Phantom inventory, often lurking unnoticed in your supply chain, can be a silent profit killer. In our latest blog post, we delve into this elusive problem, shedding light on its consequences and offering valuable insights into how you can effectively combat it.
Phantom Inventory, or PI, is one of the biggest causes of sales loss in the consumer goods market. PI occurs when your inventory system incorrectly shows that an item is available when, in reality, it is not. Since the item is already showing in stock, the inventory system you use to replenish your stock automatically does not order fresh products. Eventually, there are no stocks, empty shelves, and no new products have been ordered. You lose sales at your cash register. Even after you fix the issue, your sales forecast is inaccurate because of this incorrect inventory record. It has been estimated that approximately 3% of the inventory of a retailer can be PI. The number can increase to 10% for popular and quick-selling products. Nowadays, customers are more comfortable shopping from brick-and-mortar shops, so retailers and consumer goods suppliers need to be aware of this issue and preemptively combat it to avoid loss of sales.
Phantom Inventory—Impacts
Phantom inventory has several severe and long-term impacts on the service and sales of the customer goods industry. The following are a few considerable impacts:
- Loss of revenue
- Incorrect data capture
- Bad forecasting
- Unsatisfactory customer experience
Let’s look at these impacts individually.
• Loss of Revenue
When a particular product is available in your inventory but not on the shelves, it means you lose money. You lose a potential sale of that product. Consequently, you might lose sales from customers who could have brought more products. If you have a system that automatically tracks inventory details, it might be some time before this lack of stock is noticed. The more time that this mismatch is not identified, the more loss you will incur.
• Incorrect Data Capture
When you have incorrect inventory data, any decision you make about your products will be based on misinformation. For example, if your best-selling product suddenly stops selling and you are trying to find why. You do market research and, based on the results, try different approaches to make your product a bestseller again. What you don’t consider is the possibility of phantom inventory, as a result of which your customers cannot order this bestselling product.
• Bad Forecasting
As your inventory is capturing inaccurate data, your forecast based on this wrong data is also bad. If you have correct data, you can forecast correctly, hire staff, and replenish your bestsellers. Bad forecasting has a domino effect on how you conduct your business in the near future.
• Unsatisfactory Customer Experience
One of the most significant impacts of phantom inventory is customer experience. PI impacts customer experience negatively, and that does not bode well for the future of your business. A customer looking forward to buying your product suddenly finds that they are unavailable. The shelves in your store that had the item are empty, and when they order it online, they get a refund and an apology mail stating that the product is unavailable and don’t know when they will be available next. Needless to say, the customer is not impressed and will think twice before ordering anything from you again.
Phantom Inventory—Reason
To ensure that you spot the phantom inventory issue in advance, it is important to know the different causes. The following are the major causes of phantom inventory:
- Inventory loss
- Human errors
- Incorrect sales recording
- Missing inventory
- No inventory audit
Let’s look at these causes individually.
• Inventory Loss
Loss of inventory or shrinkage can be caused by various reasons, including employee theft, shoplifting, and fraud. So, even though the product is not on the shelves, it is still available per the automated system. No sales were made, so it was not registered in the system to be adjusted with the product quantity.
• Human Errors
If your receiving inventory is entered manually, there are chances of errors. For example, a staff entering the number of products they received can enter digits incorrectly or might not remember to deduct the broken products. Human errors are also high if the employee operates a complex system of receiving inventory and has to multitask while entering inventory details.
• Incorrect Sales Recording
If an item is not scanned and checked out correctly, its sale is not recorded in the system, and consequently, the automatic inventory system is not updated correctly. This scenario is especially relevant when a customer buys a product from a brick-and-mortar shop. For example, a customer chooses the same product but 2 different colors. The salesperson might scan the same product twice to save time and effort. However, this incorrect scanning messes up the automatic inventory system for both product colors.
• Missing Inventory
If you store your product in a large warehouse, then there are chances that your product might be misplaced. This means the product is available, but you cannot find it. In stores, it can happen if customers take and place the product in the wrong area of the store.
• No Inventory Audit
If you do not perform inventory audits regularly, then these misses in inventory and instances of phantom inventory pile up and eventually become insurmountable.
Phantom Inventory—Spotting it
The earlier you catch the phantom inventory issue, the lesser your repercussions are. To achieve this, ensure that you count your inventory regularly. Count your physical inventory and compare it with your digital data to verify that the data matches. This way, you can identify the products with a higher count digitally than the physical ones. You can double-check them and correct the discrepancy immediately. Check your data at the point of sale. It will give you a better picture of goods sold, returned, lost, or stolen.
Phantom Inventory—Fixing it
To fix the issue of phantom inventory, you can use technological solutions that will track phantom inventory. You can also perform scheduled audits to check the discrepancies. Once you have identified the cause of phantom inventory, ensure you regularize your bookkeeping to lessen these misses. Track all your inventory movements so that your record is accurate and up-to-date. Check your product availability levels regularly to spot any discrepancies. Finally, invest in robust inventory management software that will make it easier for you to manage your inventory levels more efficiently.
Conclusion:
Solving the issue of phantom inventory is a long-term process; the more you solve it, the better you will get at it. While it might not be practical to expect that you will not have any such issues, especially if you have large businesses. However, you can work towards mitigating the risks as much as possible. The trick is to identify the issue as early as possible to have a better chance of reducing the losses.
About XPDEL:
XPDEL helps eCommerce brands accelerate their growth, empowering them with multichannel fulfillment, whether shipping directly to consumers, delivering to businesses, or selling through retail stores. We are founded and operated by veterans with experience from Amazon, FedEx, UPS, JDA, Walmart, Target, and other leading companies in eCommerce and Retail. Guided by these experts, we provide customer experiences that help you grow your business.
