Case Study: Inventory Shrinkage Controls Audit for a Building Materials Retailer
Identifying inventory leakage across receiving, storage and dispatch and installing controls to reduce preventable shrinkage
Executive Mandate Summary
Key Transaction & Governance Challenges
- •The retailer's 4.2% shrinkage rate was substantially above the approximately 1.5% benchmark, creating a material inventory-loss exposure.
- •Store A operated at 2.8% shrinkage, while Stores B and C recorded 5.1% and 6.8%, respectively. The problem was therefore concentrated rather than system-wide.
- •Electrical fittings, plumbing accessories and tiles accounted for disproportionate shrinkage due to their size, value, handling requirements and receiving complexity.
- •The employee receiving goods was also responsible for the ordering process, with no second-person verification of quantities received.
Northrop Execution Architecture & Methodology
Executive Mandate Overview
A building materials retailer with Rs 22 crore annual revenue held approximately Rs 8.5 crore of inventory across three stores. Its annual physical count showed 4.2% shrinkage, representing approximately Rs 35.7 lakh of lost inventory.
Compared with the approximately 1.5% industry benchmark, the excess shrinkage represented approximately Rs 23 lakh of potentially preventable annual loss.
Identifying Where Shrinkage Occurred
Shrinkage analysis showed a clear concentration. Store A recorded 2.8%, Store B 5.1% and Store C 6.8%.
At category level, electrical fittings recorded 8.2% shrinkage, plumbing accessories 6.5% and tiles 4.8%. This allowed the engagement to focus fieldwork on the highest-risk locations and products.
Diagnosing Receiving Controls
At Stores B and C, the person receiving goods was also responsible for the ordering process. Deliveries were not independently counted, creating an opportunity for short deliveries to enter the system as complete receipts.
Northrop introduced independent quantity verification, with discrepancies identified immediately and escalated to suppliers.
Securing High-Risk Inventory
High-value electrical and plumbing products were stored in open-access areas. At Store C, customers could also enter the warehouse area.
These categories were moved into restricted storage, with designated access and a daily sign-out register for removed items.
Verifiable Institutional Outcomes & Value Realized
- The improvement was achieved through process discipline, segregation of responsibilities, restricted access and documentation rather than new capital expenditure.
- The resulting improvement represented approximately Rs 17 lakh of annual reduction in preventable inventory loss.
- Annual excess inventory loss above the benchmark was reduced substantially following implementation.
- Overall inventory shrinkage declined by 2 percentage points across the three-store network.
Ashish Chaudhary
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