What is shrinkage in inventory?

Shrinkage is the gap between what the records say you should have and what's actually there, expressed in dollars. The causes split into a few buckets: external theft, internal theft, damage and spoilage, supplier short-ships that got received at full quantity, and plain administrative error, like a case of 24 keyed in as 24 cases. The useful work isn't computing the number; it's attribution. A 2% shrink rate is one fact. Knowing that half of it traces to one receiving dock, one product category, or one shift is something you can act on. That attribution requires movement records with names and timestamps: who received the PO, who did the count, which bin the variance came from. Where teams trip: lumping every variance into a generic shrink adjustment with no cause code. The write-off clears the books and erases the evidence in the same keystroke. A better pattern is mandatory cause codes on adjustments above a small threshold, so quarterly review can show that $3,100 of the quarter's $4,000 shrink was damage in one aisle with a forklift clearance problem, which is fixable, rather than "miscellaneous loss," which isn't.