Legal Definitions - shrinkage

Shrinkage refers to the unexplained or unexpected reduction in a business's inventory of goods. This discrepancy occurs when the physical count of items available is less than what the company's records indicate should be present. Common causes include theft (by customers or employees), damage or breakage, administrative errors in recording inventory, or spoilage and obsolescence of perishable or time-sensitive items.

• Example 1: Retail Electronics Store

  A popular electronics store conducts its quarterly inventory count. They find that 15 high-demand smartphones are missing from their stock, and 5 display models have cracked screens, rendering them unsellable. Their records indicated all 20 items should have been available and in good condition.

  This illustrates shrinkage because the actual number of sellable phones is lower than what their inventory records show. The missing phones are likely due to theft (either shoplifting or internal), and the damaged display models represent loss due to breakage, both contributing to the store's overall shrinkage.

• Example 2: Supermarket Produce Department

  A large supermarket chain receives a shipment of fresh produce daily. At the end of the week, they discover that several crates of berries and leafy greens have spoiled before being sold, and a pallet of glass jars of pasta sauce was dropped, breaking many of the containers.

  Here, the spoiled produce represents shrinkage due to waste or spoilage, as these items can no longer be sold. The broken pasta sauce jars are shrinkage caused by breakage. In both cases, the supermarket has fewer sellable items than initially recorded, leading to a financial loss.

• Example 3: Manufacturing Raw Materials Warehouse

  A company that manufactures custom furniture performs an annual inventory of its raw materials warehouse. They find that the quantity of a specific type of imported hardwood is significantly less than what their digital inventory system indicates, and some bolts of fabric are unaccounted for. Investigations reveal a combination of miscounts during previous receiving processes and a few instances of small tools and materials being taken by employees without proper authorization.

  This scenario demonstrates shrinkage through a combination of administrative error (miscounts) and internal theft (employees taking materials). The discrepancy between the recorded inventory and the physical count of raw materials, regardless of the cause, constitutes shrinkage for the manufacturing business.