Eight Per Cent Shrinkage and a Discount That Expires in Three Days
A supermarket in Hubballi runs a POS-linked inventory system covering 6,200 SKUs. At the monthly physical count, SKU A (a 750 ml hair oil) shows 441 units on the shelf and in the stockroom against 480 units in the system. SKU B (a 1 kg detergent) shows 12 units more on the shelf than the system records. SKU C, a festive gift pack, shows 96 units with a best-before date 40 days away and average sales of 2 units a day. SKU A's purchase price is ₹210 and its selling price is ₹260. Average daily sales of SKU A are 18 units, the supplier's lead time is 5 days and store policy keeps a safety stock of 60 units. The owner wants to place a fresh order for 600 units of SKU A to capture a 6% quantity discount that expires in three days.
1. Calculate the shrinkage percentage and the reorder point for SKU A, then advise on the 600-unit order with numbers.
Read the worked answer
Shrinkage: variance = 480 - 441 = 39 units. 39 / 480 = 8.13% of system stock. At cost that is 39 × ₹210 = ₹8,190; at selling price ₹10,140.
Reorder point: ROP = (average daily sales × lead time) + safety stock = (18 × 5) + 60 = 90 + 60 = 150 units.
Cover: 441 / 18 = 24.5 days of stock, against a 5-day lead time. She is holding about 291 units - roughly ₹61,110 at cost - above the reorder point.
The 600-unit order: stock would rise to 1,041 units = 57.8 days of sales. The discount is 6% of ₹210 = ₹12.60 per unit, a saving of ₹7,560 on 600 units. Against that:
- at the observed 8.13% loss rate, 600 units implies about 48 units lost = ₹10,080 at cost, which already exceeds the discount;
- about ₹1.26 lakh of extra cash is locked in one slow-moving SKU for nearly two months;
- the count discrepancy is unexplained, so buying more magnifies an uncontrolled loss.
Advice: do not place 600. Investigate the 39 units first, then order roughly 150-250 units to restore cover to lead time plus one review cycle, and ask the supplier whether the discount applies at that quantity. A discount that is smaller than the loss rate is a cost, not a saving.
2. SKU B shows a positive variance of 12 units. Give three plausible causes, the check you would run for each, and explain why a positive variance is also a problem.
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Receiving error - more units delivered than keyed into the goods receipt note, or the GRN entered short. Check: match the GRN, the supplier invoice and the gate entry register for the last two deliveries; count carton quantities against the invoice case size.
Barcode or item-mapping error at POS - a similar pack of another brand or size scanned under SKU B's barcode, so sales were posted to the wrong item. Check: run a barcode-to-item audit for the detergent shelf and look for a matching negative variance on a near-identical SKU; check if SKU B's sales quantity fell in the same week its stock rose.
Unrecorded inward movement - customer returns put back on the shelf without a return entry, or a stock transfer in from another branch not booked. Check: compare the return register and inter-store transfer notes for the period, and ask the supervisor who handled returns.
Why positive variance is also a problem: it proves the stock records are unreliable, not that the store gained stock. If barcodes or GRNs are wrong, reorder points, margin reports and category decisions are all wrong, and a negative variance somewhere else is being hidden. Unexplained gains and losses usually come from the same broken process, so SKU B should be investigated alongside SKU A rather than treated as good news.
3. Set out a 40-day action plan for SKU C with numbers, and say what the store must not do.
Read the worked answer
Exposure: 96 units at 2 units/day = 48 days to clear, but only 40 days of shelf life remain. Left alone, about 16 units (8 days × 2) would still be unsold at expiry.
Plan:
- Day 0-2: stop all replenishment of SKU C; confirm the batch; move all 96 units to a single visible festive display with a price-point bundle (for example pack with a complementary item at ₹499 rather than a flat discount).
- Target rate: lifting sales from 2 to 3 units/day clears 96 units in 32 days, inside the 40-day window. That is a 50% lift, achievable with display position and bundling; track daily.
- Day 5-10: if the run rate is below 3/day, ask the supplier for a return or credit note on 25-30 units while the product is still in date; supplier returns are cheaper than markdowns.
- Day 25 (15 days before expiry): hard cut-off - pull all remaining units from the shelf into a marked 'near expiry' crate and decide markdown or return.
- Day 35-40: dispose of or return whatever is left; record it in the expiry register.
Must not do: sell below cost without a written markdown approval, mix near-expiry units into fresh stock, extend the display past the cut-off, or discount heavily only in the final week when customers have already bought elsewhere. Every step should be logged with date, quantity and approver so the loss is visible rather than absorbed silently.