Warehouse & logistics
Inventory Shrinkage
By the Supply Chain Manager team · Updated October 16, 2026
Inventory shrinkage is the loss of stock between what the records say you should have and what you actually have, from damage, theft, errors or spoilage.
Shrinkage shows up as negative count adjustments. Some is physical loss; much is process error, such as unrecorded returns, mis-picks booked against the wrong SKU and receiving mistakes.
Reason codes make shrinkage manageable. Recording each adjustment as damage, theft, expiry, receiving error, picking error or unknown turns one annual loss figure into a list of specific problems. Often a large share turns out to be process errors that can be fixed, rather than physical loss.
How to calculate inventory shrinkage
Shrinkage % = (Recorded inventory value − Actual inventory value) ÷ Recorded inventory value × 100
Inventory shrinkage example
Illustrative numbers: records show $500,000 of stock; the count finds $492,500. Shrinkage is $7,500, or 1.5%. Tracing adjustments by reason may show most of it came from damage in one zone.
Why inventory shrinkage matters for distributors
Shrinkage is lost margin. It also hides inside demand data if losses are booked as sales, which then inflates forecasts.
Common inventory shrinkage mistakes
- Writing off shrinkage as a single annual number without reasons.
- Booking lost or damaged stock as sales.
Examples on this page use made-up round numbers to show the calculation. They are not benchmarks or results from real businesses.