Understanding Inventory Shrinkage And Manufacturing Inventory Processes

Inventory Shrinkage And Manufacturing Inventory Systems

Inventory Shrinkage: Companies that generate revenue through products selling to their customers get the products by buying them from manufacturers, distributors or by developing them from scratch – from their raw materials. In each case, these companies report products sold along with the related inventories in order to track the cost of doing business and keep up the business processes.

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Shrinkage describes the loss of goods with inventories to amount of causes such as fraud and also product deterioration. Inventory shrinkage could as well refer to losing materials that are utilized in the manufacturing processes to exactly the same causes present in production companies.


Inventory Shrinkage
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Companies in addition report the inventories using both – periodic or perpetual inventory base. With the periodic inventory base, the organization counts the inventories on the end of every interval and reports cost of units sold in line with the difference among available stock and also the ending levels of inventory.

On the other hand, by using the perpetual inventory model, the company retains real time report of the inventories. Companies report shrinkage only with perpetual inventory tracking since periodic base can not make a difference among lost products and sold units.

For producers, inventory shrinkage – known as spoilage – describes these identical causes making materials difficult to use in manufacturing. Sellers and producers report inventory shrinkage as a raise in the unit cost sold and related decline to both inventory and raw materials.

High inventory shrinkage means that business has a very high cost of the units sold. Because cost of units sold will be significant element of the overall costs, high inventory shrinkage results in small net profit.

Most companies think about inventory shrinkage unwanted and they setup inventory shrinkage benchmarks to minimize costs that hurt the net profit. To fulfill those benchmarks, companies should setup systems to track any event of shrinkage in inventories, establish causes of specific inventories shrinkage and apply ways to fix those causes in the future.

Inventory shrinkage benchmarks over numerous market sectors wont be easily comparable since every industry uses various business models and creates various costs to manufacture the particular products. For instance, industrial manufacturing company will create more shrinkage than retail business.


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Every producer develops its own inventory shrinkage metrics and benchmarks depending on the business and predicts certain loss for each inventory reporting period.


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