Working With Your 3PL to Reduce Warehouse Shrinkage

Warehouse or inventory shrinkage describes inventory loss in a warehouse or distribution center that is not accounted for. There are three primary reasons for inventory shrinkage — theft, damage, and operational errors. This discrepancy between inventory on record and inventory on hand can lead to a significant loss in revenue, operational issues, compliance risks, lower customer trust, and a competitive disadvantage.

When you work with a third-party logistics provider (3PL), you can identify vulnerable areas in your operation that lead to ways to reduce warehouse shrinkage.

Inventory Management and Shrinkage

Warehouse shrinkage is a significant challenge for many organizations. It impacts profitability, operational efficiency, and inventory accuracy. It is important to note that some level of inventory shrinkage is acceptable, and some fulfillment centers will stipulate their own shrinkage allowance.

Main Causes of Warehouse Shrinkage

Considering the primary reasons you may see inventory shrinkage may assist you in finding ways to mitigate this issue.

• Theft: Inventory theft by employees, visitors, or other external parties directly leads to inventory shrinkage.
• Supplier errors: Shortages from suppliers or inaccurate deliveries lead to discrepancies in inventory levels.
• Damage: Inventory may break, get damaged, or spoil during handling or improper storage.
• Administrative errors: There is room for human error when processes are not automated. Inaccuracies in recording and data entry errors can indicate shrinkage.
• Lost shipments: Inventory en route to the warehouse or out for delivery to sellers that get lost.
• Obsolete inventory: Even when inventory is logged correctly and remains in the warehouse safely, obsolete or outdated stock that vendors can’t sell falls under the definition of warehouse shrinkage.

Reducing Warehouse Shrinkage

Reducing inventory shrinkage involves making changes to several warehouse operations. Strengthening security measures, offering comprehensive employee training, updating inventory management processes, and a dedication to continuous improvement all form part of these operational changes.

• Access control: Implement physical security measures within the warehouse, like electronic locks and access control systems that use biometric scans or keycards.
• Inventory management software: Use real-time inventory software to monitor stock levels and reduce administrative errors that falsely indicate shrinkage.
• Employee training: Provide employees with extensive training and periodic refreshers on inventory management and company policies relating to stock.
• Surveillance: Video surveillance can help you accurately identify cases of misconduct that result in warehouse shrinkage.
• Regular audits: Schedule quarterly, bi-annual, or annual audits and conduct spot audits to ensure inventory management processes operate optimally.
• Vendor management: Use a thorough vetting process to ensure you only work with reputable vendors. Conduct background checks, implement receiving protocols, and check each shipment that arrives at the warehouse. Make a note of late or incorrect orders, which can indicate warehouse shrinkage.

Inventory Control Methods

Implementing strategies to increase security and accuracy throughout the warehouse is the first step in inventory control methods. The next step focuses directly on the inventory, ensuring items are logged with accuracy and transparency.

• Unique identifiers: Use serial numbers, barcodes, or global trade item numbers to group like-kind stock and help manufacturers track products at the point of sale.
• Clear inventory processes: A few inventory processes include using a first-in, first-out approach, auditing stock, and tracking inventory restock frequencies. Periodically share these processes and any updates with employees as a proactive way to combat inventory shrinkage through human error.
• Inventory automation: Automation offers the benefits of accuracy and speed as it records inventory movements to boost warehouse efficiency.
• Clear labeling: Correct labeling ensures you log and track inventory accurately. It’s imperative to remain consistent in this practice, utilizing automation where possible to streamline the process.
• Anti-theft systems: Electronic article surveillance tags and radio frequency identification tags can indicate theft and track high-value items in the warehouse in real-time, respectively.

How to Calculate Shrinkage in Your Warehouse Operations

Whatever the reason for your inventory shrinkage, it’s in your organization’s best interest to prevent it where possible. Calculating the shrinkage rate reveals the cause of warehouse shrinkage.

For example, if the numbers typically remain consistent and see a sudden spike, it can be due to an admin error. Consistently high rates, however, can indicate a more serious issue. Use this formula to calculate your warehouse shrinkage rate:

• Inventory Shrinkage Rate = (Recorded Inventory – Actual Inventory) / Recorded Inventory

Multiply by 100 to get your shrink rate percentage.

Technological Solutions to Fight Shrinkage

Integrating technology into your warehouse operations ensures efficiency across the board. At Keller Logistics Group, we employ the following technologies to support our clients:

• Warehouse management system (WMS): SCALE is a WMS that provides real-time inventory visibility. This system also optimizes operational activities, improves traceability, and automates billing.
• RF barcode scanning: This technology registers whenever inventory is handled, providing a live feed and other features to improve inventory accuracy.
• Electronic data interchange (EDI): EDI conducts standard business transactions between computers, helping with quick turnaround times for invoicing, purchase orders, and shipping notices.
• Customer portal: In our customer portal, you get quick access to your inventories and other pertinent information, so you’re always updated on your processes.

Building a Collaborative Relationship With Your 3PL to Reduce Warehouse Shrinkage

Partnering with a reputable 3PL lets you leverage their expertise and resources to lower shrinkage rates. By outsourcing inventory management, your 3PL can enhance operational security, accuracy, and quality control in a collaborative effort to reduce shrinkage.

Emphasizing communication and transparency, you and your 3PL partner can work together to identify bottlenecks, implement solutions to overcome these, and ultimately lessen warehouse shrinkage. By cultivating trust, respect, and a commitment to this partnership, your organization can build a long-term partnership with your 3PL to ensure continuous warehouse efficiency.

Start your 3PL partnership with clear and open lines of communication. Regularly share information, updates, goals, and points of concern to ensure you can adapt strategies as necessary. Transparency fosters a mutual culture of accountability. Additionally, collaborate on identifying causes of your warehouse shrinkage and work on implementing the solutions together.

Bypass Warehouse Shrinkage With Keller Warehousing & Co-Packing Group

Organizations must implement robust inventory management systems to combat warehouse shrinkage, provide comprehensive employee training, conduct regular audits, and enhance security systems to improve warehouse processes. Partnering with a 3PL can optimize your workflows and reduce product handling as your warehouse operations streamline.

Keller Logistics Warehousing & Co-Packing manages over 3 million square feet of warehouse space across the United States. Since 1978, we’ve offered various transportation, warehousing, and logistics services under a single 3PL umbrella. We’re ready to assist with trucking, freight solutions, co-packing, and technological implements to lower warehouse shrinkage and streamline your operations.

Complete our online form for an obligation-free quote, or call us at 419.780.3767 for urgent queries.