By Ethan Johnson
Backend inventory management isn’t the sexiest part of business. No one starts a business because they’re passionate about stock counts or tracking expiration dates. However, inventory management is more often than not the defining factor between a successful business, and one that falls flat. When left unchecked, mismanaged inventory always turns into shrinkage—the silent killer that drains your business before it can ever reach its full potential. Not only are you losing products, but spending more to replace them. It’s a vicious cycle that few businesses survive.
If this has happened, or is happening to you, don’t worry. Shrinkage is common, in 2024 it cost the retail industry alone over $132 billion dollars. This problem isn’t new, and by properly managing one’s inventory, it can be mitigated almost entirely. Of course there are circumstances you can’t control like natural disasters and acts of God, however through thoughtful inventory management practices, life can become much easier for you, your employees, and your business operations as a whole. In this article, I will walk you through several strategies to avoid some common shrinkage problems. By taking these easy steps, you will be able to easily keep your business running smoothly.
1. Forecast Demand to Avoid Overstock and Stockouts
One of the most effective ways to reduce shrinkage is demand forecasting. Simply put, this means using data to anticipate how much inventory you’ll need at any given time. By analyzing past sales trends, seasonality, and market conditions, businesses can stock the right amount of inventory—preventing both overordering and running out of essential products.
Failing to forecast demand correctly can leave businesses scrambling. If you order too much, you risk spoilage, obsolescence, or storage issues. If you order too little, you risk stockouts, lost sales, and unhappy customers. The key is striking the right balance.
AI-driven forecasting tools can help businesses optimize stock levels and ensure they don’t tie up cash in excess inventory. These tools analyze past purchase patterns, customer trends, and external factors (such as holidays, economic shifts, and even weather patterns) to predict future demand. When used correctly, forecasting allows businesses to make proactive rather than reactive inventory decisions, improving both efficiency and profitability.
2. Use FIFO (First-In, First-Out) to Prevent Waste
First-In, First-Out (FIFO) is one of the simplest yet most effective inventory management techniques. It ensures that older inventory sells before newer stock, reducing the chances of waste, spoilage, or obsolescence. This method is especially crucial for industries dealing with perishable goods (like food and pharmaceuticals), electronics (where newer models replace old ones quickly), and fashion (where trends change rapidly).
Implementing FIFO requires a smart storage system. Organizing stock so that the oldest items are always at the front makes it easier for employees to pick the right products first. Businesses should also set up expiration date tracking, particularly for industries where product lifespan matters. By following FIFO, companies can minimize loss due to unsellable products while ensuring customers receive fresh, up-to-date merchandise.
3. Automate Inventory Tracking to Improve Accuracy
Manual tracking methods—like handwritten logs or outdated spreadsheets—are prone to human error and theft. Employees miscount items, misplace products, or fail to record transactions properly. Over time, these small mistakes snowball into significant shrinkage. That’s why automating inventory tracking is a game-changer.
Using RFID (Radio Frequency Identification), barcoding, or cloud-based inventory management software allows real-time tracking of stock movement. This technology reduces the chances of miscounts, ensures products are accounted for, and makes reordering more efficient. Many automated systems also provide low-stock alerts, preventing stockouts before they happen.
Additionally, automation helps businesses detect unusual inventory activity. If certain products are disappearing faster than expected, it may indicate theft, mismanagement, or vendor fraud. By having a real-time view of stock movement, businesses can catch problems before they become major financial losses.
4. Conduct Regular Cycle Counts to Catch Discrepancies Early
Many businesses rely on annual or quarterly full inventory audits, but by the time discrepancies are found, it's often too late to correct them. Instead of waiting months to realize that thousands of dollars in inventory have vanished, regular cycle counts help businesses track inventory in smaller, manageable sections over time.
A cycle count involves checking a portion of inventory daily or weekly, rather than performing one massive, time-consuming count at the end of the year. This method allows businesses to catch and correct errors before they spiral out of control.
A well-planned cycle count prioritizes high-value and fast-moving products, which are more likely to be affected by shrinkage. By breaking up inventory checks into smaller, more frequent audits, businesses can maintain more accurate records without disrupting daily operations.
5. Set Minimum and Maximum Stock Levels to Maintain Balance
Inventory mismanagement doesn’t always come from theft or damage—it often comes from poor planning. Setting minimum and maximum stock levels helps businesses maintain an ideal inventory balance, ensuring they don’t run out of critical products while also preventing overstocking.
- Minimum stock levels (also called par levels) represent the lowest amount of a product you should have on hand before reordering.
- Maximum stock levels prevent businesses from ordering too much, which can lead to excess storage costs and unsold goods.
Setting these thresholds helps businesses avoid last-minute panic buying, which can be expensive and inefficient. Automated inventory management systems can track stock levels in real-time, sending alerts when an item reaches its reorder point. This ensures businesses are proactive, not reactive, when it comes to inventory replenishment.
Final Thoughts: Inventory Management is a Business Lifeline
While shrinkage is a costly issue, it’s often a symptom of deeper inventory mismanagement. Poor forecasting, outdated tracking methods, and disorganized stock can all contribute to inventory loss. But by implementing demand forecasting, FIFO, automation, cycle counting, and stock level controls, businesses can prevent common inventory problems before they happen.
Inventory management might not be the most exciting part of running a business, but getting it right can mean the difference between struggling to survive and thriving. The more efficiently inventory is managed, the less time, money, and stress business owners will face.
