Insiders Threats and Unexplained
Inventory Loss: A Response Guide


Employee relationships should be based on trust. Our staff, after all, are on the frontline of the business, creating products, selling them, interacting with customers, and more. However, trust can sometimes be broken. This was the case when a U.S. man working in collusion with an employee of a COVID-19 test kit lab, sold the kits for up to $200 on two websites created for the purpose. Countless further examples of inventory loss at the hands of employees can be found, such as the Harry Potter studios employee who stole more than $48,000 worth of “magical merchandise”.

Inventory loss, otherwise known as ‘shrinkage’, is much more than a few stolen pens from the stock cabinet. A 2019 survey by the National Retail Federation (NRF) estimates that inventory losses cost the industry $50.6 billion per year.

But what is meant by ‘inventory loss, also known as shrinkage, and where do losses happen? More importantly, can employee investigation occur while maintaining employee-employer trust?

What is Meant by Inventory Loss or Shrinkage?

A company’s inventory covers the goods, products, and services that it provides. If the inventory is shown to be less than what should be available, then the difference reflects inventory shrinkage.

The NRF 2019 survey found that 41% of retailers surveyed reported increases in overall inventory shrinkage.

Inventory losses happen across several areas, including shoplifting, administrative errors, vendor fraud, and employee theft. Any loophole in a process can and will be exploited. Typical types of inventory lost include:

  • Product components include anything from gemstones at a jewelry maker to copper metal at an engineering firm.
  • Finished product can be stolen and resold as described in the prior Harry Potter Studios theft example.
  • Intellectual property (IP) is an attractive target for endless reasons. Industrial espionage involving theft of IP costs S. companies an estimated $600 billion a year.
  • Source code leaks are a form of digital inventory that can be sold to competitors or used to knock off products.
  • Illegal discounts/Fake sales can occur when employees, for example, take 10% off a sale to a friend during purchase, also known as ‘sweethearting’.

Trends in Insider Threats and Inventory Loss

While there are many areas where shrinkage can occur, insider theft is perhaps the most difficult to investigate. Insider threats and employee theft have the added complexity of hitting the balance of being vigilant while maintaining good relations at work.

However, with the average loss per dishonest employee at $1,264 and around 60% of retailers seeing employee theft as being “much more” or “somewhat more” of a priority in the last 5-years, this area of inventory loss must be investigated.


Technology to help prevent insider theft

Technology measures are typically used within a process of inventory loss detection and investigation. Typical technological measures include:

  • Radio Frequency Identification (RFID): RFID tags are used to identify and track the movement of products. Retailer outlet American Apparel was able to reduce shrinkage (across all vectors) by at least 50% using RFID.
  • Facial recognition: This technology is increasingly used for shoplifting and can help to spot patterns and trends in the behavior of employees too.
  • Product activation at POS: Modern POS software requires user login and can generate audit reports.
  • Biometric: The use of biometrics to control access can help to contain employee theft. Entry by biometric to certain parts of a building or to use certain tools or other items, allows you to manage access on a ‘need to know’ basis.

Dealing with Employee Theft

To maintain good employee relations, while reducing inventory loss, you must be mindful of certain pitfalls. The case below exemplifies the impact of poor practice in inventory loss investigation and prevention:

The UK Post Office recently lost a court battle with 550 ex-Post Office workers; a payout of £58 million ($71 million) was made to the complainants. The Post Office accused the employees of stealing money, with discrepancies in accounting software pointing to the theft. In the end, the losses were found to be caused by bugs in the Post Office software used by the accused. Some of the now ex-employees committed suicide under the pressure; some went to prison: All were innocent.

The above scenario is something that can be avoided by using several methods and processes that are best practice in insider-driven inventory loss investigation.

Insider-Driven Inventory Loss
Management: Detect, Respond, Investigate

Below are nine best-practice methods and processes, some augmented using technology, to help detect, respond, and investigate inventory loss:

Hire with caution

Employee recruitment should involve due diligence, including references.

Education and awareness

A culture of ‘perks of the job’ can easily enter the workplace. This may begin with an employee taking a small item before it becomes a habit that ends in larger losses.  Set out a clear policy around taking company property. Make staff aware of this policy and teach them about how losses add up and ultimately cost jobs.

Loss prevention teams

Loss prevention teams can oversee shrinkage as a whole. As part of the remit of the team, they can look at ways to tackle employee theft and associated inventory loss. The team can work on creating a culture where inventory loss is everyone’s issue, and an environment of ‘fair-play’ is fostered. This culture can be instrumental in helping to prevent shrinkage across all areas, not just employee-driven shrinkage.

Protect valuable items

A simple way to prevent inventory loss is to lock up valuable items and only allow access on a need to use basis. Removing temptation from an environment can go a long way to reducing losses.


Justification for surveillance should be done transparently. When carrying out surveillance, you generate personal data. In doing so, you should ensure that you comply with local and international laws on data protection, such as the EU’s General Data Protection Regulation GDPR.


There are several ways that an organization can use employee surveillance to prevent inventory loss:

  • Video monitoring
  • User activity monitoring on information technology
  • Inventory tracking systems, such as those associated with Point-of-Sale (POS) that track inventory automatically
  • Monitoring of specific areas such as exits

Separation of Duties

Simple demarcation of duties can help prevent theft. Don’t let the person who takes sales and payments also calculate your end of day earnings.

Anonymous Reporting – hotlines

Set up methods of communication that allow whistleblowers anonymity. This gives concerned employees the freedom to speak.

Audits and spot checks

Unannounced checks in systems working areas can help to deter misconduct.


Finally, when investigating a suspected inventory theft, remember that technology and qualified experts can be used to help in detection as well as investigation.


Your employees are your most valuable asset. However, this does not mean that they can take company assets without redress. Being proactive about inventory loss is worth going the extra mile. By building a culture of honesty and pride in work, and where inventory theft is acknowledged as not acceptable, you can help to prevent shrinkage. This culture can be augmented and enforced using technology and education for the benefit of all.

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