The article provides us with information about two separate studies conducted by Ernst and Young and University of Florida in 2002. Both studies analyze the causes and effects of inventory shrinkage in US retail industry.
According to the statistics, retailers loose at around 1.7% of their total annual sales on average due to inventory shrinkage, which includes shoplifting, employee theft and various errors.
In my opinion, inventory shrinkage is a serious problem to modern retail industry, as it significantly affects profitability of the company and its key indicators and results in consumer losses because of increased prices.
Firstly, inventory shrinkage is regarded as a cost of goods sold, and, therefore, influences gross margins of a company. If companies were able to manage inventory shrinkage more efficiently, their gross margins would increase by more than 1.5%, which is quite a significant figure. Companies would be more cost-efficient and would be able to attract more customers and potential investors.
Secondly, many companies strive to compensate their inventory shrinkage by increasing prices on their products. If the demand for these products is elastic, companies might lose potential customers, which may result in additional losses. In addition, consumer surplus will be decreased, as clients will have to pay additional money to compensate shrinkage costs.
Business analysts from Ernst & Young suggest an efficient plan, which may decrease inventory shrinkage significantly. To my mind, if companies were able to identify key problematic areas where inventory shrinkage was occurring, their action plans would be more specific and effective. Furthermore, the ability to quantify the efficiency of specific measures would help to identify and implement the most effective strategies. As a result, asset management would be performed in a more qualitative way and company’s profitability might be increased without deterring existing customers.
