Inventory is one of the retailers’ most significant assets, so it should not be a surprise the number of resources dedicated and technology developed for its optimization, such as software, artificial intelligence, and machine learning tools for demand forecasting and supply chain optimization.

However, despite all these efforts and the growing sophistication of inventory management systems, there is still an Achilles heel that no retailer has been able to overcome: phantom inventory.

Phantom inventory refers to goods that appear in the inventory system but are not available for sale, either because they are lost in the back room, out of display in the store, or simply no longer physically exist.

Phantom inventory is exceptionally costly and significantly affects retailers’ bottom line, as it essentially prevents products from being available to customers. But that’s not all. Phantom inventory also hurts inventory management, demand forecasting, online sales, analysis, and decision-making capabilities, to name a few. This blog will present the consequences of having phantom inventory problems for retailers.

Loss of sale

Loss of sales is the most obvious effect of phantom inventory since you cannot sell a product that is not physically available to the customer.
Phantom inventory generates a decrease in shelf availability, making it impossible for customers to find the products they are looking for. Studies show that when a customer faces a stock-out, they may decide to substitute a similar item, switch brands, choose to shop at another store or abandon the purchase. Regardless of the decision, the retailer will be affected, receiving 2-3% direct sales losses depending on the category.

Inventory management

As we have seen, one of the origins of phantom inventory is the discrepancy between physical and system inventory levels. Let’s consider that according to the GS1 US Survey, the average retailer in the United States has an inventory pressure of only 63%. The chances of having phantom inventory are pretty high.
Beyond accuracy, phantom inventory generates a chain reaction, disrupting processes that originate from recorded data, such as automatic purchases based on reorder points. An imbalance between the two inventories (systemic and physical) can generate stock-outs when the lack of stock in the store is identified too late; or overstocking, in case the system has registered a lower quantity than the actual one.

Non-compliance in online sales:

The adoption of e-commerce is a reality that has accelerated in recent years, putting pressure on retailers facing the highest levels of competition.
Discrepancies between the systems and physical stock create havoc in meeting online demand.
According to Peoplevox’s E-Commerce Fulfilment Report, 34% of retailers have delayed the shipment of a purchase order because they mistakenly sold a product that was not in stock. Phantom inventory leads to accepting purchase orders that cannot be fulfilled because the inventory is not actually available in the store. If you don’t pay attention, this problem will only be identified when an operator notices that there is insufficient produce to fill the order. Thus, phantom inventory tricks retailers who find themselves unable to meet their customers’ expectations.

Poor information, analysis, and conclusions

The existence of phantom inventory is undoubtedly a problem of data, a discrepancy between physical stock and that recorded in the system. And as the saying goes: garbage in, garbage out. This means that when a retailer has a phantom inventory problem – and we have already established that it is very likely to have one – the analysis and conclusions drawn from this data will be compromised.
Phantom inventory can lead to misreporting sales under projections, leading the retailer to think that a promotion is not delivering the expected result, or a product was not as successful as thought. The sales team could be analyzing and concluding without knowing that the product was not in stock or that the promotion was never implemented because there was not enough merchandise, even leading to take actions in terms of product mix or promotional strategy.

On the other hand, incorrect inventory recording will affect the supply chain. Phantom inventory will distort sales, and consequent demand projections, since the system will show available stock that has not been sold when in fact, it is not displayed correctly or available for sale. Thus, the inaccuracy will be perpetuated in the future, affecting the following projections, sales plans, store performance measurements, and the replenishment system without even knowing it.

At Frogmi®, we know that phantom inventory is highly costly for retailers. Solving the complicated dilemma of keeping stock under control while delivering the best assortment and service level to customers is no easy task.
In our experience, an efficient solution to address phantom inventory is to support the operation with advanced analytics, artificial intelligence, and machine learning to identify deviations in product sales. Studying demand patterns at a granular level will make it possible to investigate the possibility of facing a case of phantom inventory. The information may be used to trigger alarms -or even better, targeted tasks- to perform a product’s field auditory and analysis.

Implementing these technologies together with a task manager at SKU level will improve inventory assertiveness, reduce stock-outs, ensure shelf availability, and consequently increase sales. Thus, retailers can begin to make decisions based on reliable information and improve their results by paying attention to the data and the in-store operation.