Top causes of shrinkage. From theft to errors

Shrinkage happens in isolation!

While it might seem like a one-off loss or a minor oversight, inventory shrinkage often follows patterns if you know where to look. 

Spikes in shrinkage can be tied to surveillance blind spots that go unnoticed for months. 

But identifying the why behind shrink can feel like chasing shadows. Is it an internal error? Vendor dishonesty? Or are critical moments simply happening outside the camera’s view? The answer is rarely straightforward. 

This is where you might get stuck, treating shrink as an isolated event rather than a symptom of a larger visibility issue. 

But with the right tools, especially those that close monitoring gaps, you can stop guessing and start diagnosing. In this post, we’ll unpack the hidden causes of shrinkage, including the role of surveillance gaps, and explore how smarter detection leads to real control.

Now let’s find out the top causes of this shrinkage:

Top causes of shrinkage:

• Employee theft.
• Administrative errors.
• Shoplifting.
• Vendor fraud.
• Inventory depletion. 
• Vendor inaccuracy. 
• Data errors.
• Human mistakes. 
• Operational loss.
• Spoilage.
• Unattributed losses.

Employee theft:

Employees become opportunistic in a warehouse, an aisle in the biggest shopping mall, or a checkout counter. Surveillance gap provokes theft! 

Over 30% to 40% of shrinkage is due to employee theft. It’s often more costly than shoplifting because employees have inside access, system knowledge, and trust. Shrinkage usually happens when employees:

• Save under-ringing items for friends/family.
• Pocket cash or gift cards.
• Steal or mislabel items as damaged.
• Creating fake returns or refunds.

Administrative errors:

Not all losses come from bad intentions. A surprising amount of shrinkage stems from simple, unintentional mistakes. That happens during fast-paced, everyday operations. But these “small” errors can quietly add up to major revenue loss if left unchecked.

For example:

• A data entry slip-up can miscount inventory before it even hits the shelf.
• A wrong shipment—too many, too few, or the wrong SKU entirely—disrupts the supply chain.
• Mislabeling a product might mean it sells for less (or not at all).
• Forgotten markdowns or missed returns distort the books, making loss harder to trace.Even at checkout, double-scans or missed scans skew sales data and create false shrinkage.
• And yes, even using the wrong units of measurement can throw off tracking systems completely.

Shoplifting:

Shoplifting directly causes shrinkage by removing products from inventory without any corresponding sale or record.

When thieves steal from a store, the physical inventory drops—but sales data remains unchanged. This creates a gap between actual stock and what the system reports. Over time, these unrecorded losses accumulate, becoming a major driver of inventory shrinkage.

Vendor fraud:

Vendor fraud might not account for a large percentage of retail theft, but it is also a cause of shrinkage, and its impact can be devastating. Why? Because it hits where you’re supposed to trust your supply chain, invoices, and “partners”.

It’s not petty theft. It’s systemic manipulation.

When internal controls are lax or vetting is shallow, you open the door to fraud that’s hard to spot and harder to recover from.

Some examples of how vendor theft adds to shrinkage are:

• False bills for products that never showed up.
• Charging more than what was delivered.
• Resubmitting the same invoice and sometimes splitting the take with someone inside.
• Vendors team up to increase prices.
• Inventory disappears mid-delivery.

Inventory depletion:

Inventory depletion causes shrinkage when items are consumed, used, or removed from stock but not properly recorded in the system.

It’s common in food service, manufacturing, or retail, where products may be used for in-house purposes.

If these depletions aren’t tracked, the inventory records show more stock than is actually available, creating the illusion of missing items. 

Vendor inaccuracy:

Vendor inaccuracy causes shrinkage when the quantity or quality of goods delivered doesn’t match what was ordered or invoiced. But this shortcoming is unnoticed or unrecorded.

For example, if a supplier short-ships items or delivers damaged or incorrect stock, and the receiving team fails to verify and update the inventory accordingly, it leads to a gap between system records and actual stock on hand. 

Over time, these unnoticed shortages accumulate as shrinkage. Accurate receiving procedures, detailed inspections, and strong vendor accountability are essential to reduce this often-overlooked source of inventory loss.

Damaged goods:

Products can be damaged in warehouses during picking, packing, moving, and even dispatching and shipping. Sometimes, customers also damage products and then leave it sitting on the shelves, such as dented cans or ripped cereal boxes.

Xabier Basañez Lorenzo, connector of the “Leaders in Supply Chain Latam” podcasts, says that damaged and expired goods are the most significant cause of shrinkage.

Because these items can no longer be sold, they remain recorded in the accounts as available inventory.

It means you haven’t written off these items, which creates a gap between the actual and the recorded stock. It makes it seem that the products have gone missing, although they are sitting on the shelves.

To avoid this type of shrinkage, you need tight operational controls, timely inventory audits, and clear protocols for disposing of unsellable goods.

Human mistakes:

Human mistakes cause shrinkage when employees unintentionally mishandle, miscount, or misreport inventory. 

Errors like ringing up the wrong item, giving incorrect change, forgetting to scan products, or stocking goods in the wrong location can all lead to discrepancies between recorded and actual inventory.

In warehouse or retail settings, even small oversights like misplacing items or failing to log damaged goods can accumulate into significant losses over time. 

Unlike theft or spoilage, these losses are often invisible until a stocktake reveals that products are “missing”.

Spoilage:

Spoilage leads to shrinkage when items, especially perishable items such as food, drinks, or chemicals, lose their value and cannot be sold because they have decayed.

This may be caused by issues like adverse storage conditions, expiration times elapsed, or transit damage. If spoilage is not accurately accounted for or recorded within the inventory system, it may seem like stock has disappeared, adding to shrinkage.

Companies require effective stock management, such as daily stock inspections, proper storage, and transparent processes for getting rid of expired or spoiled goods, to reduce shrinkage caused by spoilage.

Unattributed loss:

• Poor sales estimates that cause bulk buying.
• Products lost or damaged in transit.
• Wasted or thrown-away materials not counted as loss.
• Damaged items hidden until the items are unpacked.
• Office supplies, snacks, or tools stolen without detection.
• Products unscanned in inventory counts or audits.

Can surveillance overcome shrinkage?

Shrinkage is mainly due to environments with low oversight, weak accountability, and easy asset access.

AI-powered surveillance systems help you maintain full control over employees and assets, as well as who goes where and when!

Combining 24/7 monitoring with advanced video analytics makes these systems more intelligent and insightful. 

Access control	AI surveillance	Accountability systems
Stop shrinkage at every entry point. Restrict who can go where via keypads, fobs, or biometrics to protect sensitive areas like stockrooms or cash offices. Maintain detailed logs of employee access to high-risk zones. Prevent access during off-hours or unauthorized shifts.	See what humans miss. Detect suspicious behavior, such as loitering, tampering, or repeated visits to restricted zones. Monitor blind spots 24/7. Flag unusual movements, missing inventory, or unauthorized equipment use.	Turn data into deterrence. Combine access logs and video feeds to cross-reference who was where and when. Flag and document suspicious activity instantly for review. When employees know systems are in place, the incentive to steal or make careless errors drops sharply.

AI surveillance cameras analyze live video feeds and flag suspicious behaviour in real time, helping loss-prevention teams intervene before losses occur.

Tools like behaviour analysis, object detection, loitering detection, and anomaly recognition allow surveillance cameras to identify patterns that humans often miss. For example:

or example, in warehousing, AI-powered cameras monitor loading docks, detect unauthorized use of forklifts or vehicles, and automatically trigger alerts when suspicious movement is detected.

These examples show that intelligent cameras can turn passive video systems into active loss-prevention tools, catching employee theft or unauthorized activity in real time. 

How can AI security cameras stop shrinkage?

Modern AI cameras and video-management platforms offer a wide range of built-in analytics tuned for retail and warehouse environments to control the causes of shrinkage:

Object and people detection/tracking:

AI-powered security cameras, especially PTZ auto-tracking cameras, can identify people, products, carts, pallets, or packages and continuously follow them across fields of view. For instance, if a high-value item is picked up and carried toward an exit without being scanned, the system notes it.

Behavior analysis:

Loitering detection AI

Advanced bullet and dome security cameras can spot suspicious actions. Such as staff loitering in restricted areas, workers opening registers without transactions, or unusual movement patterns near cashiers. They can detect and trigger alarms at suspicious shoplifting behaviours such as:

• Hiding items in backpacks or handbags.
• Hiding products under coats or jackets.
• Slipping items into trousers, skirts, or dresses.
• Placing goods under or inside strollers.
• Consuming food or beverages before purchase.
• Frequently scanning the surroundings or checking for staff.
• Displaying nervous hand movements.
• Loitering unusually long near specific shelves.
• Repeatedly picking up and putting down the same item.

The latest cameras can even detect when an employee enters a non-work zone (e.g., stockroom off-hours) or when multiple items pass checkout in a single bin and flag these as potential theft.

Anomaly detection:

AI can highlight outliers by learning regular activity (sales flow, staff schedules). Examples include sudden spikes in voided sales, repeated returns without receipts, or an employee making an unusual number of “overring” discounts. 

These systems often send real-time alerts to managers when such anomalies occur. Anomaly detection learns normal store patterns (e.g., typical transaction flows) and flags deviations, such as an employee voiding sales or “sweethearting” discounts for friends

This means that, with 24/7 monitoring, you can create conditions that trigger alarms in addition to regular AI.

Employee behaviors like lingering in stockrooms, tampering with cameras, or applying unauthorized discounts can all trigger real-time alerts.

Triggers can be set for specific events like:

• Someone cutting or jumping over a fence.
• A gate left open too long.
• Obstruction of camera views.

Pattern and metrics analytics:

Beyond theft detection, analytics like people counting, heat maps and dwell-time analysis help retailers optimize layouts and staffing. AI cameras can count foot traffic, identify peak hours or aisles with high traffic (often correlated with loss), and even provide heatmaps of store hotspots.

Intrusion and access alerts:

You can also integrate cameras with door sensors and alarms. For example, cameras immediately record and flag any movement if a door is opened when the store is closed. Behaviors like tailgating into secure areas or leaving doors left ajar can trigger instant alerts.

Remote video monitoring:

When you integrate your security cameras with Remote Video Monitoring, you add another layer of protection.

When the alarm for a security breach is triggered, the remote operators at the remote video monitoring center access the live video feeds and act according to the SOPs. You also receive alerts on mobile devices and can review incidents from anywhere.

Actionable insights for retailers and warehouse managers:

To leverage AI video analytics against employee theft, businesses can take several practical steps:

Focus on high-risk areas:

Install AI cameras in stockrooms, self-checkout areas, cash offices and back doors. Configure analytics to alert on unusual access or item movements in these zones. For example, cache the dumpster or loading dock as a sensitive zone (employees sometimes stash items there).

Use behavior and transaction triggers:

Train the system to flag specific fraud patterns: unauthorized register voids, repeated items in blind spots, or manual discounts. Link cameras to POS so that, say, a $0.00 transaction without payment automatically generates an alert. For inventory, set alerts if stock levels change without matching sales or transfers.

Enable real-time alerts and reviews:

Don’t just record video; set up live notification channels (SMS, app push, or pagers) so managers hear about theft attempts instantly. Encourage supervisors to act quickly on alerts (checking cameras or questioning activity). Use analytics dashboards to review incidents after hours without sorting through hours of footage.

Integrate and automate:

Connect the video system with your inventory management, POS, and access-control platforms. Automated cross-checks (e.g, matching scanned items vs. physical movement) catch theft that humans may miss. For example, if an item leaves the shelf zone when the POS never recorded a sale, the system should automatically flag it.

Pilot and measure:

Start with a small set of cameras or one store to calibrate the AI analytics (reduce false alarms, refine rules). Track shrinkage and incident rates before and after. Many firms see double-digit percentage drops in losses. Regularly update the AI models (for instance, adding known fraud patterns or images of high-risk items).

Key takeaways:

Shrinkage Cause	AI Surveillance Solution
Employee theft	Real-time behavior monitoring with AI detects under-ringing, pocketing, fake returns, etc. Facial recognition can link incidents to individuals. Heatmaps & dwell time help spot suspicious actions.
Administrative errors	AI-integrated POS & surveillance can cross-verify actions vs records, flagging anomalies in scanning, inventory entry, or transaction flow.
Shoplifting	AI-enabled video detects loitering, hiding items, or bag-switching. Alerts staff before theft occurs. Pattern recognition helps identify repeat offenders.
Vendor fraud	AI logs and matches delivery footage to invoices. Any mismatch in quantity or packages is flagged instantly. License plate tracking verifies authorized entries.
Inventory depletion	AI cameras track internal stock use in kitchens, service areas, or production zones. Any unrecorded depletion is flagged for reconciliation.
Vendor inaccuracy	AI compares received stock (via video and barcode scans) against purchase orders. Automated alerts for discrepancies in count or condition.
Damaged goods	Object-recognition AI detects dropped, mishandled, or dented products during handling. Helps document the damage caused and the  timeframe for accountability.
Human mistakes	AI surveillance paired with POS systems can identify scanning errors, missed items, and staff confusion at self-checkouts or registers.
Spoilage	AI temperature sensors and video analytics detect improper storage or early spoilage signs. Alerts help prevent losses.
Unattributed loss	AI tracks stock movement, including samples, office use, or promotional giveaways. It can tag footage of unusual item removal or misplaced inventory.

Conclusion:

The top causes of shrinkage include different types of theft and errors, defective or outdated items, human mistakes, spoilage, and unidentified losses.

Whatever the cause of shrinkage, its effects are the same: lost sales, skewed inventory figures, and blind spots in operations.

To minimize shrinkage, a comprehensive security strategy is the need of the hour.

AI surveillance, frequent audits, employee training, and definite procedures for loss and waste can significantly reduce shrinkage.

Contact us today to secure profits and better understand how you can keep an eye on the top causes of shrinkage.