Counts find differences, cases get dropped and product expires. Adjusting inventory is not the problem. Adjusting without a reason is. An adjustment with a clear reason, an approver and a value at cost is information you can act on. One without those is just a hole in the numbers.
Count again before you adjust
Many apparent losses are timing, not loss. Before posting a variance above a level you set, do three things:
- Recount, ideally with a second person.
- Check open work. Picks not yet confirmed, receipts not yet posted, transfers in transit and pallets still in staging all make a count look wrong when it is not.
- Look for an offsetting variance. If one item is short by six cases and a similar item is over by six, that is almost always a mispick or a pallet in the wrong spot, not a loss and a gain. Correct both together and note the link, rather than writing one off and booking the other as found stock.
Regular cycle counts keep each of these checks small. Our guide to cycle counting without shutting down covers how to run them.
Use reason codes that tell you something
A short list that people actually choose correctly beats a long one that everyone answers with "other". A workable starting set:
| Reason | What it means | What it points to |
|---|---|---|
| Expired or spoiled | Past its date or no longer sellable | Ordering and rotation |
| Damaged in the warehouse | Dropped, crushed, punctured | Handling, layout, equipment |
| Damaged on arrival | Found at receiving | A claim against the supplier or carrier |
| Returned to supplier | Rejected for quality | A supplier credit to collect |
| Customer return, not resellable | Came back and cannot go back on the shelf | The credit memo it belongs to |
| Count correction | A variance with no other explanation after a recount | Process gaps |
| Samples and donations | Given away on purpose, with approval | Nothing missing; still counted |
If you keep an "other" reason, require a note with it.
Set approval limits by value
Approvals force a conversation when the amount matters, and the conversation often turns up context the person posting did not think to mention. Set limits by value at cost, not by case count. As an example, a distributor might choose:
- Under $100: any shift lead can post it.
- $100 to $1,000: the warehouse manager approves.
- Over $1,000: the controller or owner approves.
Your limits will depend on your size and margins. Two principles hold either way. The person who counted should not be the only one who approves their own variance. And the approver should ask three questions: what happened, can any of it be recovered from a supplier, carrier or insurer, and what stops it happening again.
Quarantine before you write off
When product might be bad but nobody is sure yet, move it to quarantine so it cannot be picked, then decide. It may go back to the supplier for credit, be repacked, be donated or be destroyed. Writing it off on the spot throws away the chance of a supplier credit.
Keep the lot attached to every write-off. If a lot is recalled later, you need to know where every case went, including the ones you threw away.
Get the accounting right
- Value adjustments at cost, using the same method as the rest of your inventory, such as weighted average cost or the lot's cost. Never at sell price.
- Post to separate accounts by reason (spoilage, damage, count corrections) so the profit and loss shows where the money went.
- Do not net gains against losses. Report found stock and lost stock separately, or a large loss can hide behind a large gain.
- Date it when it was found. If the period is already closed, post it in the current period with a note rather than reopening the old one.
- Treat supplier and carrier claims as money owed to you until the credit arrives, not as an expense you have already absorbed.
When adjustments post to the general ledger as they happen, shrink shows up in the month it occurred instead of as a surprise at close.
Read the patterns every month
Review adjustments monthly by reason, item, location and person, and look at the trend across quarters. Some patterns and what they usually mean:
- Repeated damage on arrival for one supplier or item: packaging or handling at the source. Raise it with the supplier, with your records in hand.
- Large count variances in one area: unclear labels, a confusing layout, or two look-alike items stored side by side.
- Spoilage climbing on one item: you are buying more than it now sells, or rotation is failing. Check its reorder point and safety stock.
- Unexplained loss rising in one area: look at process and access first, then security.
- Many adjustments by one person: usually a training gap, sometimes something that needs a closer look.
Skip the industry benchmarks. The useful comparison is your own: shrink as a share of cost of goods sold, month over month, by reason. If it is moving, you will know where to look.
How APFoodz handles it
APFoodz tracks inventory by lot, with expiry and quarantine. Its general ledger posts as the work happens, and you decide who can do what (see permissions and approvals).