In plain words
Inventory shrinkage is the stock that disappears between buying it and selling it. Units break in the warehouse, go out of date, get lost or miscounted, or are written off as samples.
You paid for those units, and the units you do sell have to carry them. The usual way to cost shrinkage is a percentage of the product cost, added to every order. For products with a shelf life it is far from a rounding error.
Formula
- Shrinkage rate = cost of units lost ÷ cost of units bought
- Shrinkage per order = the order's product cost × shrinkage rate
Worked example
At a 2% shrinkage rate, the engine adds $0.24 to the coffee bag's order: 2% of its $12.00 unit cost. The order keeps $15.12.
On three bags the charge is $0.72. It follows the product cost in the box and ignores the price, so a discount does not shrink it.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| Cost of goods | per unit | −$12.00 |
| Pick and pack | per order | −$1.18 |
| Packaging | per parcel | −$0.50 |
| Shipping label | per parcel | −$7.50 |
| Card fee per order | per order | −$0.30 |
| Refunds | percent | −$2.00 |
| Card processing | percent | −$1.16 |
| Contribution margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
Shrinkage is not refunds
A refund follows a sale: the unit shipped and the money came back. Shrinkage is stock that never produced a sale at all. They have different causes and different fixes, and a refund reserve does not cover shrinkage.
Using it
Measure it from stock counts: what you bought, less what you sold, less what is on the shelf. Do it per product line, because a perishable product and a mug shrink at very different rates. If your supplier's cost or your landed cost already includes an allowance for breakage, leave shrinkage out, or you will count it twice.
In Offer Suite
In Offer Suite's engine a percentage cost can be a share of the order's revenue with shipping, of its product revenue, or of its unit cost. Shrinkage and scrap are entered as a percentage of unit cost.
Source: Offer Suite's margin engine and its cost grains.