Measuring Shrink


Focus on Accuracy

Twelve percent of stores reported shrink loss of 1.72%, which serves as the benchmark target for companies striving for best-in-class results. These companies demonstrate diligence in making certain that shrink is exposed so that it can be accurately measured. In doing so, these companies operate on the principle that what they can see and track can be controlled most effectively.


There is one condition common to all best-in-class companies - an intense focus on accurate shrink loss accounting and a refusal to allow practices that mask shrink loss. This focus originates in the executive suite with collaboration between the president, CFO, and vice presidents of operations, merchandising, and loss prevention. It is here that optimal, rather than budgeted, profit becomes the mandate. This level of executive focus on shrink reduction and operational best practices is fundamental to the results achieved by best-in-class companies. Company-wide shrink-loss assessments focused on results at every level, require systemic accountability, provide feedback on results, and make recommendations in a continuous effort for profit improvement.



Measuring Shrink

Shrink loss can be classified as known or unknown. By following consistent procedural recording and reporting practices, managers can properly account for known loss and then optimize their ability to control it. The unknown shrink that remains then becomes dependent on effective inventory and financial reconciliation. In order to effectively measure shrink loss at best-in-class levels, there are four practices companies must have in place:



Accurately measuring shrink loss encompasses two fundamental principles - some shrink loss is unavoidable and will naturally occur in every retail store, and shrink is a controllable expense if and when it is recognized.



Calculating Shrink

Shrink loss is typically calculated in one of two ways:


Calculating Shrink


57% of survey participants reported using the retail method and 43% reported using cost accounting. While both accounting methods are generally accepted practices, companies using the retail accounting method and recording departmental shrink in all departments appear to report more accurate shrink numbers.



Lessons Learned



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