The Hidden Costs of Phantom Inventory- How much are you losing?

Knowledge is power, but what if you don’t know that the product consumers want is out of stock? This is where phantom inventory comes in. Known for plaguing retail organization in sectors across the gamut, phantom inventory is when a product that should be labeled as out-of-stock or sold out is still presenting as available to consumers. This means that your online storefront is marketing your products as available when there aren’t any to be purchased- hence the name “phantom” inventory. This can be detrimental for buy-online-pick-in-store (BOPIS) but also poor customer experience in the store.

You might be questioning if phantom inventory is really as serious as some make it out to be and if that's the case, you haven’t taken the time to explore just how detrimental this phenomenon can be to current, and future business. The impact of phantom inventory often extends past immediate lost sales, leading to inaccurate forecasting, incorrect data, and poor customer experiences. 

What is phantom inventory? 

Phantom inventory, also known as ghost inventory, are goods or inventory that an enterprise resource planning (ERP) or POS system has falsely accounted for.  This means that the system considers it to be on-hand whether it be in a brick-and-mortar storefront, or storage facility when the product is sold out, missing, or out of stock. Phantom inventory can occur from several causes including misplaced inventory, lost, stolen, or broken goods, data entry errors, lack of inventory control, or deliberate fraud. 

What causes phantom inventory? 

In order to eradicate the risk of phantom inventory, it’s important to identify what causes it. Identifying what’s causing your phantom inventory problem is the first step to preventing long-term loss. The most common sources of phantom inventory are lack of inventory audits, poor sales recordings, receiving errors, and shrinkage. 

1. Lack of inventory audits 

Failing to adequately keep track of your inventory can lead to an influx of phantom inventory. When you fail to conduct regular inventory audits, small mismatches will begin to compound to large discrepancies. Performing regular audits will help you catch phantom inventory before it occurs rather than months down the line.  

2. Poor sales recordings 

Poor or false sales recordings occur when a product isn’t properly accounted for during checkout. This is typically the result of an in-store sales error. For example, you may sell two different coloured lip gloss products to one consumer. Instead of the cashier scanning each product individually, they scan one twice because the price is the same. This transaction will now skew stock levels for both colors and create phantom inventory for the color that wasn’t scanned. 

3. Receiving errors 

Like any scenario in which manual data is being recorded, the risk of human error is increased. Receiving errors may occur in a number of scenarios for a variety of different reasons. For example, an employee may record a higher or lower number of units or forget to account for broken or damaged goods during receival. Delivery from distribution center might not have had all the SKUs as expected and the store accepts delivery without inventory check.

4. Shrinkage 

Shrinkage is a term used to describe when a retailer has fewer items in stock than its recorded inventory. There are a number of factors that can contribute to shrinkage including employee theft, shoplifting, administrative errors, vendor fraud, product damage, and other unknown reasons.

The impact of phantom inventory 

1. Lost revenue 

When a specific product isn’t on your shelves, it can’t generate any revenue. This remains true for shelves in your brick and mortar locations in addition to virtual shelves in your online storefront. If you’re under the impression that your products are readily available, but they aren’t, your losing out on immediate revenue from the customer that has attempted to make the purchase in addition to more revenue when the customer that would have purchased more than one product becomes frustrated or gives up and makes the purchase from a competing retailer. The longer your phantom inventory goes unnoticed, the greater the potential loss. 

2. Incorrect data 

Phantom inventory can be translated to bad or inaccurate data. Chances are, it may take you a long time to recognize that you have a phantom inventory problem which leads to an incredibly poor decision-making process. You may be scratching your head wondering why one of your top selling products is no longer flying off the shelves. You may change your marketing strategy, invest tens of thousand into market research, or cancel future orders all together. All because your top seller is no longer selling. What you may have failed to recognize is that your popular products aren’t failing to sell, customers just can’t find them on your physical or virtual shelves. 

3. Inaccurate forecasting 

Forecasting is a crucial component of long-term success. Unfortunately, you will not be able to forecast appropriately if your data is inaccurate. Inventory data is an essential component of the demand forecasting puzzle. Without it, you won’t be able to budget accurately, maintain a positive cash flow, hire enough staff, or promote your products to the right audience at the right time. Additionally, you won’t have the insights you need to set your supply chain or stock replenishments up for success. 

4. Poor customer experiences  

Imagine being an excited customer that has been waiting to purchase a product from your store. It's finally in stock, and they make their way all the way to your storefront just to be greeted with disappointment. The item that they were told was in stock is actually sold out and instead of shopping from your store, they get frustrated and take their business elsewhere. Not only have you lost an immediate sale, but you may have also lost a life-long customer. 

How can I reduce phantom inventory? 

Phantom inventory can be incredibly costly and detrimental to the long-term success of your business. The key to combating phantom inventory is implementing preventative measures so you can catch and solve phantom inventory problems before they end up costing your business millions of dollars. Unfortunately, solving phantom inventory issue can be challenging as the number of store and SKU combinations grow making it impractical to analyze with common tools like Excel, PowerBI or Tableau.

In an attempt to eradicate the risk of phantom inventory, businesses around the world are continuing to innovate by embracing artificial intelligence (AI) and machine learning (ML). Leveraging AI and ML can greatly reduce the risk of inventory anomalies in retail including phantom inventory by providing businesses with predictive inventory management, inventory tracking, inventory optimization opportunities, and fraud detection. The ML model can help retail chain identify potential stock outs in the coming week/month and then trigger fulfillment of additional units to the correct store resulting in improved sales. Once the phantom inventory issues are identified the chains can assess store operating procedures to improve the situation and more accurately adjust inventory levels in their systems.