The viability of a business of any kind can be affected by what we know as shrinkage. Although these may vary and be different depending on the sector to which the company belongs, in the industrial case, the concept has a precise meaning: shrinkage is a loss in the supply chain.
Therefore, they are defined as the loss of value of the stocks in the warehouse. In other words, the losses are the difference between the stock reflected in the accounts ( theoretical stocks ) and the physical stock available for manufacturing ( actual stocks ). Thus, when this mismatch appears, the volume or amount of available material decreases.
Now that you are in a situation, you should also know that the shrink has no resale value. In other words, you cannot sell the resulting stock, unlike waste, which you can sell at a lower price. This is the aspect in which both concepts referring to the losses of a company are distinguished.
Types of Losses that Can Occur in the Industry
Losses can be challenging to detect immediately. Furthermore, once they become significant losses, they are considered impairments. You must ensure that they do not reach such a magnitude. So, before knowing how to prevent them, you must know the causes from which they can derive.
This type of loss can be of two kinds. On the one hand, there is the normal shrinkage, which occurs when stocks are used for production processes. Here, only excess in the planned production can cause the imbalance of numbers. On the other hand, there is abnormal shrinkage, which occurs when fortuitous accidents or unforeseen situations arise.
Most of the losses are of this second type, and these are its possible causes :
This variable depends a lot on the kind of stock you have. If they have an expiration date, you must keep profound control over each batch and product in your inventory. This is essential to avoid giving up its use at a given time because it is expired and would not comply with safety and quality standards.
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In this sense, you must watch that your raw materials do not spoil because the warehouse suffers from an overstock. This happens when there are more stocks than are usually needed for manufacturing and the calculations reveal that more quantity is received than is required by production.
Another circumstance that you may experience is that the market disappoints you and, for reasons that you cannot control, your final products do not sell as much as expected. In that case, the raw materials could expire if not used in the foreseen times.
The next most common cause of shrinkage is a product purchased for manufacturing breaking. This can occur due to poor handling by the staff, a poor location in the warehouse, mishandling by the carrier, or a production failure that has made it defective without the supplier’s notice.
Whatever the case, you must identify where the problem is to solve it so that it does not happen again.
Administrative or Accounting Error
Due to poor management when placing the order or insufficient registration when receiving the merchandise, stock problems may also appear. All this is included in administrative or accounting human errors that make inventories unbalanced. Includes late transfer of information, failure to update systems, etc.
In the task of receiving the products, it is another point where there may be errors, mainly due to not checking them correctly. It must be verified that they do not arrive damaged, expired, or with poor packaging, that there is no missing unit within the batches and that there are no mismatches with prices or inadequate labeling, among other errors.
It would help if you never took the focus off logistics. It is essential to verify that the process of transporting the merchandise is completed successfully within the agreed terms and times. In addition, it is necessary to maintain levels of security and quality consistent with excellent service.
Finally, there may be cases of theft that cause losses, either by dishonest customers or staff workers who take advantage of their employment position. In case of suspicion, it is advisable to act accordingly, prudently.
Measures to Prevent Losses
Suffering these inventory losses negatively affects the economics of the business for several reasons: inventory costs increase, and, second, labor costs rise, as well as other production costs, especially in the industrial sector.
To avoid these consequences, you can carry out preventive measures such as those briefly described below:
Review and reinforce, if necessary, security in all processes, from the supply chain to final manufacturing. It would help if you prevented failures, so we recommend using ERP software for industries that monitor activities.
Select a qualified and honest person to avoid the so-called anti theft and the waste of raw materials due to improper use. You can use psychometric tests and even ask for references from other companies.
In addition, it is convenient to supervise the work of current employees.
Check that production is following quality standards. To minimize losses, operators must know and apply the rules when working with the merchandise. To promote this, employees must have workspaces that facilitate functions, not hinder them.
Produce according to actual demand. This implies knowing precisely the number of units to be manufactured and calculating the necessary material.
For example, inventory control ensures errors are not made in the input and output records. Or accounting and finance tasks, for which you can count on a financial management program.