Don’t Get Spooked by Phantom Inventory: Definition, Causes, and Solutions
By Kristina Lopienski Published on July 5, 2023 Last updated on August 14, 2023
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Table of Contents
What is phantom inventory?
The negative impact of phantom inventory on ecommerce, 4 common causes of phantom inventory, how to prevent phantom inventory, how shipbob can help businesses tackle phantom inventory, phantom inventory faqs.
In ecommerce, how inventory flow in managed and accounted plays a vital role in warehouse efficiency and your bottom line.
Inaccurate inventory reporting is inevitable, but when you’re continuously seeing more inventory reported than what you physically have, then it can raise concern.
This phenomena is known as “phantom inventory,” and every growing business has seen a case of it. But how can a business get better at preventing an inventory discrepancy?
In this article, we’ll discuss what causes phantom inventory and what to do about it.
Phantom inventory refers to the inventory that’s available in your records but doesn’t physically exist. It’s a discrepancy in your physical stock levels and your inventory records , usually due to factors such as theft, spoilage, breakage, data entry errors, or misplacement.
For example, if your records show that you still have 10 units of a certain SKU left so a customer places an order for 5 units. But when your picking team goes to pick those items from storage, they notice that there are actually only 3 units left.
In this case, the 7 remaining units are considered phantom inventory.
Regardless of what caused phantom inventory to exist, one thing is for certain — it can have a serious negative impact on your business.
Here are some of the main ways in which phantom inventory can harm your ecommerce business.
Accurate inventory forecasting provides the data and clarity necessary to make inventory decisions and helps you plan your inventory replenishment accordingly to meet demands.
But when phantom inventory exists, it skews your forecasting numbers, since you don’t have an accurate sense of your inventory needs.
Forecasting inventory is never accurate, but when you’re dealing with inaccurate numbers, it’s hard to make the best decisions in terms of how much inventory to order. And, it can increase your risk of backorders .
Risk of stockouts
As a direct result of the above, you’re likely to experience stockouts, since there’s a discrepancy between the number of physical units left in stock and the number of units in your records.
You’re essentially recording more inventory than you actually have, which means you won’t be aware of stock levels dipping below your usual reorder point . So you won’t be placing replenishment orders on time, which puts you at risk of running out of physical stock.
Businesses that use manual inventory recording or outdated systems are prone to experiencing this type of issue as they lack visibility into their inventory.
For example, ecommerce brand, FlutterHabit, had been relying on spreadsheets to manually count inventory from multiple locations before coming to ShipBob. This was a highly complex and time-consuming process and was extremely prone to errors.
“Once we could see the pitfalls in our old manual system of fulfilling orders, we just realized we need something else to scale with. To get where we were going, we would need more structure to support all of our growth — so we switched to ShipBob.” Bethany Peterson, COO of FlutterHabit
Poor customer experience
Imagine buying something that the website clearly shows as “in stock” only to find out later that it’s unavailable to ship. This can cause frustration for customers who expected to receive the item before a certain date.
Even if a refund was issued, it means that the customer is mostly like going to search for similar product someplace else. Since a sale can’t be made, there is also stockout costs associated to this.
This issue often arises when the inventory system being used is incapable of communicating in real time with your online store.
For example, before partnering with ShipBob, online brand Ocean & Co. were using a fulfillment network that appeared to have a solution that would automatically sync with the product page and update the inventory count in the backend.
However, this was far from reality as they often experienced issues with out-of-sync inventory counts between the store view and the fulfillment software. It turned out that the former 3PL’s network’s technology had trouble communicating amongst itself, resulting in inaccurate inventory records.
“We had 10 orders on an address hold with the new fulfillment network over one weekend. All we were able to see is the orders were ‘on hold’—not why they were on hold. By the time we were able to finally identify the cause and correct the addresses, we were out of stock of the items ordered. The SKUs weren’t placed on hold. We oversold by 10 items and had to email those 10 customers to let them know that we didn’t actually have stock.” Gerard Ecker, Founder & CEO of Ocean & Co.
Phantom inventory also translates to a loss of revenue for your ecommerce business. If an item isn’t physically available for you to sell, it’s obviously not going to generate revenue.
Moreover, you lose the opportunity to generate revenue when you lose customers to other retailers —customers who definitely would’ve made a purchase if the item had been available right away to pack and ship.
You can always write this loss off at the end of a fiscal or accounting year. But since beginning inventory is a business asset, it’s still lost revenue if some inventory is lost and can’t be sold.
False sense of profitability
Sometimes when you have more inventory in your records than what’s physically available, it has the potential to inflate the value of your assets.
This creates a false sense of profitability for your business, which could result in poor decisions that eventually impact actual profit made.
For example, if your records show that you still have sufficient stock of a high-demand SKU, you might feel comfortable with current sales forecasts and inventory levels.
But if you end up selling out and later realize you didn’t have as much inventory as you thought, you’ll end up with less-than-ideal sales numbers and not enough inventory to sell more on time to meet demand.
The key to preventing phantom inventory is by getting to the root of the problem, which would involve understanding what causes it.
Here are some of the main causes of phantom inventory that you should be aware of.
While it may seem contradictory, overstocking could potentially result in phantom inventory. When you order more inventory than you actually need, a significant portion of the inventory goes unsold.
It sits in the warehouse where it’s at risk of expiring, going obsolete, getting damaged, or even getting stolen by unscrupulous staff.
Eventually, you end up losing some of the inventory while your records still show that you have the same level of stock left.
Poor inventory management practices
Lack of proper inventory management is another leading cause of phantom inventory. When you’re not managing your inventory as you should, you might not be performing regular inventory audits .
As such, you might be failing to account for inventory that has been damaged, lost, stolen, misplaced, or have become obsolete (outdated technology, out-of-style apparel trends, etc).
Unless this is done on a regular basis, there’s a high chance that your inventory records will no longer match the actual physical inventory levels. This can lead to a discrepancy in your inventory data, with a significant portion turning into phantom inventory.
Inaccuracies in your inventory data can also result in phantom inventory.
These inaccuracies are often a result of human error. For example, your receiving team may have accidentally recorded a higher number of units than they actually received, or they may have failed to account for the goods that arrived damaged
Similarly, there can also be inaccuracies if sales weren’t recorded correctly or if your inventory management software isn’t providing real-time insights.
Lack of inventory visibility
When you don’t have real-time visibility into your inventory, there’s a greater risk of phantom inventory. Implementing real-time inventory management is key to understanding exactly how much inventory you have in the given moment.
Real-time inventory tracking becomes even more important when more than one sales channel is involved, including other retailers in a B2B commerce case. Along with multichannel retailing , storing inventory in one or more warehouses also calls for real-time inventory data.
Without this information, you could miss accounting for certain items that have already been sold or even those items that have been misplaced, damaged, or stolen.
Now that we understand the causes, it’s time to look at the preventative steps.
Here are some of the best ways you can prevent phantom inventory from occurring.
Implement proper inventory management practices
Implementing inventory management best practices is one of the most critical steps to ensuring that your inventory levels are accurate and updated according to your physical stock count.
Start with an inventory tracking system that will keep an accurate count of your physical inventory levels while factoring in things like unsellable items and returns.
Accurate inventory tracking identifies:
- Current inventory levels
- When you need to reorder
- And how much you need to reorder
It’s also necessary to minimize the risk of misplacements as it helps you track exactly where certain SKUs are stored in or more warehouses.
Moreover, good inventory management allows you to better organize inventory using lot tracking , so items can be located and accounted for easily.
Audit your inventory regularly
A regular inventory audit that are done at the same time every year is essential.
By doing regular inventory audits, you can quickly identify any discrepancies between what you have recorded and what’s physically in stock.
This can be done faster and accurately when implementing automated inventory tools that automatically track inventory flow. This way, you have access to inventory analytics and other data to easily pull reports whenever you need them.
Improve inventory visibility
Having clear visibility into your physical inventory is a necessary step to prevent any mismatches between physical stock count and inventory records.
This will help you keep a close eye on where your inventory is at all times while providing you with the latest information about changes in physical inventory levels.
That way, you know when and how many units are leaving the warehouse, or if certain items have undergone some type of damage. This means you have the visibility you need to keep your inventory records updated with the most accurate information.
On the supply chain side, I just throw in what we placed at the factory into a WRO in the ShipBob dashboard, and I can see how many units we have on-hand, what’s incoming, what’s at docks, and so on. I can see all of those numbers in a few seconds, and it makes life so much easier.” Harley Abrams, Operations Manager of SuperSpeed Golf, LLC
Leverage technology and automation
Making use of the right technology can help you improve efficiency and accuracy across all aspects of your ecommerce business.
Inventory automation systems is the best way to manage inventory flow and keep track of ever-moving inventory, from receiving to fulfillment.
At the most basic level, inventory tracking technology offers built-in inventory management tools that provide:
- Real-time visibility into your inventory levels
- Historical data for more accurate inventory forecasting
- The ability to manage inventory on the SKU level
Inventory management technology, even at the basic level, automates tedious tasks, such as physical inventory cycle counts and pulling together inventory reports.
Many inventory tracking systems integrate and sync with sales platforms, so that new orders are automatically accounted for and inventory levels are updated.
“We realized that this time, we had to find a global fulfillment provider with expertise in US fulfillment — which led us back to ShipBob. ShipBob’s software was much easier to use than our previous local provider’s, and gave us a better picture of what was going on with our orders. Even from overseas, it gave us the visibility and control we would expect from a provider in our backyard.” John Greenhalgh, Co-Founder of A Year of Dates
Partner with a 3PL
From continuously tracking inventory levels to maintaining accurate inventory records — it can be a challenge to keep up with without the right technology in place.
Sometimes, it’s best to leave it to the professionals who can help you reduce the risk that comes with poor inventory management, When you partner with 3PL , you’re able to implement inventory management tools that automate time-consuming processes that are prone to human error.
Above all, a 3PL can support your fulfillment needs, so you can focus on building your business.
For example, ShipBob offers two ways to partner with us: you can either implement our cloud-based warehouse management system (WMS) to track inventory in house, or store inventory in one or more of fulfillment locations and track inventory from the ShipBob dashboard.
ShipBob is trying something that other 3PLs haven’t done, offering the tools they’ve built and actually use in their fulfillment centers — to us, their customer. It feels like a really honest and fruitful relationship. ShipBob is always introducing new products and listening to our feedback. That’s an important consideration when you’re a customer.” Adam LaGesse, Global Warehousing Director at Spikeball
ShipBob’s WMS offers built-in inventory management tools that help you tackle inventory management challenges, such as phantom inventory. ShipBob’s technology comes with real-time inventory management capabilities, so you have better visibility and control over your inventory.
ShipBob makes it easy track of your inventory movement at the operations level, so you always know where your inventory is and how much is available across different warehouse locations.
ShipBob’s technology also provides powerful analytics that closely tracks inventory performance for each item, allowing for better SKU management . With ShipBob’s technology, you can:
- Collect historical data on inventory sales
- Identify your average inventory turnover rate
- Prioritize stocking fast-moving SKUs
- Forecast demand more accurately
“One of the things that set ShipBob apart from other companies we were considering was the scale at which they’re operating. There were very few providers that could support even one customer that is doing hundreds of thousands of packages in a month, and a lot of the systems would fall apart once you started to scale to any kind of degree. ShipBob’s system is built to handle millions of orders per month, so businesses can scale with peace of mind.” Ben Tietje, Co-Founder and CEO of Earthley
With this level of visibility into your inventory, your records are always updated with your physical stock levels, so if there is a discrepancy, you have the information on hand to pinpoint what it causing it.
ShipBob offers a global fulfillmen t network powered by it’s cloud-based WMS. You can store inventory close to your customers and track it all from the ShipBob dashboard.
But if you decide to stick with in-house fulfillmen t, you can get more information on how to implement ShipBob’s WMS for in-house warehouse management . Click below for more info.
Below are answers to the most common questions about phantom inventory.
Can phantom inventory lead to overstocking?
Phantom inventory is a common cause of stockouts, but it can also lead to overstocking, especially if returns are mismanaged.
How can partnering with ShipBob help prevent phantom inventory?
When you partner with ShipBob, you get access to built-in inventory management tools within ShipBob’s cloud-based WMS system. These tools provide real-time visibility into stock levels across your supply chain. That way, you always know how many units of each SKU is available in each warehouse or fulfillment center location.
Can phantom inventory occur even with accurate inventory tracking?
Even with accurate inventory tracking, phantom inventory can still occur but only for a short period of time until the mismatch is identified and resolved. For instance, technical glitches may result in failure to properly account for sales, which may cause phantom inventory. However, if regular inventory tracking is done, the issue will be quickly identified and fixed.
What is phantom shipping and receiving?
Phantom shipping and receiving is when there’s no product being moved, although there are false invoices and documents recording the shipment.
Kristina is the Sr. Director of Marketing Communications at ShipBob, where she writes various articles, case studies, and other resources to help ecommerce brands grow their business.
Read all posts written by Kristina Lopienski
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Phantom inventory: definition and how to ghost it
Phantom inventory is a serious logistics issue. The disparity between the number of goods physically present in a store or warehouse and that recorded in the computer system can lead to major losses for a company.
In this post, we analyze the concept of phantom inventory, emphasizing how to detect it in time to ensure that it doesn’t affect order preparation and dispatch.
What is phantom inventory?
The term phantom inventory refers to imbalances between the products on hand in an establishment or facility and the stock recorded in the system . In other words, it’s inventory that appears available in the database but — due to human error — can’t be found in its intended location.
This discrepancy between the recorded and real stock means that, for example, a business might accept orders that can’t be delivered to customers because of a lack of product . By going to pick the items, the operator realizes there isn’t enough merchandise and raises the alarm. There could also be problems with the supply of raw materials for the production lines, which could eventually halt the manufacture of a product.
An imbalance between the two types of stock means that purchase orders, to be sent at the reorder point , are not issued at the right time. This results in stockouts (when sent too late) or overstock (when sent too soon, because the number of units accounted for is lower than the actual number).
Phantom inventory usually stems from errors arising from manual handling of the goods. It normally occurs in warehouses with a wide range of SKUs , for instance, those of e-commerce and retail businesses. In fact, phantom inventory affects facilities as well as companies.
Ultimately, phantom inventory has become a major logistics risk, as it results directly in stockouts, which prevent the order from being delivered on time and under the conditions previously agreed upon with the customer . It could also make it difficult to execute the manufacturing order according to the bill of materials (BOM) for the established production.
How to reduce phantom inventory
More often than not, phantom inventory can be traced back to human errors of various kinds: moving goods from their location without recording the change, unintentionally hiding a product, confusion when picking similar-looking SKUs, working from memory and making a mistake in the number of units or even the product, making errors when entering the data into the system, theft, etc. If inventory is kept with Excel , pen and paper, or basic software, these actions that cause phantom inventory are more likely to occur.
The implementation of an advanced goods management software program , such as a warehouse management system (WMS) , makes it easier for companies to steer clear of these types of mistakes.
A WMS organizes operator tasks and ensures that they are performed correctly. For example, in goods receipts , the software sends step-by-step instructions to accurately record the units received, their handling, and, finally, their storage locations. It also stops employees from skipping steps, which could lead to mistakes. For instance, by means of barcode reading and confirmations on the scanner, the operator must validate that he/she has taken the correct product and placed it in the assigned location.
Another stage that tends to produce errors is order picking. Again, the goal is to minimize human intervention, automating decision-making and streamlining operator movements. Guided picking technology such as pick-to-light and voice picking are essential for minimizing the risk of phantom inventory, helping operators to carry out each task in a simple, intuitive way. By means of lights, these systems indicate where a product should be picked and in what quantity.
A more sophisticated option would be high-performance pick stations . The goods are stored in boxes, and the miniload system’s stacker crane automatically removes the box from the rack, depositing it at the operator’s workstation. The operator, without having to move at any time, merely has to pick the indicated number of units from the box in front of him/her and deposit them in a box below that one.
The aim in all cases is to make the operations as simple as possible to lower the risk of human error.
Automation: the definitive solution for eliminating human error
The WMS and picking assistance systems notably minimize the likelihood of mistakes. However, only automated storage and retrieval systems (AS/RS) can guarantee that no human errors will be made, as all operations are automated , while human presence is restricted to administration and supervision. This is especially evident in AS/RS for pallets .
In these systems, when a pallet enters the facility, it must go through a mandatory pallet checkpoint , the function of which is to verify the proper condition of the goods and confirm that the product matches the information entered in the system. Then, the conveyors are charged with automatically moving the load to the designated point in the warehouse. Finally, the stacker cranes for pallets automate the retrieval and storage of products on the racks. To dispatch the goods, the process is repeated in reverse order.
All these actions are performed without human intervention and are controlled by the WMS, which checks that the merchandise is handled appropriately and manages movements in the facility. This way, it’s practically impossible for phantom inventory to appear .
Moreover, AS/RS don’t just prevent inventory errors; they also considerably raise warehouse throughput and maximize storage capacity (they make it possible to work at a greater height and leave less space between the racks).
Phantom inventory can be prevented
Phantom inventory is a serious disadvantage for companies. Therefore, manual operations are being replaced with automated elements that ensure the reliability and safety of all processes.
Implementing a WMS is the first step towards getting rid of phantom inventory . This system monitors all product movements and guides employees when replenishing stock, preventing human errors. To limit these mistakes even more, AS/RS coordinated by a WMS are the way to go. They carry out tight control of warehouse stock to guarantee that goods are no longer lost or damaged. When it comes to eliminating the margin of error in stock counts, process automation plays a fundamental role.
Interlake Mecalux’s automated storage solutions are combined with Easy WMS, our warehouse management system, to ensure maximum reliability in inventory records. Automated operations nip phantom inventory in the bud. Be sure to get in touch . One of our expert consultants will offer you the best solution for eradicating this type of inventory from your facility.
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What Is Phantom Inventory? Here’s How to Spot It
- by Matt Ellsworth
- April 23, 2019
- 3 minutes read
Are there ghosts haunting your shelves? No, not real-life ghosts: phantom inventory. Walk through the aisles and see empty shelves and out-of-stock products. Check the system and see that everything looks good. It looks like there is enough inventory in the back room and on the shelves to meet demand. But your eyes don’t lie. Something is off.
What’s wrong is called phantom inventory.
What is Phantom Inventory?
Phantom inventory is inventory reported that does not exist. It is what happens when perpetual inventory—the number of items in the front and back of the store—is greater than on-shelf availability.
Phantom inventory is particularly challenging because your inventory management system says the products are in-stock, but the shelves are empty . You can’t fix what you don’t know is even a problem. There are several potential causes of phantom inventory, including:
- Shrinkage – Shrinkage occurs when a product is lost due to employee theft, shoplifting, or another unknown reason.
- Receiving errors – Errors can happen as merchandise is received and processed at the back of the store.
- Employee errors – Store associates may make an error when entering data, processing returns, or picking inventory to fulfill an online order.
How Phantom Inventory Hurts Retailers
Phantom inventory is a problem for retailers because it generates zero dollars in sales. It’s inventory that you believe is on the shelf but doesn’t exist, which means nobody can buy it.
Furthermore, phantom inventory creates more issues beyond lost revenue. The unknown nature of this type of inventory means you can’t attribute a poor-selling product or underperforming store to phantom inventory. Your data isn’t accurate, and any insights you’ve gleaned from that data may be incorrect.
For example, you may evaluate a new product launch and see that it isn’t selling in-store as well as you predicted. So, you go back to the drawing board, cancel reorders, or remove that SKU from the shelf altogether. In reality, your perpetual inventory was incorrect, and nobody was buying the SKU because it wasn’t even on the shelf .
You just wasted time and resources judging a product launch on incomplete information.
Phantom inventory is when perpetual inventory—the number of items in the front and back of the store—is greater than on-shelf availability.
How to Identify Phantom Inventory
The challenges associated with phantom inventory increase with scale. The more SKUs you have, and the harder it is to identify and prevent phantom inventory.
Therefore, the best solutions to this problem involve retail analytics and software solutions. You need eyes and ears inside stores checking on-shelf availability, and then you need more help to compare that data against perpetual inventory to pinpoint any phantom inventory.
One such solution is mobile crowdsourcing. Smartphone-enabled shoppers can be leveraged to audit retail locations on your behalf. These modern mystery shoppers can provide brick-and-mortar data from more store locations than otherwise possible and can be guided to check specific shelf conditions that could uncover phantom inventory.
Smartphone-enabled shoppers can provide images from the shelves along with data on inventory levels, so you can quickly and easily see shelf conditions. Images are crucial because it’s clear evidence of a problem at the shelf-level. Once you have that evidence, you can work backward to identify the cause of the phantom inventory and prevent a repeat incident in the future.
In summary, identify and prevent phantom inventory by:
- Leveraging mystery shoppers to report on shelf-level conditions
- Comparing on-shelf availability to perpetual inventory
- Backtracking phantom inventory’s path to the shelf to identify the cause of the problem
Take Advantage of Shoppers Already In Stores
Fixing phantom inventory begins with resources. You need the right tools to analyze hundreds—or more—SKUs across thousands of store locations. Manual data collection and entry won’t get the job done.
Instead, take advantage of the shoppers that are already inside those stores to provide data via retail auditing . Smartphone-enabled shoppers are incentivized to share key datapoints via a mobile app back to your business. They’re shopping anyway—use that to your benefit by getting critical shelf-level insights that can uncover where phantom inventory is eating away at your sales.
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Phantom Inventory: Everything You Need to Know in 2023
In this article, we will cover what phantom inventory is and its common causes. We will also delve into its impacts on your business and provide strategies to avoid it. Read on to learn more.
What is Phantom Inventory?
Phantom inventory refers to the discrepancy between the recorded inventory levels in a company's database and the actual physical stock available. It occurs due to errors in recording, theft, damage, or other issues leading to inaccurate tracking of inventory.
Example: A retailer's system indicates that there are 50 pairs of Nike sneakers in stock, but a physical count reveals only 40 pairs are actually available. This resulted in a phantom inventory of 10 pairs.
Causes of Phantom Inventory
Phantom inventory can occur for numerous reasons. Here are some of the most common causes:
1. Human Error:
Mistakes in manual data entry can lead to inaccuracies in the recorded inventory levels. For instance, an employee might input the wrong quantity received leading to a mismatch between the actual and recorded inventory.
2. Theft and Shoplifting:
Items stolen from the inventory aren't always immediately accounted for in the system. If 5 iPhones are stolen from a store, the inventory system may still reflect those as available until the next physical count.
3. Damaged Goods:
Products that are damaged in the warehouse or on the sales floor might not be updated in the inventory records promptly. If 10 dresses got damaged due to a water leak, the system might still show them as saleable inventory until corrected.
4. Inadequate Technology:
Outdated or malfunctioning inventory management systems can lead to incorrect tracking. Inaccuracies in barcode scanning or database updates can result in phantom inventory.
5. Supplier Errors:
Sometimes, suppliers might deliver the wrong quantity of products leading to a mismatch. If a supplier delivers 80 units of a product instead of the ordered 100, yet the full 100 are recorded, it results in a phantom inventory of 20 units.
6. Incomplete Sales Transactions:
At times, items can be removed from the shelves and not purchased or transactions might be initiated but not completed. If a customer takes a product but then abandons it before checkout and the inventory isn’t updated, it can lead to phantom inventory.
Impacts of Phantom Inventory
The impacts of phantom inventory can be significant and affect various aspects of a business. Here are some of the most common impacts:
1. Customer Dissatisfaction:
Customers might experience disappointment when products shown as available online or in-store are actually out of stock. For example, a customer might visit a store to purchase a specific model of a laptop listed as in stock, only to find it unavailable leading to a negative customer experience.
2. Revenue Loss:
Phantom inventory can lead to missed sales opportunities. If a business believes it has more stock than it actually does, it might miss the chance to reorder in time leading to stockouts and lost sales.
3. Operational Inefficiency:
With inaccurate inventory data, businesses can face challenges in planning and operations. For instance, having excess inventory in the system might lead to underutilization of warehouse space or misallocation of resources.
4. Supply Chain Disruptions:
Phantom inventory impacts the accuracy of demand forecasting and can lead to either overstock or stockout situations creating inefficiencies and disruptions throughout the supply chain.
5. Increased Costs:
Inaccurate inventory levels can lead to urgent and unplanned reordering of stock often at higher costs. Expedited shipping and handling costs to quickly replenish understocked items can erode profit margins.
10 Steps to Avoid Phantom Inventory
To maintain accurate stock levels and optimize operational efficiency, you can follow our simple 10 step process below.
Step 1. Implement Automated Inventory Management
Utilize technology to automatically track and manage inventory, reducing human error and ensuring real-time data accuracy. Automated systems can quickly adjust inventory levels based on sales, returns, and restocking.
Example: A bookstore uses an automated system that instantly updates the inventory levels after selling 20 copies of "The Catcher in the Rye." The system ensures the stock count is always current minimizing the risk of phantom inventory.
Step 2. Regular Physical Audits
Schedule consistent physical counts of inventory to validate and correct the data in the inventory management system. This step helps in identifying discrepancies and updating the system accordingly.
Example: Every month, a clothing retailer physically counts the stock and discovers that there are only 30 pairs of Levi’s jeans instead of the 50 recorded in the system enabling immediate correction.
Step 3. Employee Training
Equip employees with adequate training to minimize errors in inventory handling, recording, and management. Well-trained staff ensure accurate tracking and reduce incidences of phantom inventory.
Example: Employees at a tech store receive training on using barcode scanners ensuring accurate tracking of items like the Samsung Galaxy phones
Step 4. Strengthen Security Measures
Enhance security protocols to mitigate theft and shoplifting, which are common causes of phantom inventory. Security measures ensure that inventory losses are minimized.
Example: A jewelry store installs advanced surveillance cameras, leading to a significant reduction in theft and ensuring that the recorded 200 gold necklaces match the actual count.
Step 5. Supplier Collaboration
Work closely with suppliers to ensure accurate and timely delivery of ordered inventory. Efficient communication and collaboration prevent discrepancies in ordered and received stock.
Example: A toy store confirms the receipt of 500 Lego sets as per the order, ensuring that the supplier’s delivery matches the store’s recorded inventory.
Step 6. Efficient Return Handling
Develop a streamlined process for handling returned items to ensure they are adequately accounted for in the inventory. This step prevents the inflation or deflation of inventory counts due to returns.
Example: An online fashion store immediately updates its inventory after 10 returned pairs of Nike sneakers ensuring an accurate reflection of available stock.
Step 7. Use of RFID Tags
Incorporate RFID tags to track products in real time and ensure accurate inventory counts. RFID technology aids in precise, real-time tracking of each item in the inventory.
Example: A supermarket uses RFID tags to track 2000 cartons of milk, ensuring real-time updates and reducing the risk of phantom inventory.
Step 8. Accurate Demand Forecasting
Implement tools and analytics for precise demand forecasting to manage inventory effectively. Accurate predictions help in maintaining optimal stock levels.
Example: An electronics retailer accurately predicts the sale of 150 Apple iPads during the holiday season, ensuring adequate stock availability and preventing phantom inventory.
Step 9. Implement Efficient Data Management
Utilize a well-organized data management system to reduce errors and inefficiencies. Proper data management ensures inventory records are accurate and up-to-date.
Example: A car dealership uses a cloud-based system to update the inventory ensuring the recorded 50 Toyota Corollas match the actual stock, minimizing discrepancies.
Step 10. Improve Communication Channels
Ensure effective communication among all departments involved in inventory management to swiftly address discrepancies. Improved communication facilitates quick responses to inventory issues.
Example: When the sales department of a furniture store sells the last 5 oak dining tables, they immediately inform the inventory team to update the records ensuring accuracy in stock levels.
Case Study Example
TechWorld is an electronics retail company that specializes in selling various electronic gadgets and accessories. Let’s explore how the company applied our 10 step process to avoid phantom inventory.
TechWorld integrates an automated inventory system that updates in real time as sales are made. This technology ensures that when 15 units of iPhone 13 are sold, the system instantaneously adjusts the stock levels.
Every quarter, TechWorld conducts a physical count and discovers a discrepancy of 10 units in the recorded stock of MacBook Air. The counts are corrected immediately preventing any phantom inventory.
TechWorld trains its employees rigorously ensuring they are adept at using the inventory management system. This training ensures that when 25 units of Samsung Galaxy Tablets are received, they are accurately entered into the system.
Security cameras and anti-theft systems are installed across TechWorld stores to minimize theft. These measures ensure that the recorded 50 units of Bose headphones remain consistent with the actual stock.
TechWorld maintains close communication with suppliers. When an order of 200 units of Fitbit smartwatches is made, the reception and entry into the system are double-checked for accuracy.
A system is in place to immediately update the inventory when returns occur. So, when 5 units of Dell laptops are returned, the stock level is promptly adjusted.
RFID tags are attached to all Sony TVs in stock, allowing real-time tracking of the 100 units available and ensuring immediate updates on sales or theft.
TechWorld uses predictive analytics to estimate that it will sell approximately 300 units of Apple AirPods in December and ensures that stock levels are maintained to meet this demand.
With a cloud-based inventory system, discrepancies like recording 120 units of GoPro cameras when only 100 units are available are quickly identified and corrected.
Whenever a sale, return, or reception of stock happens, communication is swift among all departments. For instance, when the last 10 units of HP printers are sold, the inventory team is immediately notified to update the records and reorder if necessary.
We hope that you now have a better understanding of what phantom inventory is and how to optimize your inventory to avoid it.
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Guide to spot and solve phantom inventory
In this helpful guide, we will go over the definition of phantom inventory (also known as ghost inventory), the best ways for suppliers to identify phantom inventory, and the methods available to make sure that products stay stocked and on shelves.
Staying on top of phantom inventory issues helps consumer packaged goods brands reduce out of stocks, maintain smooth relationships with retailers and maximize sales to increase revenue.
What is phantom inventory?
The term “phantom inventory” refers to inventory at a retail store or distribution center that would seem to be missing, due to a discrepancy between inventory shown in a system and actual inventory on-hand. With phantom inventory, the system will indicate that there are greater quantities of a product available than are actually in-stock.
Dealing with phantom inventory means that a supplier may have out of stocks that need to be addressed, but could require extra steps to identify.
All CPG brands are susceptible to experiencing phantom inventory, but brands with many varying SKUs, brands with products in high theft categories, and brands with products that are prone to damage may have an increased risk of phantom inventory.
In most cases, it will be the supplier’s responsibility to address phantom inventory issues, and not the retailer so it is important for brands to have solutions and processes in place.
Phantom inventory – also known as ghost inventory – occurs for many reasons; ranging from technical to human error. Common causes of phantom inventory include:
- Receiving errors: Issues with phantom inventory can begin with improper scanning at the time stock is received by the retailer. The retail team may incorrectly scan the amount of product that comes in. Or it can result from human error on the supplier side, with the shipment being labeled incorrectly, resulting in stock levels being recorded incorrectly.
- Improper sales recording: If an item is not accounted for correctly at the register, or point-of-sale (POS), then it will not be properly deducted from the inventory in the system.
For example, this often occurs when a cashier enters the incorrect quantity of an item, or for instance, scans one can of beverage multiple times, to account for different flavors – therefore recording sales for the wrong UPC.
- Inventory Management Errors: Inventory management errors can occur when there is mis-recorded or misplaced stock, or while there are errors moving and recording stock from the distribution center, to a back room and onto a retail floor.
- Shrinkage: In retail, shrinkage is a blanket term for unrecorded loss of inventory, which include shoplifting, employee theft, damage, and expiration. Some categories incur these losses more than others, and can be more susceptible to phantom inventory issues.
Combined, these causes can amount to an average 10%-40% variance in inventory accuracy by retailer! How then, can a supplier identify their own discrepancies and maintain stock levels?
How to identify, or calculate phantom inventory
In order to identify and solve phantom inventory, it will be necessary to cross-reference different sets of data, considering that the inventory data itself is off.
For starters, a supplier can pull a velocity report, showing how many units per week they are selling at a given retail location. If velocity slows down to a halt, even though there is a record of units on-hand, you may be able to identify these remaining quantities as phantom inventory. From this, you can seek to replenish the stock.
CPG brands can access both inventory and sales velocity reports – down to individual retail locations – using the Crisp data platform.
Still, when it comes to calculating phantom inventory across hundreds, or thousands of store locations, the Crisp voids dashboard provides the best data to be proactive with retail partners. The Crisp voids dashboard uses proprietary machine learning technology to reference multiple data points, across current and historical data to predict and identify out of stocks.
The impact of Phantom Inventory, and why it’s important
It’s important to address issues pertaining to phantom inventory as soon as possible, as there are consequences that can add up in the time it takes to solve them. The main and obvious consequence is that a supplier will lose sales on their product that is missing. This can mean falling behind on projections, both internally and with the retailer.
Different from dealing with the usual out of stocks, it can take extra time to coordinate the shipment of product to replenish phantom inventory. This extended window of time can affect relationships with retailers, and allow a competing brand to gain greater shelf space and market share in the meantime.
Due to the compounding, negative impact of phantom inventory issues, and especially in the competitive retail landscape, it’s important for packaged goods brands to identify and solve them as soon as possible. Preferably using data technology that can expedite the process.
How to prevent phantom inventory, and solutions
To best stay on top of phantom inventory, suppliers will want to designate time each week to identify and address voids by accessing and comparing the latest point-of-sale (POS) data. Furthermore, it will be helpful to utilize this data in such a way, that members of the team can receive alerts when sales drop and a location may be dealing with out of stocks.
These internal systems can be built using Crisp , and can provide a long-term, automated solution for staying on top of ghost inventory issues.
Another solution to maintain inventory levels in-stores, is to work with a merchandising team. Merchandisers own the presentation and upkeep of products on-shelves, and can be instrumental in making sure your items are in the right place and accessible, and that quantities align with those in the system. It can be exciting for brands to grow into hundreds, or thousands of retail locations, and merchandisers are able to provide peace of mind that your valuable inventory is being tended to, even after it leaves the warehouse.
Finally, consumer packaged goods brands may want to assess the value of shrinkage solutions, including theft deterrent devices, and alternate packaging to prevent damage. Reducing shrinkage is sure to help reduce phantom inventory issues across retail locations.
Due to the compounding, negative impact of phantom inventory issues, and especially in the competitive retail landscape, it’s important for packaged goods brands to identify and solve them as soon as possible. Preferably using data technology that can expedite the process.
In an ideal world, every unit that is manufactured would be perfectly tracked throughout the supply chain, through to its successful sale with a retailer. For the reasons listed above, we know that there are factors that can get in the way, and present challenges that will need to be addressed. Phantom inventory is a complex issue that CPG brands will need to tackle across many, varying retailers as they scale. Luckily, there are technology solutions available to stay on top of these discrepancies, maintain inventory levels and relationships with buyers, and maximize revenue at every opportunity.
If you are a Crisp customer, and dealing with phantom inventory, be sure to reach out to your Customer Success representative for the best solutions.
Or, for a look at how Crisp can help your organization identify and address phantom inventory issues, feel free to book a demo here.
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Phantom Inventory Definition
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Phantom inventory refers to goods that are recorded as available on-hand at a storage location within an inventory management software, but that are not actually present. At the store level, phantom inventory is one of the major root cause behind out-of-shelf availability problems.
Impact on inventory availability
Phantom inventory can delay automated reordering , hence leading to stockouts . Indeed, when no ordering constraints are present, the reorder quantity is computed as the difference between the reorder point and the sum of the stock on hand plus the stock on order.
The graph below illustrates the impact of phantom inventory on service level . In particular, a discrepancy in the stock on hand value can result in a much lower service level.
The term inventory freezing has been coined by Kang and Gershwin (2005) to describe a situation where the stock on hand is actually depleted, but where no further reorders are made because of an erroneous stock on hand record. When an automated replenishment system is in place, the only way to get the system out of an inventory freeze is a manual recount of the stock on hand.
Then, outside the strict inventory optimization viewpoint, phantom inventory can also result in broader accounting issues and restatements.
While retail technology has been steadily improved over the last decades, many factors still contribute to generate inventory record inaccuracies including:
- replenishment errors,
- employee theft,
- customer shoplifting,
- improper handling of damaged merchandise,
- imperfect inventory audits,
- incorrect recording of sales.
The most widespread technique used to correct phantom inventory problems is physical cycle count . For a more details about the extent of the problem, see the page about inventory accuracy .
Phantom inventory is one of the major problem in retail that is too frequently ignored; and when the problem gets addressed it’s only by simply throwing more manpower on counting operations. We believe that statistical data analysis can help to predict the existence of phantom inventory, in order to prioritize counting where it is needed the most.
Kang, Y. and S. B. Gershwin (2005). Information Inaccuracy in Inventory Systems: Stock Loss and Stockout. IIE Transactions 37: 843-859.
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What is Phantom Inventory & How to Deal With It
Discover the top causes of phantom inventory, the biggest consequences, and the best ways to deal with ghost inventory through real-world examples.
When merchandise goes missing or gets damaged (without your knowledge), it can still appear as “in stock” within your system. These data discrepancies are referred to as phantom inventory — since the actual product has no on-shelf availability.
Phantom inventory makes it difficult to know your stock levels and to make purchasing decisions for your retail store. And it leads to data errors, lost revenue, and unsatisfied customers. But luckily, with a bit of detective work, you can find what’s causing phantom inventory and exorcize the problem.
What is phantom inventory?
Phantom inventory (also known as ghost inventory) refers to missing units when a store’s physical stock count does not match its digital records.
For example, a product might be damaged, stolen, or misreported but still shows as in stock in your records. However, this inventory is not actually available for sale, despite what the record shows. As such, phantom inventory misleads retailers about their stock levels, impacting product availability and long-term revenue.
There are many reasons for phantom inventory. But for ecommerce retailers, the most common cause is inventory not being tracked properly. Take damaged goods, for example. These products are unsellable, but until they’re found and properly reported, they are marked as in stock in your inventory management system.
What causes phantom inventory?
Ecommerce retailers can proactively prevent phantom inventory (before it causes long-term issues) by identifying the root problem. Here are the most common causes of lost stock.
Inventory replenishment errors
Manual processes for inventory repl e nishment run the risk of human error. For instance, if someone miscounts how many items were received and misrecords the shipment, that can cause phantom inventory.
These mistakes cause a chain reaction that throws off your stock levels until the data error is discovered. In the meantime, you run the inventory risk of phantom stockouts happening, which can lead to overselling a SKU and make meeting customer demand more difficult.
For instance, you might enter 78 units for a specific SKU when the actual count is 75. These 3 extra units (that don’t exist) become ghost inventory, leading to incorrect reorder points, potential stockouts, and unhappy customers.
Shrinkage caused by shoplifting, theft & fraud
The National Retail Security survey saw retail shrinkage hit an all-time high in 2020, accounting for 1.62% of brands’ bottom lines and costing retailers a whopping $61.7B.
When merchandise is stolen or goes missing, it disappears physically — but it’s still counted in your inventory management system. This inevitably throws off your stock levels and inventory optimization efforts (AKA, your endeavors to keep only the stock you need on hand).
While it’s less common, inventory shrinkage can also be caused by vendor fraud. Meaning, a supplier might send less than initially promised on your approved purchase orders (but still show the agreed-upon amount on the invoice). This can be intentional or unintentional (like if the PO’s order accuracy was off). Luckily, 3-way matching should quickly catch this phantom inventory either way.
No matter how well your supplier packs and ships products, some items will still arrive damaged. Typically, these items should be discovered when the shipment arrives at your warehouse. However, if these items go undetected, you end up with unsellable items on your shelves. And you unknowingly have less inventory to meet demand.
Alternatively, items can also be damaged when they’re not stored properly. For instance, LuLaRich had a stinky legging scandal when some of their merchandise was held outside, exposed to the elements, and left to grow mold.
But its damaged inventory isn’t always in your brand’s control. Some products get shipped to customers up-to-par and returned in a below-standards condition. As a result, these items typically live in “inventory purgatory,” where they take up warehouse space but can’t be resold.
Inaccurate inventory audits
Inventory audits should keep inventory data reconciled and correct. But like anything with a human operator, there’s still room for error. These miscounts or misreports (like skipping over a damaged item) muddle inventory data and throw off your next replenishment.
That’s why you generally want a minimum of 2 people running each inventory audit. One to count and the other to check that count. While seemingly small, this extra step can massively improve the accuracy of your inventory records and prevent ghost inventory.
Inaccurate inventory sales records
When an order gets fulfilled but isn’t scanned properly or marked as sold, it still shows as “in stock” in the system. Frequently, a flawed process for recording sales or a faulty inventory management system is the root cause.
For example, let’s say you sell 2 of the same product in different colors. But you only ring up one SKU twice because they’re the same price and forgo scanning each separately. This will skew stock levels for both colors and create phantom inventory for the color you didn’t scan.
The impact phantom inventory has on your retail operations
When left unchecked, phantom inventory impacts your in-store availability, which wreaks havoc on your sales, revenue, and financial health. Here are the biggest consequences of poorly managed phantom inventory.
Delayed automated reordering
The biggest impact of phantom inventory is when they create discrepancies between your digital records and actual product availability. These mismatches can delay automated reordering and stunt inventory turnover (since your system says there’s more inventory than there is).
For instance, let’s say your reorder point (ROP) is set at 30 units, but 10 of those units are actually phantom inventory. This means your ROP won’t hit at the proper time, and you won’t have enough stock to meet forecasted demand (leading to stockouts and lost revenue).
Stockouts or overstocks
When you believe you have more inventory than what’s available, there’s less merchandise to meet demand. This leads to stockouts , whether they’re caused by delayed reorder points, inaccurate replenishment counts, or inventory breakage.
On the other hand, phantom inventory can also create overstocks from mismanaged returns. Because when returns aren’t properly entered into the inventory management system, you end up with SKUs you got back (but your system thinks they’re still with a customer).
Whether that item is sellable or not, it requires storage space and sucks up holding costs . And enough of these can lead to overstocks because you have more inventory than your records show.
In other words, this phantom inventory causes you to over-forecast what you need (assuming the returned merchandise still meets the brand’s standards and can be resold).
Bad customer experience
Let’s say an excited customer comes to your site to buy a product they’ve been eyeing for days. They add the item to their cart and go through the entire checkout process. But because there’s a mismatch in your records, they receive a refund and apology instead.
In this scenario, your brand not only misses out on the individual sale but also the long-term relationship. Why? Because 33% of customers will switch companies immediately after 1 bad experience.
Lost sales and revenue
Admittedly, a few units of phantom inventory might not seem concerning at first. But these units quickly add up, resulting in really bad data over time.
This unreliable data makes it nearly impossible to make smart inventory purchasing decisions for your brand. And when (note: not “if”) you end up ordering the wrong products at the wrong time, you’ll lose out on sales or eat away at your profit margins .
For instance, say you constantly have stockouts from ghost inventory. When that happens, you lose the opportunity to make a sale at that moment — but you also weaken your customer lifetime value (CTV) long-term. That’s because stockouts deter customers from returning again in the future.
🔥 Tip: Stocking out doesn’t have to mean missing out on one-off revenue. Instead, sell on backorder with Cogsy. Backorders convert at nearly the same rate as selling that same product in stock. Learn more.
Reduced forecasting accuracy
As you already know, if a SKU isn’t properly tracked when it’s sold, it still shows up as “in stock” in your real-time inventory records.
And when your records don’t match your physical inventory counts, it’s impossible to have inventory accuracy . This disrupts your forecasting efforts and makes it difficult to meet demand properly.
For instance, let’s say your inventory management system says 18 units, but your physical stock is actually 10. The upcoming forecast says you need 20 units to meet demand. But because of the bad data, you only order 2 units (instead of 10) and run into stockouts later.
How to deal with phantom inventory
Improving inventory visibility is the best way to detect and deal with ghost inventory. Here’s how brands can comb through their data and recount their stock as accurately as possible.
Conduct physical counts and cycle counts
The most common solution for phantom inventory is to physically count your stock and check it against your records. This way, you can catch when damaged goods, inventory shrinkage, and potential fraud — while ensuring inventory accuracy.
There are 2 approaches for inventory reconciliation:
- Physical counts require brands to count every single item in inventory once or twice a year. It’s a cumbersome job that requires a lot of manual work, but it’s effective for reconciling records.
- Cycle counts are when brands count small samples of inventory at a time, auditing their entire inventory over time. For instance, if a brand performs quarterly cycle counts, it’ll audit a quarter of its merchandise each cycle to ensure it counts all of its stock by the end of the year.
Ideally, brands combine these practices. They conduct perpetual inventory cycle counts throughout the year as spot checks. And they do a full physical count annually or semiannually to fully audit their inventories.
Why? Because generally, the more often you count, the more accurate your inventory records are, and the sooner you can address potential phantom inventory problems.
For example, say you catch 10 units of ghost inventory in your March cycle count. If you only ran an end-of-year physical count, you wouldn’t have discovered this issue until December. At that point, not only is there likely more phantom inventory, but you’ve likely invited bigger problems — like stockouts, lost revenue, and inaccurate forecasts.
Analyze POS data
Your point-of-sale (POS) system is the second-best resource to detect and prevent phantom inventory. Why? Because all you need is a quick scan to see where discrepancies arise.
Most POS systems track when you receive and sell inventory, as well as your returns and exchanges. This also includes how many units you have of each SKU and per storage location.
Ecommerce retailers can compare their sales and inventory data to spot any discrepancies that led to phantom inventory. For instance, say you ship 15 shirts from one warehouse to another, but only 13 show up. Sometime during that transfer, 2 units went missing, and the discrepancy started.
Unlike cycle counts and physical counts, analyzing your POS system allows you to identify when and how your ghost inventory came to be. But similarly, this initiative takes time and can be prone to human error.
Use inventory management and analytics software
Your best bet for spotting ghost stock? Using inventory management and analytics software that does the detective work for you (and notifies you right away of any problems).
Unlike manual data entry or counts, these solutions use artificial intelligence to constantly compare real-time inventory data against sales records and historical trends. Plus, with machine learning, they consider hundreds of other data points to spot potential phantom inventory. The ML models perform this all by working undisturbedly on the quality data they have been trained on.
🤿 Dive deeper: Compare the top 7 real-time inventory software.
How Cogsy helps DTC brands reduce phantom inventory
When brands leverage Cogsy to track their inventory management, they improve data accuracy to proactively prevent phantom inventory — here’s how:
- Cogsy monitors your inventory levels in real-time to ensure data accuracy
- More accurate data fuels better demand forecasts, which optimizes stock levels
- Low-stock alerts raise red flags for out-of-stock products and trigger investigation
Plus, with Cogsy’s multi-location support feature , you can accurately forecast demand and monitor inventory at individual warehousing locations (as well as holistically). This enables brands to track in-motion inventory — whether it’s an incoming shipment or inventory moving from one warehouse to another.
As a result, you always know where your units are located, ensuring better inventory visibility and decreasing phantom inventory. This next-level accuracy supports smarter decision-making and optimized stock levels for your brand.
Want to see how Cogsy can help you prevent phantom inventory?
Phantom inventory faqs.
Phantom stockout is when your inventory records say a product is “in stock,” but there is actually no inventory available for you to sell. This leads brands to unknowingly oversell a product, and when they correct the mistake, missing out on revenue and frustrating customers.
Ecommerce brands can detect phantom inventory by physically counting their inventory, reconciling their POS data, and leveraging inventory management software. Manual counts and checks are effective but tedious, while software spots issues automatically.
The best way to prevent ghost inventory is to better track your inventory and sales data. Manual stock counts are the most effective strategy, but they are also tedious and time-consuming. Luckily, inventory management software can help brands effortlessly monitor their inventory levels and sales data for discrepancies between counts.
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How to Manage Phantom Inventory in the Age of COVID-19
By Prakash Tilwani, IRI
Phantom inventory is one of the biggest challenges that retailers face when managing proper inventory levels and availability on the shelf. It occurs either when the system shows there is inventory on the shelf, but there really is nothing there, or when the system reflects that the store is out of inventory, but it isn’t. Studies estimate that this could be happening for up to 25%-30% of inventory across CPG retailers today.
These kinds of inventory errors can cause real and lasting damage to customer relationships, hurting retailers and, by extension, CPG manufacturers. Research shows that when customers don’t find what they’re looking for on the shelf, 44% of them switch brands (which hurts manufacturers), 21% go to a different store (which hurts retailers) and 35% choose not to buy at all (which hurts both). The resulting losses can be staggering. Between 2017 and 2018, the Consumer Brands Association (formerly known as the Grocery Manufacturers Association) estimates that the industry lost more than $50 billion because of out-of-stock challenges in North America alone.
Keep in mind, these numbers are reflective of a pre-COVID-19 world. In the midst of the current pandemic, with intense stockpiling and unprecedented demand as lockdown measures spread, the problem of phantom inventory has been exacerbated, to say the least. Shifts in shopping behaviors related to the pandemic also make it difficult to get a clear understanding of true availability, which is critical at times like this.
So how can retailers best manage phantom inventory? And how can they reduce its prevalence?
Over the long term, the best way to deal with the problem is to have a data-driven solution, leveraging the right data science and artificial intelligence methodologies, to deal with it for you. Algorithms are trained to look for trends in data across sales rates, inventory and shipments and flag items that seem to have phantom inventory–like behavior. They do this at quite high accuracy levels, allowing issues to be quickly, even automatically, removed from a retailer’s projections.
Unfortunately, the reality today is that most systems are not set up to capture phantom inventory behavior in such a systematic way – legacy and disparate systems that don’t fully talk to each other can exacerbate the problem. However, there are simple methods that can be employed for critical fast-moving items, allowing retailers to more effectively navigate the ongoing coronavirus crisis. With a simple business intelligence tool, data analysts can analyze sales and inventory data daily on any in-demand products to look for patterns. The key thing is to identify divergence between sales trends and inventory numbers.
For example, if a store shows that it has 20 units of hand sanitizer on hand but hasn’t sold any in 48 hours, there’s a reasonably high chance that this is phantom inventory, given everyone is looking for this product. Likewise, if inventory data shows that dried beans are out of stock, but sales of beans are still ongoing, that would suggest a phantom inventory problem. Of course, it can be challenging to catch all, or even most, of the phantom inventory cases given the vast amount of data. But at this stage in a crisis like what we are going through today, this approach could help better manage on-shelf availability in high-demand categories.
Doing so will not only improve sales for retailers and manufacturers but will help ensure that customers can get what they need when they need it. In a time of such upheaval, that kind of peace of mind can go a long way with consumers, resulting in longer-term loyalty. To learn more about supply chain solutions that can help you manage through the current coronavirus crisis, email me at [email protected] or visit IRI’s COVID-19 Solutions page here .
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Demystifying The Phenomenon: What Is Phantom Inventory?
Oct 10, 2022
When you’re running a business, it’s important to keep track of your inventory and assets. After all, if you don’t know what you have and what’s coming in and out, you can’t make sure that your shelves are stocked with the things that your customers want.
But even if you’re keeping careful track of your physical inventory, there’s still a chance that you could fall victim to phantom inventory.
What is phantom inventory, and how can you make sure that it doesn’t creep into your inventory record? Let’s take a look.
What Is Phantom Inventory?
Phantom inventory can be defined as “the discrepancy between a company’s physical stock and its records.”
In other words, phantom inventory is inventory accounting that is reflected in a company’s books as on-hand but isn’t physically present or available for sale at the store location. Simply put, phantom inventory exists on paper, but not in reality.
In addition, phantom inventory can also be the result of damaged or outdated merchandise. If a product is damaged, it can’t be sold, and if it’s outdated, it may no longer be in demand.
Either way, phantom inventory takes up valuable space and resources without providing any benefits. Rather, phantom inventory can have far-reaching consequences for a business.
For example, it can lead to inventory turnover issues, as businesses may order more inventory than they actually need. Additionally, it can throw off the reorder point, resulting in periods of time when there is too much or too little inventory on hand at the store level.
Finally, phantom inventory can make it difficult to track down items when they are needed, as the actual storage location of the inventory may be unknown.
Ultimately, phantom inventory can cause problems for businesses if it is not carefully managed. While it may seem like a small issue, it can have a big impact on a company’s operations.
What Causes Phantom Inventory?
Phantom inventory is a problem that can plague businesses, brands, and retailers of all sizes and can occur for a number of reasons:
– Poor Inventory Management : Poor inventory management is often the root cause of phantom inventory. When businesses don’t have a clear idea of what they have in stock, it’s easy for items to get lost or misplaced.
As a result, businesses may order more inventory than they need, thinking they have less on hand than they actually do. This can lead to excess and unused inventory, tying up valuable resources that could be better spent elsewhere.
In addition, phantom inventory can cause stockouts and disruptions in the supply chain. When phantom units are removed from the inventory system, it can cause a sudden drop in inventory levels, leading to stockouts and disruptions in production.
To avoid phantom inventory, it is essential to have accurate and up-to-date inventory management practices in place.
– Human Error : Phantom inventory can be caused by a number of factors, but human error in the perpetual inventory system is often to blame.
One common cause is simply misplacing items or failing to properly update records. This can happen when items are moved around without being properly logged, or when employees forget to scan items into the system.
Another common cause of phantom inventory is incorrect data entry. This can occur when employees input the wrong data, or when they mistakenly duplicate entries.
In either case, the result is the same: phantom inventory that costs businesses time and money.
By taking steps to improve accuracy and communication, businesses can reduce the chances of phantom inventory occurring.
– Theft : Phantom inventory can also build up on a company’s books as a result of theft and inventory shrinkage.
If items are regularly stolen from a warehouse or store, the company may not realize that they are missing until an inventory count is conducted. At that point, the phantom inventory is revealed, and the company is forced to come up with the missing merchandise.
In some cases, this can be a major loss for the business. Not only does it mean that they are paying for goods that they do not have, but it also means that they are losing out on potential sales.
– Lack of Supply Chain Visibility : Lastly, a lack of supply chain visibility can lead to phantom inventory because it makes it difficult to track where inventory is and whether it’s in sellable condition.
If a company does not have visibility into its supply chain, then it may be difficult to track where products are and how they are moving through the system. This lack of visibility can ultimately lead to errors in forecasting and stocking, which can result in a build-up of phantom inventory, leading to wasted space, lost sales, and frustrated customers.
The best way to avoid this problem is to invest in supply chain visibility tools , like asset management software, that will give you real-time data analysis on your inventory levels. With this information, you’ll be able to avoid phantom inventory and keep your business running smoothly.
Regardless of the cause, phantom inventory can have a significant impact on a company’s bottom line.
The Impact of Phantom Inventory
While phantom inventory may not seem like a big deal, it can actually have a significant impact on a business.
Inventories are typically carried on a company’s balance sheet as an asset. However, if phantom inventory is present, this can artificially inflate the value of assets and give a false impression of profitability.
Additionally, phantom inventory can lead to costly write-downs and disruptions in the supply chain. If inventory levels are inaccurate, it can lead to stockouts and production disruptions, both of which can be costly for businesses.
Lastly, phantom inventory can damage relationships with customers and ultimately, result in lost sales. If customers cannot get the products they need when they need them, they may look elsewhere for a better experience. This can lead to lost sales and a decline in customer loyalty.
The same is true for suppliers. If they cannot rely on a company to accurately forecast demand, they may be hesitant to do business with them in the future. This could lead to higher prices and longer lead times, both of which can be detrimental to a business.
In short, phantom inventory is a drag on business efficiency, reputation, and profitability that should be avoided whenever possible.
How To Prevent Phantom Inventory From Haunting Your Business
Phantom inventory can be a real nightmare, causing disruptions in your supply chain and leading to lost sales and frustrated customers.
So how can you prevent phantom inventory from haunting your business? Preventing phantom inventory can be tricky, but there are a few steps you can take to reduce the chances of it occurring in your business.
1) Regularly Conduct Inventory Audits : These should be done at least once a year, and more often if you have a large or high-value inventory. The goal of an inventory audit is to count the physical units of inventory on hand and compare it to the reported, or “on paper”, quantity.
The audit should also include an inspection of the condition of the inventory to ensure that it is usable. By auditing inventory regularly, discrepancies can be discovered and corrected quickly, before they have a chance to grow into larger problems.
2) Implement a Cycle Count System : This involves counting a portion of your inventory on a regular basis (weekly or monthly). By conducting regular counts, businesses can ensure that their records are accurate and that they are not overstocking or understocking items.
In addition, cycle counting can help to identify errors and discrepancies in the system, which can then be corrected. Overall, implementing a cycle count system is an effective way to improve inventory management and prevent phantom inventory.
3) Invest in an Asset Tracking Solution : An asset tracking solution can help you keep track of your inventory so that you know what you have and where it is at all times. This information can help you make better decisions about what to stock and how to best utilize your available space.
Additionally, an asset tracking solution can alert you when items are close to becoming phantom inventory so that you can take steps to sell or dispose of them before they become a liability, while also cutting back on the time it takes to perform inventory audits and cycle counts.
Implementing an asset tracking solution is a smart way to help prevent phantom inventory and keep your business running smoothly.
By following these steps, you can help prevent phantom inventory and keep your business running smoothly.
Don’t Let Phantom Inventory Creep Into Your Books
No business wants to be haunted by phantom inventory, but it can happen to even the most well-run organization. By taking proactive measures such as regularly conducting inventory audits, implementing a cycle count system, and investing in an asset tracking solution , you can prevent phantom inventory from putting a damper on your business.
At Radiant, we offer a state-of-the-art asset tracking solution that can help you keep tabs on your assets and avoid costly inventory errors. Request a demo of our solution below and see how easy it is to get started.
Are you ready to learn more? Request a demo.
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How to identify and resolve phantom inventory.
Phantom inventory is a silent killer that saps revenue from consumer brands and retailers in the order of billions of dollars per year . Phantom inventory occurs because items that don’t exist in reality still appear in the digital legers of stores and DCs in your retail network, blocking replenishment and masking the problem. It can occur because of theft, unreported shrink and other random loss of inventory.
For example, RetailLink may show that there are two units of your top selling SKU in several Walmart locations, but in reality, the shelves have been empty for months. This means that you’re chronically out-of-stock, losing sales day after day because replenishment isn’t triggered by inventory levels reaching zero.
How to calculate likely instances of phantom inventory using SKU-store level data
Stores that have phantom inventory will register some inventory but will have no sales for a set period of time, which may vary depending on the sales velocity of the product.
For example, you could filter store-SKU combinations that register inventory but have had no sales for the past eight weeks. Those locations are likely suspects for phantom inventory and should be investigated further.
The optimal fix: manual inventory resets
In an ideal world, you could simply flag instances of likely phantom inventory to your retail buyer and they would manually reset inventory levels to zero for those stores, triggering replenishment. However, most replenishment managers and retail buyers are incentivized to run lean on inventory so this is a tough ask.
The best way to get around these objections is to suggest a test group of stores. If you think there are one thousand SKU-store combinations that have phantom inventory, suggest a test group of one hundred to reset. Wait until the stores are replenished, and if sales start flowing again, that’s a clear sign that you were right. Now you can go back to your buyer and ask them to reset inventory for the other nine hundred stores.
The ol’ reliable: calling individual stores
If the price point of your products justifies it and you can find someone to do the work, your team can also pick up the phone and methodically call individual store locations to check if they have product on the shelf. If the store manager can validate that you have phantom inventory, it will be hard for your replenishment manager to say no to replenishing that store.
The expensive: store visits
You can also send your reps to individual stores or contract with retail execution companies like Field Agent to physically validate on-shelf availability (as well as price compliance, end-cap set up and more). If you can prove in-person that you have phantom inventory, your buyer will have no choice but to reset inventory for that location.
Measuring and reporting on the impact
No matter how you decide to resolve phantom inventory, you should always run a pre/post analysis of the sales at the SKU-store combinations you’ve addressed so that you have something to show for your efforts. If you have fixed the problem, you should see sales restarting once those chronically out-of-stock locations have been replenished.
This is important for showing your internal stakeholders that the time and effort invested in resolving phantom inventory is worth it. It’s equally important to share this type of analysis with your buyers so that you can build trust that will make it easier to suggest a manual override in the future. Resolving phantom inventory can be uniquely challenging, especially if you’re lean on analyst headcount or don’t have an analytics solution in place.
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Phantom Inventory Is Haunting Your Supply Chain
Phantom inventory can be as spooky as it sounds if you let it get out of hand.
What Is Phantom Inventory?
Phantom inventory occurs when a Retailer’s Perpetual Inventory System states there is sellable inventory available in a store, but none actually exists. It can also occur when the store’s system displays a higher quantity of product in-stock than is actually available in the store; phantom inventory is the difference between the two. Because phantom inventory never generates sales, Store Managers and Buyers may conclude the product is not selling well and decide against reordering or even carrying the SKU. The reported inventory level is essentially a figment of the imagination, hence the “phantom” moniker.
Phantom inventory can cause major out-of-stock issues, thereby contributing to the “Ghost Economy”, a term used to describe the staggering $1.75 trillion combined impact that out-of-stocks, overstocks, and preventable returns have on retailers worldwide.
What Causes Phantom Inventory?
A number of issues can cause phantom inventory:
- broken products not removed from the Perpetual Inventory (PI),
- mis-picks , mis-receipts, and data entry errors,
- checkout issues (i.e. scanning errors)
Related Reading: Environmental Effects of Supply Chain Waste
How Does it Affect Your Supply Chain?
Let’s walk through a scenario. For example, the store’s system shows that your company’s product is in-stock and ready to be bought. But in reality, it’s not in the store. A customer is looking for your product. They can’t find it; so they enlist a store employee’s help in locating it. The product is nowhere to found. This results in a lost sale, a dissatisfied customer, and operating costs spent on the employee’s time responding to the customer’s request.
The employee may not address the issue, thinking that the product will simply turn up eventually. The employee may make a manual order for additional inventory, but once that newly received inventory sells through, the same phantom inventory situation will occur again, unless the inventory is adjusted. However, it is very unlikely an adjustment will be made until the end of the modular cycle. Thus, the store’s potential sales for this SKU will be impacted for the entire modular cycle. Phantom inventory strikes again!
The effects can be dire. As detailed in a Wall Street Journal article , professors at Stockholm Business School, Air Force Institute of Technology, and MIT’s Center for Transportation & Logistics sought out to measure the effects of phantom inventory by collaborating with a major CPG.
Their research “showed that for a category of laundry detergents sold by a large retailer, lost sales were almost five times greater than previously assumed owing to unobserved stock-outs.”
How Can You Spot and Fix Phantom Inventory Issues?
Identifying and fixing phantom inventory issues begins with product visibility. Product visibility becomes more and more difficult based on the number of SKUs you’re tracking. Let’s say you’re a CPG with 5 SKUs, available in 2,000 Walmart U.S. locations. Or you’re a larger CPG with 40 SKUs in all 4,761 Walmart U.S. locations. Whether you’re examining 10,000 data points or 190,000 data points per week (or even per day), legacy spreadsheet systems aren’t going to cut it when it comes to crunching data in a timely manner.
How can you spot inventory discrepancies when you’re manually running reports on thousands of data points per day? You have poor product visibility because getting granular with sales and inventory data would require a major time commitment that no CPG analyst likely has.
Phantom inventory analysis, at any scale, calls for a more powerful retail intelligence tool that can quickly work through your data points for you to point out trends and irregularities so they can be addressed in a timely manner. Particularly, if the analytics solution is equipped with machine learning capabilities , demand inventory uncertainties can be worked into forecasting plans by copying demand patterns for each individual SKU. This will provide a more accurate picture of future inventory needs, thereby helping to curb phantom inventory issues and save the associated costs.
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Written by the supplypike team, about the supplypike team, supplypike builds software to help retail suppliers fight deductions, meet compliance standards, and dig down to root cause issues in their supply chain..
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ZHENHUB > Blog > Uncategorized > What is Phantom Inventory and How Can You Avoid It?
What is Phantom Inventory and How Can You Avoid It?
Running a business requires managing inventory, especially if you’re in the retail or eCommerce. Making the best choices for your company will be made easier by using effective inventory management strategies. These methods can also aid in preventing phantom inventory.
Most online merchants will plan and manage store layouts, merchandise, and limited-time promotions. However, these can be challenging to track if you’re unaware of the actual amount of inventory on hand.
You have phantom inventory when items are displayed as available by your point of sale (POS) system but aren’t physically present in your store or fulfillment center. This can also sometimes be called a ghost inventory.
Phantom inventory can mislead you about stock levels in your stockroom or warehouse . This inaccurate inventory count will prevent you from finding the necessary products when it’s time to replace shelves. This problem can occur in addition to issues with on-shelf availability.
The more SKUs in your inventory and the larger your store, the more difficult it is to identify and stop phantom stock.
Customers want options available when they want them, which is usually on the shelf in this age of convenience . If it isn’t, they’ll choose not to buy it, replace it with another item, or put off purchasing.
The more affordable and commoditized an item, the more likely consumers will choose a competitor with a comparable product. Consequently, you lose that one transaction, the buyer could switch brands, possibly costing you their future business.
Phantom inventory can occur for a variety of reasons. However, the most frequent reason for eCommerce merchants is improper inventory tracking. Consider faulty products, for instance. These goods technically can’t be sold, but your inventory management system still lists them as in stock. But you have to locate them and adequately report them.
Beyond spotting phantom inventory or non-moving goods at the point of sale, the difficulty for online merchants is their timely management.
How Phantom Inventory Occurs
Finding the source of the issue and comprehending its causes is crucial to preventing phantom inventory.
Phantom inventory is a silent killer that can siphon much of your annual income. These “missing items” can appear in your distribution centers and warehouse records, preventing replenishment and hiding the issue. Theft, unreported shrinkage, and other arbitrary inventory losses are all possible causes.
Phantom Inventory – What Is Phantom Inventory? | Radiant (radiantrfid.com)
Despite the seeming contradiction, overstocking can lead to phantom inventories. A sizable chunk of the stock is unsold when you order more than you need. It can be stuck inside a warehouse where it could spoil, get outdated, damaged, or even stolen by dishonest employees.
Even if your records continue to indicate that you have the same amount of stock left, you will eventually lose some of the inventory.
Poor Inventory Management
Phantom inventory is also frequently caused by improper inventory management. You might not be doing routine inventory audits if your merchandise is not managed.
As a result, you could be missing inventory that has been damaged, stolen, lost, misplaced, or obsolete (due to old technology or outdated fashion trends, for example).
There’s a reasonable probability that your inventory records won’t match the real physical inventory levels if this isn’t done frequently. Your inventory data may become inconsistent, with a sizeable chunk of it becoming phantom inventory.
Inaccurate Data Tracking
Data inventory errors can cause you to see more inventory than you have.
Human error is frequently to blame for these kinds of discrepancies. For instance, your receiving crew might have mistakenly reported more units than they got. Conversely, they may have missed the number of damaged goods that arrived.
Similarly, there can be errors if sales aren’t accurately recorded or the inventory management software isn’t providing real-time information.
Lack of Visibility
There is a higher chance of phantom inventory occurring when you don’t have real-time visibility into your stock. Real-time inventory management is essential to know exactly how much goods you have at any one time.
Real-time inventory control becomes more relevant when other sales channels are involved, such as additional merchants in a B2B commerce scenario. Real-time inventory data is also required when keeping goods in one or more warehouses and using multichannel retailing.
Without this information, you may forget to account for some products that have already been sold or even those that have been lost, broken, or stolen.
Five Tips to Avoid Phantom Inventory
Finding the phantom inventory in your company’s stock is not always simple. The more merchandise you have, the bigger the possibility of phantom inventory. Increasing inventory visibility is a good start when identifying and addressing ghost inventory.
It will be worthwhile to have a holistic approach to identifying and addressing phantom inventory issues. For as long as you operate your store, you must be on the lookout for potential ghost inventory.
1. Physical Audits and Cycle Counts
Physically counting your stock and comparing it to your records is the most popular method for addressing phantom inventory. Doing so guarantees inventory accuracy and detects damaged goods, inventory shrinkage, and probable fraud.
There are two effective methods for reconciling inventory:
- Brands must perform physical counts once or twice a year, counting every item in their inventory. Although it’s an uphill task that involves physical labor, it’s great for physically checking and inspecting all your items in stock.
- Cycle counts are when online merchants audit their whole inventory over time by counting small samples. For example, if an eCommerce business conducts quarterly cycle counts. It will audit a quarter of its products each cycle to ensure that it counts all of its stock by the end of the year.
eCommerce merchants should employ both of these strategies. You can perform yearly spot checks known as perpetual inventory cycle counts. And to thoroughly audit your inventories, consider complete physical counts once or twice a year.
Your inventory records will be more accurate due to your frequent counting. You can resolve any potential phantom inventory issues faster with accurate inventory data.
2. Optimize Your Inventory Management
Implementing inventory management best practices is one of the most essential steps in ensuring that your inventory levels are accurate and updated.
Introduce an inventory tracking system to accurately track your physical inventory levels while accounting for returns and unsold items.
Inventory management software enables you to track precisely where specific SKUs are kept in one or more warehouses. This is essential to reduce the risk of misplaced goods.
3. Inventory Tagging
Inventory tagging is a practical method of preventing phantom inventory. You won’t have to look for certain merchandise because the tags will make it simple to find, saving time.
This technique may also decrease the chance of inventory theft and loss. The location of your inventory will always be known to you. Quick response codes (QR codes) and radio-frequency identification techniques are commonly used to track inventory.
Inventory Management Statistics – Meteor Space
Utilize retail technology solutions to do all the tracking and recording for you. Phantom inventory can be virtually eliminated using automated software. Such tech solutions simplify the audit process by automating it and assisting with inventory labeling.
Automated inventory software uses real-time and unique identifying numbers that the system stores once tags are scanned. When a product is bought or sold, your system will automatically retrieve the information, allowing inventory levels to be updated. Constantly updated inventory levels lead to a more transparent system, helping to avoid phantom inventory.
5. Check Your Point-of-Sale (POS) Data
An excellent tool for identifying and preventing phantom inventory is your POS system. Most POS programs keep track of your inventory purchases, sales, refunds, and exchanges. This also contains the quantity of each SKU and each available storage location.
eCommerce retailers can discover anomalies resulting in phantom inventory by comparing their sales and inventory data. For example, suppose you send 15 laptops from one warehouse to another, but only 13 arrive. The discrepancy began when two units went missing during that transfer.
Unlike cycle and physical counts, analyzing your POS system enables you to determine when and how your phantom inventory originated.
No business wants to be haunted by phantom inventory, but even the best-run company can experience it. Prevent phantom inventory from negatively impacting your operations by taking a proactive stance for tracking inventory. As stated above, periodically doing inventory audits, implementing a cycle count system, and investing in digital logistics solutions are great solutions.
Zhenhub helps you exert complete control over your eCommerce inventory with your all-in-one digital dashboard. Get real-time insights on stock movement and enjoy end-to-end visibility over your fulfillment operations. Sign up for free at our website to get started.
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- AUDITING /FRAUD
Ghost Goods: How to Spot Phantom Inventory
What auditors have to know to uncover phony figures..
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ASSESSING THE RISK OF INVENTORY FRAUD
Statement on Auditing Standards no. 82, Consideration of Fraud in a Financial Statement Audit, lists many factors at play in cases of financial statement manipulation. In evaluating risks of inventory overstatements, the auditor should answer the following questions. The more “yes” answers, the higher the risk for inventory fraud
CASE STUDY: FAR MORE GHOSTS
Since he was a kid, Mickey Monus loved all sports—especially basketball. But with limited talents and height (five foot nine on a good day) he would never play on a professional team. Monus did have one trait, however, shared by top athletes: an unquenchable thirst for winning.
Monus transferred his boundless energy from the court to the board room. He acquired a single drugstore in Youngstown, Ohio, and within 10 years he had bought 299 more stores and formed the national chain Phar-Mor. Unfortunately, it was all built on ghost goods—undetected inventory overstatements—and phony profits that eventually would be the downfall of Monus and his company, and would cost the company’s Big 5 auditors million of dollars. Here is how it happened.
After acquiring the first drugstore, Monus dreamt of building his modest holdings into a large pharmaceutical empire using power buying, that is, offering products at deep discounts. But first he took his one unprofitable, unaudited store and increased the profits with the stroke of a pen by adding phony inventory figures.
Armed only with his gift of gab and a set of inflated financials, Monus bilked money from investors, bought eight stores within a year and began the mini-empire that grew to 300 stores. Monus became a financial icon and his organization gained near-cult status in Youngstown. He decided to fulfill a sports fantasy by starting the World Basketball League (WBL) in which no players would be over six feet tall. He pumped $10 million of Phar-Mor’s money into the league.
However, the public did not like short basketball players and were not buying tickets. So Monus poured more Phar-Mor money into the WBL. One day, a travel agent who booked flights for league players received a $75,000 check for WBL expenses, but it was disbursed on a Phar-Mor bank account. The employee thought it odd that Phar-Mor would be paying the team’s expenses. Since she was an acquaintance of one of Phar-Mor’s major investors, she showed him the check. Alarmed, the investor began conducting his own investigation into Monus’s illicit activities, and helped expose an intricate financial fraud that caused losses of at least half a billion dollars.
THE GAME IS OVER
Generating phony profits over an entire decade was no easy feat. Phar-Mor’s CFO said the company was losing serious money because it was selling goods for less than it had paid for them. But Monus argued that through Phar-Mor’s power buying it would get so large that it could sell its way out of trouble. Eventually, the CFO caved in—under extreme pressure from Monus—and for the next several years, he and some of his staff kept two sets of books—the ones they showed the auditors and the ones that reflected the awful truth.
They dumped the losses into the “bucket account” and then reallocated the sums to one of the company’s hundreds of stores in the form of increases in inventory costs. They issued fake invoices for merchandise purchases, made phony journal entries to increase inventory and decrease cost of sales, recognized inventory purchases but failed to accrue a liability and over-counted and double-counted merchandise. The finance department was able to conceal the inventory shortages because the auditors observed inventory in only four stores out of 300, and they informed Phar-Mor, months in advance, which stores they would visit. Phar-Mor executives fully stocked the four selected stores but allocated the phony inventory increases to the other 296 stores. Regardless of the accounting tricks, Phar-Mor was heading for collapse. During the last audit, cash was so tight suppliers threatened to cut the company off for nonpayment of bills.
The auditors never uncovered the fraud, for which they paid dearly. This failure cost the audit firm over $300 million in civil judgments. The CFO, who did not profit personally, was sentenced to 33 months in prison. Monus went to jail for 5 years.
JOSEPH T. WELLS, CPA, CFE, is founder and chairman of the Association of Certified Fraud Examiners, Austin, Texas. He can be reached at [email protected] .
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Top 5 Reasons for Inventory Discrepancies
Why is phantom inventory is such a headache for retailers? Out-of-stock products, lost sales and frustrated customers are just a few of the consequences of inaccurate inventory data. Allocation and forecasting are also disrupted, making it hard for retailers to ensure they have the right products in the right locations to meet customer demand.
The Invent Analytics Phantom Inventory Mobile App streamlines inventory management, automating time-consuming tasks and providing real-time insights. By eliminating manual processes, store managers can now dedicate more time to other responsibilities, enhancing overall operational efficiency and improving profitability.
Learn the top 5 reasons why phantom inventory exists and the benefits of utilizing our app to correct inventory discrepancies.
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Phantom inventory management: Leveraging AI to strengthen the supply chain
Supply Chain Management
Date : 08/01/2022
Learn how Tredence's AI solutions can help you overcome the challenges of phantom inventory and improve your supply chain.
AUTHOR - FOLLOW Vidit Agarwal Senior Director, Tredence Inc.
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Table of contents.
By Vidit Agarwal, Senior Director, CS and Lead Gen
Retailers go to extreme lengths to ensure they minimize stock-outs on both in-store and digital shelves. Over the last few years, their teams have leveraged data science to assess a huge volume of historical transactions and customer interactions and accurately predict future demand many times at an SKU level.
This visibility has helped buyers, warehouse managers and store ops evaluate demand with current inventory levels and plan replenishment in advance. However, there are times when the inventory system shows a product in stock, even though, in reality, the product is not available. As a result of this phantom inventory, planners end up delaying the replenishment which, in effect, derails the entire operation.
One of the most common and notorious reason for phantom inventory is shrinkage, where loss of product happens due to theft or fraud. Today, shrinkage is at an all-time high at 1.6%, with over 15% of retailers experiencing more than 3% shrinkage, according to the National Retail Federation . Errors in recording products received, damaged goods, sales, and more also lead to phantom inventory.
There are multiple implications:
Revenue loss : If a product is not physically in stock, it can’t be sold, directly affecting the retailer’s topline.
Customer loyalty dilution : For an average shopper, product availability is one of the top three reasons they choose a retailer. If they don’t find what they need, they are more likely to switch. In fact, research finds that over 24% of Amazon’s revenue is a result of a physical retailer’s on-shelf availability issues. So, this is not just loss of revenue from the sale of a particular product, but lifetime loss of the customer itself.
Omnichannel disruptions : If in-store stockouts is a customer experience problem, it gets multiplied in an omnichannel setup including e-commerce delivery and curbside pickups. Customer dissatisfaction is significantly higher when an order has been placed and is then only partially fulfilled or, worse, cancelled for lack of stock.
Replenishment inefficiencies : Most retailers have an auto-replenishment mechanism that orders products when the system shows the inventory to be lower than a predetermined threshold. However, if the system doesn’t reflect the out-of-stock situation, no reorders will be placed, extending the timeline of the problem.
Inaccurate future demand prediction : When a product has phantom inventory, it is likely to see no scans or ‘significantly lower than usual’ scans. Retailers might assume this is due to extraneous factors causing sales drop, leading to inaccurate forecast of future demand.
Despite significant direct and indirect revenue leakage, most retailers leave the phantom inventory problem unaddressed due to:
- Lack of data to correlate stock levels on the systems with on-shelf availability.
- Thorough and regular inventory audits can also be time- and labor-intensive.
However, an emerging solution for this Gordian Knot lies in a robust data management solution and a comprehensive supply chain strategy. Here’s how you can leverage that for your retail organization.
#1 Consolidate data siloes and connect the dots
As a retailer, it is important to have to a connected data strategy which enables acquiring and linking of data from suppliers, manufacturers, wholesalers, stores, point-of-sale (POS), etc. Clean, standardized data creates end-to-end visibility and makes predicting phantom inventory easier. For instance, if POS data shows sales anomalies/outliers for specific SKUs between last week and the current week, the analytics engine can automatically flag this situation and conduct a rapid reconciliation across systems.
#2 Set up the right metrics
A FMI/GMA Trading Partner Alliance Report on the out-of-stock problem finds that the very definition of on-shelf availability varies widely from physical audits to zero-on-hand metrics to minimum display values. Standardized metric definitions enable an entire organization to speak one single language, minimizing confusions and maximizing actionability.
Set baselines for on-shelf availability, out-of-stock, zero scans and more. Track zero scan and off-scan events using POS data streams. Consider seasonality and cyclicity while identifying off-scan events. Recognize the safety stock of each SKU at the store level. Based on all these insights, get clear visibility into phantom inventory.
#3 Drive actionability through a rapid alert in mechanism
Going beyond just building a dashboard for insights, set up an analytics engine that sends real-time alerts and recommendations to various personas throughout the supply chain.
- Set up alerts for key metrics such as on-shelf availability, out-of-stock and zero scan
- Customize alerts by changing the conditions based on business requirements
- Identify push opportunity (land grab) alerts
- Prioritize alerts about high-value SKUs at the store-level to optimize every dollar spent
- Prioritize alerts based on each user persona, sending what’s relevant to them
- Pool alerts from SKU-level analysis for focussed action
- Suppress repetitive/redundant alerts based on business rules
#4 Forecast better
With the foundation of such comprehensive data, forecasting becomes much simpler. Leverage advanced ML algorithms to forecast sales from historical data across ??demand, supply, inventory, pricing and logistics. Based on these forecasts, you can strengthen your supply chain to prevent OSA, OOS and phantom inventory.
As the retail landscape across the globe becomes increasingly competitive, especially with greater push from data-savvy online players, traditional retailers can no longer ignore key supply chain issues such as phantom inventory. Even a 1% loss of sales due to phantom inventory can not only translate to millions of dollars in losses, but also have a long-lasting impact on customer retention and loyalty.
A robust on-shelf availability analytics engine can make the supply chain more resilient to disruptions and empower store and warehouse teams with transformative insights in real time, allowing them to create better customer experience every time.
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Everything You Need to Know About Phantom Inventory
“Knowledge is Power” No we are not mentioning the famous dialogue of game of thrones. This is the mantra of Asset Management. When you have details of each and every asset as well as inventory then you can definitely manage them efficiently.
But what happens when you have a big organization & you don't know the exact whereabouts of inventory & asset. What if your organization showing inventories available on paper but when you explore your warehouse it's not? The big problem, right?
This is the classic case, known as Phantom Inventory!
What is Phantom Inventory?
It refers to a missing product from the warehouse but according to the Inventory Management System , it is available. Long story short, Inventory that does not exist is known as Phantom Inventory! As they say, " You can't fix something you don't know about”.
Also Read: How to Avoid Accumulation of Ghost Assets in Your Business?
What causes the Phantom Inventory?
There are several reasons behind it such as -
Burglary - Shrinkage happens when an item is lost because of employee robs product or an inventory item, shoplifting, or another obscure reason. How you can spot it? If you see a sales drop in peak season or high sale season, then this might be the case of burglary.
Data entry mistake - Errors can occur as the product is received and sent to the warehouse but forget to mention in the system or putting the wrong information in the system.
Worker errors- Store partners may make a mistake when entering information in the system, preparing returns, or picking a stock to satisfy an online order.
Customers inventory theft and imperfect inventory count are also a few factors that cause phantom inventory.
What is the impact of Phantom Inventory? How it affects your business?
If you don't find the solution for the Phantom inventory, it can hurt your business in a huge way! Now you may ask how it affects your business? When you order inventory through the inventory system then you can get the inventory for the same. Then you put them for sale, and some put in the warehouse stock.
However, from the warehouse, your inventory stock is not there. But your inventory management system shows that it is available but in reality, it is not . So, as a result, you lost a potential client, business and it also impacts your business reputation.
It can also impact your account books if you are declaring more assets that you actually have so also misleading.
After that, your inventory management software also does not perform re-ordering because it thinks that it is available in stock. So, again your business affects by losing business.
Phantom Inventory also causes low sales performance and wrong assessment of the organization, department store or retail shop.
Also Read: 6 Incidents that could be avoided with Asset & Inventory Management
How to detect the Phantom Inventory?
How can you detect stock conflicts when you're manually running reports on a huge number of information data every day? You have poor item visibility on the grounds!
Because the inventory is huge and data analysis would require a lot of time of Consumer-Packaged Goods (CPG) expert has. Perhaps, it would require a whole dedicated team.
Ghost stock examination, at any scale, requires an all the more dominant retail skilled & intelligent tool that can rapidly work through your information data. Indicating for you call attention to patterns and inconsistencies so they can be treated in a convenient way.
Especially, if the analyze solution is combined with Artificial intelligence. It can detect irregularities & patterns. After analyzing, it can inform you of every particular SKU (Stock Keeping Unit). This will give a clearer picture of future stock requirements.
Moreover, you will be able to tackle phantom inventory-related issues more efficiently. Furthermore, you can save the related expenses.
What is the solution?
It is one of the serious & major problems in the retail sector. But it is not given as much attention as this issue required. Retail companies think there is the only solution (as of now) to this issue. That is putting manpower for counting the inventory on a manual basis.
We know putting your manpower on manual counting of items is time-consuming but it's the base for finding phantom inventory. Then only you will be able to track it.
Other than this, your company can hire mystery shoppers they might be helpful in shelf-level conditions. You can also compare the on-shelf availability to continuous inventory. The information on Inventory quantity is kept updated on a regular basis.
Also Read: 15 Useful Asset Tracking Tips to Help You Track Your Assets
Phantom Inventory is a big issue especially if you are in the retail industry. However, we can only try to reduce and avoid phantom inventory it. Moreover, it is believed that if you are a huge retail company & have several warehouses. Then there are chances that are phantom inventory in your company.
At last, as far as we are concerned, we believe that phantom inventory tracking can be done with the help of statistical data. When you keep track of historical data it's a possibility that you can found phantom inventory exists in your company or not. You can follow the above-suggested solution.
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Phantom Inventory Creates Havoc in Retail Supply Chains
Inventory Management | By Steve Banker • 11/18/2009
In my “ What Causes Shelf Out-of-Stocks? ” posting last week, I reviewed some research conducted by Walmart on the major causes of shelf-level out-of-stocks. One reason, occurring about 20 percent of the time, is phantom inventory. Phantom inventory occurs when the store system shows inventory available but none really exists. It also occurs when the system shows more inventory than what is actually available in the store; this can be caused by theft, broken products, mis-picks or checkout issues, for example.
When a store system shows inventory that doesn’t really exist, a store manager could easily assume the product is not selling well and thus decide not to reorder it. When the store system shows more inventory than what really exists in the store, this can also create havoc. I did not fully understand why this was so until Cedric Guyot of Retail Solutions walked me through some slides and explained it to me.
Stores have min/max replenishment logic just like other nodes in the supply chain. Imagine that for a particular SKU, the min is seven and the max is fifteen, and that the store reorders every time the inventory level falls to seven or lower. When the store reorders the product it makes sure the delivery will bring the number of items in the store up to 15. These min/max targets are based on a service level analysis – e.g., the minimum target level that will lead to a 99 percent in-stock rate for that product. In other words, with this minimum target level, if the store operations folks do a good job of keeping the shelf replenished and the inventory accurate, there is only a one percent chance, based on the demand history of that product, that a customer will not find this item in stock when they want to buy it.
Now assume that there is some phantom inventory, that there are two less units of inventory in the store than what the system shows. As the chart below shows, the target service level for a min of 5 is only 95 percent. So, if this min reorder point had been chosen, customers coming into the store would not have found that product in stock five percent of the time. Further, if you look at the shape of the service level curve, the more units of phantom inventory, the greater the drop-off in service level. If the store inventory system says there are seven units of the product available, but only two really exist, the service level would be only 69 percent. The shape of this curve is pretty typical. The more phantom inventory you have, the easier it is to have truly unacceptable, yet hard to detect, shelf service levels.
Finally, when the level of phantom inventory becomes greater than the reorder point quantity (eight in the above example), the store stops ordering altogether, creating long out-of-stocks that can only be fixed by an inventory adjustment.
I should point out that the service level curves shown above are hypothetical. Store-level SKU service levels would differ for every SKU in every store based on that store’s/SKU’s demand history.
In conclusion, Mr. Guyot tells me that most studies show 40 to 50 percent of the items in a store have some amount of phantom inventory. This is clearly a serious problem, but a problem that current Demand Signal Repositories are helping to solve.
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This article describes, in detail, how the Phantom line type can be used for the lines of a bill of materials (BOM) and a formula.
In figure 1, (a) is the BOM for product H and parts F and G, and (b) is the route sheet for products H and part F.
Figure 1 shows an example of a BOM structure in two levels. Finished product H represents a product for a machine assembly. The machine assembly consists of two parts, an electrical unit (F) that has two materials (A and B) and a group of packaging materials (G) that also has two materials (C and D). Another material (E) is used during the general assembly of the machine.
Figure 1 represents the Engineering BOM for product H. This structure provides a good overview of the parts and components of the overall machine assembly. However, although product designers might prefer to see the BOM represented in this way, this structure might not correctly represent the way that the machine is built on the shop floor.
For example, the Engineering BOM in the figure 1 indicates that electrical unit F is assembled as a separate part on a separate work order. However, on the shop floor, it might be judged more optimal to assemble the electrical unit as part of the overall machine assembly, not as a separate work order.
This Engineering BOM also indicates that part G is a separate part. However, in this structure, part G doesn’t represent a physical part but a collection of packaging materials.
Therefore, although an Engineering BOM provides great value for the design of a product and maintenance of that design, it might not be the most logical way to support the manufacturing execution process of the product. By contrast, a Manufacturing BOM represents the best way to build a product.
Figure 2 shows how the preceding Engineering BOM is transitioned into a Manufacturing BOM. In figure 2, (a) is the BOM for product H, and b is the route sheet for product H.
In this structure, you can see that there is no notion of parts F and G, and the materials that these parts consist of have been elevated to the next BOM level.
Unlike the Engineering BOM, which had two operations sheets, the Manufacturing BOM has only one operations sheet. The packaging operation that was linked to part G has also been elevated and is now part of the operations sheet for product H. The assembly of the electrical unit is the first operation. This order makes good sense, because this unit is used in the next operation, which is the machine assembly. The last operation is the packaging operation, which consumes two packing materials (C and D).
The transition between the Engineering BOM and the Manufacturing BOM is enabled through the Phantom BOM line type. As the term “phantom” indicates, parts F and G have disappeared during the transition between the two BOM types. In this example, the Phantom line type is applied to the BOM lines for parts F and G in the Engineering BOM. When a production or batch order is created, the Engineering BOM is copied to the production or batch order. Then, when the order is estimated, the transition from the Engineering BOM to the Manufacturing BOM occurs, as shown in figure 2. From the operations sheet in figure 2, packaging materials C and D are input for the operation.
Multilevel phantom BOM structures
The Phantom line type can be used in multilevel BOM structures, as shown in figure 3. In figure 3, (a) is the BOM for product G, and (b) is the route sheet for parts E and F and product G.
Figure 4 shows the resulting Manufacturing BOM and route sheet if the BOM lines for parts E and F are configured so that the line type is Phantom. In figure 4, (a) is the BOM for product G, and (b) is the route sheet for product G.
Phantom and route network
Phantom BOMs can also be used for a BOM that has a route network. In a route network, one or more operations run in parallel. Figure 5 shows an example of a route network that is used in a multilevel BOM. In figure 5, (a) is the BOM for product G and part F, and (b) is the route sheet for product G and part F, which has a route network.
In figure 6, (a) is the BOM for product G and part F, and (b) is the route sheet for product G and part F.
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Phantom inventory is a common expression for goods that an inventory accounting system considers to be on-hand at a storage location, but are not actually available. This could be due to the items being moved without recording the change in the inventory accounting system, breakage, theft data entry errors or deliberate fraud. The resulting discrepancy between the online inventory balance and physical availability can delay automated reordering and lead to out-of-stock incidents. If not addressed, phantom inventory can also result in broader accounting issues and restatements.
Examples of phantom inventory in the following topics:
Perpetual vs. periodic counting.
- Perpetual inventory updates the quantities continuously and periodic inventory updates the amount only at specific times, such as year end.
- A company using the perpetual inventory system would have a book inventory that is exactly (within a small margin of error) the same as the physical (real) inventory .
- Physical inventories are conducted at set time intervals; both cost of goods sold and the inventory are adjusted at the time of the physical inventory .
- Perpetual inventory systems can still be vulnerable to errors due to overstatements ( phantom inventory ) or understatements (missing inventory ) that occurs as a result of theft, breakage, scanning errors, or untracked inventory movements.
- While the perpetual inventory method provides a close picture of the true inventory information, it is a good idea for companies using a perpetual inventory system to do a physical inventory periodically.
Impact of Measurement Error
- Inventory systems can be vulnerable to errors due to overstatements ( phantom inventory ) when the actual inventory is lower than the measurement or understatements (missing inventory ) when the actual stocks are higher than the measurement.
- Overstatements and understatements can occur as a result of theft, breakage, scanning errors or untracked inventory movements.
- Inventory controlling helps revenue and expenses be recognized.
- A general rule is that overstatements of ending inventory cause overstatements of income, while understatements of ending inventory cause understatements of income.
- Female clerk doing inventory work using a handheld computer in a Tesco Lotus supermarket in Sakon Nakhon, Thailand
Phantom Limb Sensation
- Phantom limb sensations include pain, itches, twitching, and feelings of gesturing.
- Phantom sensations may also occur after the removal of body parts other than the limbs, such as after the amputation of the breast, the extraction of a tooth ( phantom tooth pain), the removal of an organ (such as the appendix), or the removal of an eye ( phantom eye syndrome).
- Phantom limb pain is usually intermittent.
- Instead, the patients' phantom pains increased.
- Many were left with the sensation of both the original phantom limb, as well as a new phantom stump with a pain of its own.
- Companies must choose a method to track inventory .
- The perpetual inventory system requires accounting records to show the amount of inventory on hand at all times.
- In the periodic inventory system, sales are recorded as they occur but the inventory is not updated.
- Regardless of what inventory accounting system is used, it is good practice to perform a physical inventory at least once a year.
- Inventory itself is not an income statement account.
Dangers Involved in Inventory Management
- Excessive inventory means idle funds which earn no profits; inadequate inventory means lost sales.
- The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory , asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory , available physical space for inventory , quality management, replenishment, returns, and defective goods and demand forecasting.
- However, it is not well advised for the firm to keep low inventory levels, since inadequate inventory means the firm does not have sufficient raw materials for production.
- Inadequate inventory also means not ample goods to sell.
- Inflation encourages the firm to purchase more inventory , exposing them to excessive inventory .
Conducting a Physical Inventory
- Physical inventory is a process where a business physically counts its entire inventory .
- In addition, inventory control system software can speed the physical inventory process .
- A perpetual inventory system tracks the receipt and use of inventory , and calculates the quantity on hand.
- The teams count the inventory items and record the results on an inventory -listing sheet.
- An inventory control system ensures that the company's books reflect the actual inventory on hand.
- Efficiency ratios for inventory measure how effectively a business uses its inventory resources.
- In addition, excess inventory increases the risk of losses due to price declines or inventory obsolescence.
- Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory (to calculate average inventory , add the balances of beginning and ending inventory and divide by 2)
- The inventory turnover ratio is a measure of the number of times inventory is sold or used in a time period, such as a year.
- The inventory conversion ratio is a measure of the number of days in a year it takes to sell inventory or convert it into cash.
- In the context of accounting, inventory or stock is considered an asset.
- Inventory management tracks the shape and percentage of stocked goods.
- Inventory management addresses a number of concerns, including: replenishment lead time; carrying costs of inventory ; asset management; inventory forecasting; inventory valuation; inventory visibility; future inventory price forecasting; physical inventory ; available physical space for inventory ; quality management; replenishment; returns and defective goods; and demand forecasting.
- Reasons for keeping an inventory include:
- Inventory considerations present at each level include:
Benefits of Inventory Management
- The intent of inventory management is to continuously hold optimal inventory levels.
- The scope of inventory management concerns the fine lines between replenishment lead time, carrying costs of inventory , asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory , available physical space for inventory , quality management, replenishment, returns and defective goods, and demand forecasting.
- Inventory management involves systems and processes that identify inventory requirements, set targets, provide replenishment techniques, report actual and projected inventory status, and handle all functions related to the tracking and management of material.
- Inventory management also can help companies improve cash flows.
- Companies with effective inventory management do not have to spend large capital balances for purchasing enormous amounts of inventory at once.
Methods in Retail Inventory
- For some companies, taking a physical inventory is impossible or impractical so the Retail Inventory Method is used to estimate.
- Note that both the gross margin and the retail inventory methods can help you detect inventory shortages.
- The advantage of this method is that companies can estimate ending inventory (at cost) without taking a physical inventory .
- Because RIM only provides an approximation of inventory value, physical inventory must also be performed periodically to ensure the accuracy of inventory estimates due to issues such as shoplifting.
- The steps for finding the ending inventory by the retail inventory method are: