrative errors, damaged products, supplier problems, incorrect adjustments, and products being lost inside a warehouse. Shopify includes employee theft, shoplifting, vendor fraud, damage, and administrative errors among the common causes of inventory shrinkage.
For an eCommerce business, inventory may become inaccurate when:
- A supplier sends fewer products than expected
- The full purchase order is received in the system anyway
- An employee picks the wrong SKU or variation
- Products are moved without updating their location
- Damage or returns are recorded incorrectly
- Inventory adjustments are made without explanation
- Products are lost or stolen
The first step should not be to assume theft. It should be to determine where the inventory record stopped matching the physical movement of the product.
Start With Accurate Receiving
Many inventory discrepancies begin when products first enter the business. Receiving employees should compare the shipment with both the purchase order and the products that physically arrived. They should verify SKUs, quantities, condition, and warehouse locations before making inventory available for sale.
For example, if ten units were ordered but only eight arrived, the system should show eight received and two still expected. Recording all ten creates inventory that exists in the system but not in the warehouse.
The receiving process should also explain what to do when products arrive damaged, the supplier sends substitutions, quantities exceed the purchase order, or an order arrives in several shipments.
Ordoro’s inventory management tools help merchants manage purchase orders, goods receipts, warehouses, and inventory quantities within connected order workflows.
Keep Products in Defined Locations
Inventory is often considered missing when it has simply been placed in the wrong location. Products may be left at a receiving station, packing table, overflow shelf, returns area, or temporary storage location without the movement being recorded. Similar-looking products may also be stored in the wrong bin.
Every sellable, returned, damaged, or quarantined item should have a defined location. Employees should understand when moving a product physically also requires updating its recorded location.
Clear SKU labels and warehouse location names make it easier to store, pick, count, and investigate inventory. Our guide to preventing misplaced inventory explains how location controls, receiving procedures, and regular counts help make stock easier to find.
Returned or damaged products should also remain separate from inventory that is ready to ship. When a return arrives, employees should confirm the SKU, quantity, and condition before deciding whether the item can be restocked, refurbished, returned to the supplier, or written off.
Use Individual Accounts and Role-Based Permissions
Employees should not share inventory system credentials. Individual accounts create a clearer record of who received a shipment, changed a quantity, processed a return, or completed another inventory action. Shared accounts make it much harder to investigate mistakes or unauthorized changes.
Access should also match each employee’s responsibilities. A receiving employee may need to record incoming products without changing costs. A customer service employee may need to view availability without approving adjustments. A manager may need broader reporting and approval permissions.
This follows the principle of least privilege, which means giving each account only the access required to complete its work. CISA recommends limiting user access to the minimum permissions necessary for assigned tasks.
Permissions are not a substitute for training or trust. They are a practical way to reduce accidental changes, discourage misuse, and make inventory activity easier to review.
Require a Reason for Every Adjustment
Inventory adjustments should not become a shortcut for making the system match a physical count.
When an employee finds a discrepancy, the business should first investigate what caused it. The difference may be tied to a recent receipt, open order, return, transfer, damaged item, picking error, or incorrect SKU.
When an adjustment is necessary, the record should include a specific reason, such as damage, receiving error, return correction, misplaced stock, cycle-count correction, theft, or loss.
Businesses should also define:
- Who may make adjustments
- When manager approval is required
- Which discrepancies need further investigation
- How recurring problems should be reported
A detailed adjustment history helps distinguish an isolated mistake from a repeated pattern.
Count Inventory Regularly
A business should not wait until the end of the year to discover that recorded quantities are wrong. Cycle counting allows employees to count smaller portions of inventory throughout the year. High-value products, fast-moving items, and SKUs with a history of discrepancies may need to be counted more frequently than stable, low-risk inventory.
When the physical count and system quantity do not match, the goal should be to find the cause before correcting the number. Recurring differences involving the same SKU, warehouse location, supplier, shift, or process may reveal where controls are failing.
A perpetual inventory system updates inventory records as transactions occur, but physical verification still matters. Software can record what employees enter. It cannot confirm that every physical movement happened correctly.
Secure High-Risk Inventory
Some products require tighter controls than others. Small, expensive, popular, or easily resold products may be more vulnerable to theft or accidental loss. These items may need restricted storage, locked cabinets, serialized tracking, limited access, cameras, or more frequent cycle counts.
Security measures should be proportionate to the risk. Locking down every product can slow receiving and fulfillment. A focused approach protects high-value inventory without making normal warehouse work unnecessarily difficult.
Train Employees on the Full Workflow
Employees are more likely to follow inventory procedures when they understand how their work affects the rest of the business. A receiving mistake can make unavailable stock appear ready to sell. An incorrect pick can create both a customer-service problem and an unexplained inventory difference. An undocumented return can affect purchasing and future orders.
Training should cover the specific tasks each role performs as well as the larger inventory workflow. Employees also need to know how to report mistakes without hiding them or making an unauthorized adjustment.
Our guide to inventory management training for eCommerce teams explains how receiving, warehouse, purchasing, customer service, and management teams contribute to inventory accuracy.
Investigate Patterns Before Assuming Theft
Theft should be taken seriously, but it should not be the automatic explanation for every missing item. Review the available records and look for patterns. Does the same SKU repeatedly come up short? Do discrepancies follow receipts from one supplier? Are losses concentrated in one warehouse location? Did the problem begin after a workflow change?
A pattern may point to weak receiving controls, confusing product labels, incomplete training, supplier shortages, unauthorized activity, or a problem with returns and adjustments.
Investigations should be based on records and evidence rather than assumptions about individual employees. Clear procedures protect the business while also helping avoid unfair accusations.
Monitor Whether Shrinkage Controls Are Working
Businesses can track inventory accuracy over time to see whether new controls are making a difference. Useful measures include unexplained adjustments, receiving discrepancies, picking errors, misplaced products, damaged inventory, return-processing mistakes, and differences found during cycle counts.
Reviewing results by SKU, warehouse, supplier, and workflow can make problem areas easier to identify. A company-wide number may hide an issue concentrated within one product category or location.
Our guide to inventory management best practices covers the receiving, storage, counting, purchasing, and accountability practices that support dependable inventory records.
You can also review the warning signs of inventory inefficiency for other signs that inventory processes may be breaking down.
Inventory Shrinkage FAQs
Is all missing inventory caused by theft?
No. Theft is one possible cause, but missing inventory can also result from receiving errors, damage, incorrect adjustments, supplier discrepancies, misplaced products, and return-processing mistakes.
How often should inventory be counted?
The right schedule depends on the product and the business. High-value, fast-moving, and frequently inaccurate products may need weekly or monthly counts, while more stable inventory can be counted less often.
Can inventory software prevent theft?
Inventory software cannot physically prevent theft, but it can support individual accounts, permissions, transaction records, adjustment histories, warehouse tracking, and regular reconciliation. Those controls can make unusual activity easier to identify.
Keep Better Track of Every Inventory Change
Preventing inventory shrinkage starts with accurate receiving, controlled adjustments, dependable warehouse records, and clear accountability.
Ordoro helps eCommerce teams manage purchasing, receiving, inventory quantities, warehouses, returns, and connected order workflows from one platform. Explore Ordoro’s Inventory Management Tools
