I'm still not exactly sure what defect does that audit doesn't also do.

Not trying to be flippant. I get that defect removes an item from the inventory. Audit also does that. How is using audit over defect contributing to shrink in that case? If I zero in defect or audit, it's still a zero in the inventory system.

Yeah, so it removes it from the inventory system either way, but defecting merchandise actually accounts for why you don't have it and tells the system where it is going, ie returns center or in the trash can. The product is tracked from start to finish with defect.

Audit does not do this. Audit just says that you don't have this item instock, but doesn't categorize where the product went that you were supposed to have. Audit is only used to trigger replenishment when you have overstated on hands.

Ex. You defect out some formula and donate it. We know that it's going to your food bank. It is going into a box, and will be picked up by your food bank. This formula has been accounted for.

Ex. 2. You audit your formula down to 0. Physically where is the product? Where did it go? How does the computer know that your formula went to the food bank? Would it even matter if we threw the formula in the trash? Or sent it home with a TM to use? We will get new formula to replace it, but as far as we are accounting for this merchandise, what exactly did we do with 24 packages of formula?

Ok, now it is time to inventory. RGIS, or whoever is going to count your infants department.

For Ex1. Based on what your DC sent you, you should have gotten 400 formulas this year. You sold 350 of them at the register. You donated 24 of them using defect. RGIS counts 26 on your salesfloor.

350 sold+24 donated+26 on your floor =400 shipped formulas from your DC. This number matches what you should have, so there was no shrinkage on your formula.

For Ex2, let's keep the numbers the same, but assume you choose to audit instead of defecting/donating.

350 sold + 26 on your floor = 376 formulas accounted for.

You SHOULD have 400 accounted for, but you only accounted for 376. Now you are missing 24 formulas. WHERE DID THE FORMULAS GO? Let's say each formula has a price of $20. $20 x 24 missing formulas = $480. This is SHRINK. Your store shrunk out on $480 of merchandise because it was not accounted for properly.

Does this make more sense?