The Hidden Costs of Poor Inventory Management

There are many challenges running a retail business and small business owners wear many hats to ensure their business is profitable and stable.  Some responsibilities are natural and intuitive while others must be learned.  One skill that must be mastered is merchandise availability and inventory control—keeping product on the sales floor and available for customers to buy.

Very few retailers have complete product exclusivity, which makes having the right product and size available, when a customer walks into a store critical to successful operations.  Beyond selecting the right products in the correct quantities, retailers must have product availability.

There are several challenges inherent in product availability, but the one that is often overlooked is merchandise retention.

  • Merchandise retention, loss prevention, or inventory control helps retailers mitigate theft in their establishments.
  • Theft of goods is a fact in every type of retail environment and every community experiences theft.  It is committed by individuals and by organized groups, and it hurts both owners and consumers.
  • If left unmanaged, theft, in an otherwise successful business can mean the difference between a growing small business chain and one that closes its doors.

Here is a great example of the costs of un-managed theft:

A prominent motorcycle dealership which sells licensed products, such as leather goods, noted that for every leather jacket that is stolen, it must sell 12 more leather jackets to cover the cost of that one stolen jacket, when all costs are properly factored.  Certainly, a number like that exposes how much investment is contained within each item on a sales floor.  Beyond the wholesale cost of the item and its shipping cost, there are labor costs, overhead, and accessory product costs (security tags, labels, etc.) that factor into the retail selling price.  Now keep that number in mind and double it because that is what is required to replace an item which has left the store without being purchased.

That is just the monetary cost of the loss of an item.  There’s also availability. Hypothetically, a customer comes into store A to buy a product. The product is unavailable because it has been stolen. Store B who practices inventory management has the product.  That customer leaves store A disappointed and buys from store B.  Thus, store A incurs the costs of the “lost” item, and has lost a customer and her potential loyalty. Unfortunately, this process can repeat itself many times over, and in the era of social media, an unhappy customer can spread her dissatisfaction very rapidly.

Moreover, a lack of inventory control directly effects consumer prices and savvy shoppers know this. Poor inventory control ultimately results in consumer price increases to recover lost revenues. Because retail stores depend upon customers who want the product immediately and will visit a store to purchase it, keeping merchandise on the floor is crucial to retaining sales and maintaining a profitable business. With so many fixed and variable costs already inherent in retail, an owner cannot afford to incur more costs or raise consumer prices because he or she failed to manage and control their inventory.  And, the first best defense in inventory control is not a camera, but an EAS (electronic article surveillance) system and its attendant tags and labels.

For more information on retail security, inventory control and theft defense, visit

Contributed by Eric J. Snyder, President of Choice Security Systems Southeast. 

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