Inventory loss—a.k.a. shrinkage—is a major concern in the LBM industry. What’s considered normal when it comes to inventory loss? The Building Material Operations Comparison survey of roughly 150 dealers from 20 states found that the average inventory shrinkage amounted to 0.5% of net sales. That’s tolerable, though not without pain.

What’s staggering is how much of the overall shrink is due to theft. According to the most recent National Retail Security Survey, a poll of larger retail institutions in all lines of business, 70% of inventory losses are caused by theft. Of those theft losses, 55% are caused by employees.

How can you reduce loss? First, take care of the security basics. Burglar alarms and digital video recording devices (not just live cameras) are a must. If you don’t have them, start there.

Equally important is an ethics policy. Incredibly, many employees are unaware that they are not supposed to steal. In many cases, business owners never defined expectations. One proven way to prevent theft is to adopt an ethics policy and a code of conduct. Empower your employees to report violations. Employees want to be good, and solid policies are a place to start.

At your store, do owners, managers, and even preferred customers often take things without paying for them? Employees can be expected to emulate this behavior, and they will. We should lead by example and follow our own rules.

Beyond the basics, create a proper internal control environment for inventory. Include safeguards to protect from damage or theft. Proper check-out procedures are a must, both for the store and for the yard. Declare that goods cannot leave the premises without verified receipt—not even from delivery trucks. Invoice at the time that goods are removed.

Segregation of duties can also make a difference. If possible, limit the inventory adjustment process to those who are not physically handling the inventory. Keep a close eye on the physical movement of goods, including trash removal. Certain activities are a breeding ground for shrinkage. Any of the following should trigger a cycle count and review of transaction activity:

  • Returned goods—especially for immediate refund.
  • Voided transactions.
  • No-charge sales and credit memos.
  • Shelf tags or bar codes with no inventory on hand. (This serves a dual purpose; it controls inventory and reduces out-of-stock situations.)

And while it’s crucial to invest in loss-prevention, many owners are left wondering how much money to put on the line. If you have a tolerable loss (less than 0.5% of sales), I would invest about 20%, or a tenth of 1%, in capital assets to prevention. For a $10 million business, this would be $10,000 per year. This should cover your alarm system, cameras, and all related gear. In addition, invest three times this amount—in this case, $30,000 per year—to control inventory and prevent intolerable losses. That puts the total investment in this case at $40,000 per year or 0.4% of sales. If your shrinkage is greater than 0.5% of sales, invest one-third of the variance over 0.5% tolerable to get the problem resolved. If the same $10 million business realized an inventory loss of 1.5% of sales, or $150,000, invest $33,333 to get the problem resolved ($150,000 loss less $50,000 tolerable loss or $100,000, times one-third). Once resolved, these resources can be redeployed.

By following the above strategies, you will be less vulnerable to tricks and will enjoy some much-need peace of mind—and extra profit.