Shrinkage is inventory that disappears between purchase and sale — through theft, spoilage, damage, or administrative error — expressed as a percentage of revenue or inventory value, and representing a direct, compounding distortion to every procurement calculation that depends on accurate inventory records.
Quick answers
What is shrinkage? Shrinkage is the gap between what your system says you have and what you actually have on the shelf. It has four causes: external theft (shoplifting), internal theft (employee), spoilage and damage (breakage, expiration), and administrative error (mis-scans, receiving mistakes, wrong counts). Every unit of shrinkage inflates your apparent demand, causing your procurement system to reorder based on sales that never happened.
What's a normal shrinkage rate? Common planning ranges are around 1–2% of revenue for retail, 2–3% for grocery, and 4–10% of food cost for restaurants. If you have never measured shrinkage, treat those as starting benchmarks and verify with cycle counts.
How does shrinkage affect procurement? Your POS records a sale, or your system records a receipt. When inventory vanishes between those events, the system interprets the gap as sales. Demand appears higher than it is. Safety stock is sized for phantom demand. Reorder points trigger early. You carry more inventory than you need, which increases carrying cost, which increases the next round of shrinkage through spoilage. It compounds.
How do you detect shrinkage? Cycle counts. Compare physical count to system quantity. The difference, aggregated across all items and periods, is your shrinkage rate. Without regular cycle counts, shrinkage is invisible until annual physical inventory — by which point twelve months of procurement math have been contaminated.