← All Posts

Guide April 16, 2026 · Guidance Team

• ✓ Implement strict receiving and storage protocols at your co-packer.
• ✓ Track actual production yields against your BOM for every run.
• ✓ Utilize end-to-end lot traceability to pinpoint sources of loss.
• ✓ Conduct regular inventory reconciliations across all locations.

What is Shrinkage and its True Cost?

Inventory shrinkage isn't just theft; it's any loss between recorded and actual inventory. For food brands, this includes spoilage, damage, miscounts, processing waste exceeding acceptable tolerances, and administrative errors. Consider a 2% shrinkage rate on $1,000,000 in annual raw material purchases. That's $20,000 directly out of your gross margin, money you worked hard to earn. It impacts your COGS, making your product less profitable and potentially forcing price increases. Ignoring shrinkage means you're operating with incomplete financial data, making strategic decisions harder and less accurate. You must see it as a direct hit to your profitability, not just an unavoidable cost of doing business.

Raw Material Receiving and Storage Errors

Losses often begin before production. Incorrect receiving at your co-packer's dock is a major culprit. Did they physically count and inspect every pallet against your Purchase Order (PO)? Or did they just sign off on the truck driver's manifest? A damaged pallet of fruit, a short count on a sugar delivery, or expired ingredients accepted by mistake all become your brand's shrinkage. Improper storage, like incorrect temperatures for sensitive ingredients or poor FIFO (First-In, First-Out) rotation, leads to spoilage. Ensure your co-packer has strict receiving protocols and that you regularly reconcile their receiving logs against your POs and invoices. Don't assume everything is correct.

Production Yield Discrepancies and Waste

Your Bill of Materials (BOM) specifies exactly how much of each ingredient should be used to make a batch. When actual usage deviates significantly, that's shrinkage. Common causes include over-scaling ingredients, spills during transfer, product sticking to equipment, or rework that consumes extra materials. For instance, if your BOM calls for 100kg of fruit puree for a batch, but the co-packer consistently uses 103kg, you're losing 3% on that ingredient. Track actual ingredient usage and finished goods yield for every production run. Compare these numbers against your expected yields. Any consistent deviation flags a process problem that needs investigation with your co-packer.

Lot Traceability Pinpoints Shrinkage Sources

When shrinkage occurs, knowing exactly *where* and *when* it happened is crucial. This is where robust lot traceability comes in. If a specific lot of nuts consistently shows higher waste during processing, or if a particular shipment of packaging materials frequently arrives damaged, lot tracing helps you identify the problematic supplier or process step. Without end-to-end lot visibility from raw material receipt to finished goods shipment, pinpointing the source of loss is nearly impossible. Guidance’s Lot Traceability module allows you to track every ingredient lot through your co-packer, helping you identify exactly which materials or production runs are contributing most to your shrinkage problems, making corrective action specific and effective.

Organic Mass Balance and Compliance Shrinkage

For organic brands, shrinkage isn't just about monetary loss; it's about compliance. Organic certification requires you to demonstrate a positive mass balance – that the amount of organic ingredients entering production roughly equals the organic finished goods produced, accounting for normal processing loss. If your records show a significant discrepancy, indicating more organic ingredients were used than can be accounted for in finished product, your certifier will question it. This can lead to product write-offs, downgrading to conventional status, or even loss of certification for that specific lot. Accurate tracking of organic ingredient flow by lot is paramount to avoid this specific, costly type of shrinkage.

Implementing Controls to Minimize Loss

Reducing shrinkage requires a combination of robust processes and reliable data. First, establish clear, documented Standard Operating Procedures (SOPs) for receiving, storage, and production with your co-packer. Second, move beyond spreadsheets. Implement a system that provides real-time inventory visibility across all locations, including your co-packer's facility. Conduct regular cycle counts and full physical inventory counts to reconcile actual stock against your records. Investigate every discrepancy, no matter how small. The goal is not zero shrinkage, which is unrealistic, but to understand its causes and keep it within acceptable, controlled parameters, typically under 1-2% of COGS, depending on your product.

See How Guidance Handles This

Guidance is a CPG operations platform built by the CEO of Claros Farm. Apply to join the design partner program.

Apply as a Design Partner →

Frequently Asked Questions