The 4 Types of Inventory Loss and How to Minimize Your Risk

Inventory management is a critical aspect of operations for manufacturing companies and distributors, as it directly impacts profitability, customer satisfaction, and overall business success. However, despite advancements in technology and logistics, inventory loss remains a persistent challenge for many organizations.

In this article, we’ll explore the various types of inventory loss faced by manufacturing companies and distributors and discuss strategies to minimize these risks.

Additionally, we’ll highlight how Radio-Frequency Identification (RFID) technology serves as a powerful solution for reducing inventory losses and improving overall inventory management efficiency.

The Hidden Cost of Lost Inventory

Inventory loss isn’t just a line item on a balance sheet—it’s a silent drain on profitability, efficiency, and customer trust. For manufacturers and distributors, even small inaccuracies can ripple across the entire supply chain.

Industry studies consistently show that inventory inaccuracies are widespread and costly:

• Global retailers and manufacturers lose hundreds of billions of dollars annually due to shrink, miscounts, and process failures.
• Average inventory accuracy using manual or barcode-based processes often falls between 60–70%, leaving organizations operating with incomplete or outdated data.
• Carrying excess inventory to “buffer” against inaccuracies can increase inventory holding costs by 20–30%, tying up working capital and warehouse space.

Lost or unaccounted-for inventory also creates indirect costs that are harder to measure—but just as damaging:

• Production delays when materials can’t be located
• Expedited shipping costs to recover from stockouts
• Chargebacks, penalties, and disputes with customers and suppliers
• Lost sales and damaged customer relationships when orders can’t be fulfilled on time

For manufacturers and distributors operating on tight margins, these hidden costs add up quickly. Without real-time visibility into what inventory exists, where it’s located, and when it moves, organizations are forced to make decisions based on assumptions instead of facts—putting both revenue and customer satisfaction at risk.

Types of Inventory Loss

Inventory loss doesn’t come from a single source. For manufacturers and distributors, it typically stems from a combination of operational, process, and visibility gaps that occur across the supply chain.

Understanding the most common types of inventory loss is the first step toward reducing waste, improving accuracy, and protecting margins.

1. Shrinkage

Shrinkage refers to the loss of inventory due to theft, damage, or administrative errors. Common causes of shrinkage include shoplifting, employee theft, supplier fraud, and inaccurate record-keeping. Shrinkage can have a significant financial impact on businesses, eroding profits and undermining operational efficiency.

2. Obsolescence

Obsolescence occurs when inventory becomes outdated, obsolete, or no longer in demand. This can happen due to changes in consumer preferences, technological advancements, or market trends. Obsolete inventory ties up valuable storage space and capital, leading to financial losses and reduced profitability for businesses.

3. Damage and Spoilage

Damage and spoilage occur when inventory is mishandled, improperly stored, or exposed to adverse environmental conditions. This is particularly common for perishable goods, such as food products, pharmaceuticals, and chemicals. Damage and spoilage result in product waste, increased costs, and potential liabilities for businesses.

4. Inaccurate Forecasting

Inaccurate forecasting of demand and inventory requirements can lead to overstocking or understocking of products. Overstocking ties up capital and storage space, while understocking results in lost sales opportunities and dissatisfied customers. Poor forecasting accuracy can disrupt supply chain operations and hinder business growth.

Minimizing Inventory Loss

Reducing inventory loss requires a combination of strong processes, physical controls, trained staff, and the right technology. Below are the most effective ways manufacturers and distributors can protect inventory and improve accuracy.

Strengthen Inventory Management Processes

Consistent inventory management practices help surface discrepancies before they turn into major losses. Regular audits, cycle counting, and reconciliation ensure records stay aligned with reality. Inventory management software also plays a key role by tracking stock levels, monitoring movement, and generating accurate, actionable reports.

Improve Security and Access Control

Inventory loss is often tied to theft or unauthorized access. Enhancing security with surveillance cameras, controlled access points, and clear inventory policies can significantly reduce risk. Background checks and defined procedures also help create accountability throughout the organization.

Optimize Warehouse Layout and Organization

An organized warehouse reduces damage, spoilage, and misplaced items. Proper shelving, labeling, and storage bins make inventory easier to locate and manage. For perishable or time-sensitive goods, FIFO (First In, First Out) or FEFO (First Expired, First Out) methods help ensure stock moves efficiently and doesn’t go to waste.

Use Technology to Increase Visibility

Technology is one of the most effective tools for minimizing inventory loss. Solutions like RFID provide real-time visibility into inventory movement across the supply chain. By automatically capturing data as items move, RFID helps organizations detect issues early, improve accuracy, and maintain tighter control over inventory assets.

Enhanced Visibility

RFID enables real-time visibility into inventory movements, allowing businesses to track the location, status, and condition of products throughout the supply chain. By accurately capturing data on inbound and outbound shipments, RFID helps prevent loss, theft, and damage to inventory assets.

Improved Accuracy

RFID systems achieve higher levels of accuracy compared to manual or barcode-based inventory tracking methods. With RFID, businesses can eliminate data entry errors, misreads, and discrepancies, ensuring inventory records remain up-to-date and reliable.

Automation and Efficiency

RFID automates data capture processes, streamlining inventory management operations and reducing the need for manual intervention. This improves operational efficiency, reduces labor costs, and enables employees to focus on value-added tasks rather than mundane data entry activities.

Scalability and Flexibility

RFID technology is highly scalable and adaptable to diverse inventory management needs, making it suitable for businesses of all sizes and industries. Whether tracking small items in a warehouse or managing large-scale distribution operations, RFID can accommodate various inventory types and volumes with ease.