Shrinkage

Shrinkage is the gap between what your system says you have and what a physical count reveals you actually have. It is expressed as a percentage of inventory value and captures all forms of unaccounted loss: pilferage, unrecorded damages, spoilage, evaporation (literal, in the case of dairy), administrative errors in receiving or billing, and vendor fraud. In Indian FMCG distribution, shrinkage at the distributor godown level typically ranges from 1-3% for ambient goods and 3-7% for perishables.

For a dairy distributor handling Rs 50 lakh in monthly throughput, even 3% shrinkage means Rs 1.5 lakh per month walking out the door unnoticed, Rs 18 lakh annually. Multiply this across a brand's 500-distributor network and the total shrinkage can exceed Rs 50-80 crore per year. Despite this, most Indian distributors do a full physical stock count only once a month (or once a quarter), meaning shrinkage is discovered long after the loss has occurred.

Combating shrinkage requires a multi-pronged approach: real-time inventory decrements at every transaction via order management, regular cycle counts, scan-based receiving to catch short deliveries, and exception alerts when system stock diverges from expected depletion patterns. Sales analytics can flag suspicious patterns like a specific SKU shrinking faster at one godown than others.