Phantom inventory is a dreaded concept and a nightmare for all retailers. Ironically, it is a common challenge in the dynamic world of supply chain management. Phantom inventory is the discrepancy between recorded and actual stock levels that becomes a silent disruptor in the seamless flow of goods. From obscured operational inefficiencies to financial losses, the consequences of phantom inventory/ghost inventory are far-reaching.

As they say, “When you know better, you can do better.” However, what if you don’t know that the product consumers want is out of stock? Notorious for causing issues in various retail sectors, phantom inventory occurs when a product labeled as out-of-stock or sold out incorrectly appears available to consumers. Essentially, your online store is promoting products as accessible when, in reality, they are not available for purchase. It can wreak havoc with your brand’s reputation and adversely affect buy-online-pick-in-store (BOPIS) operations. With numerous choices in the digital marketplace, such anomalies will cost you losing valued customers.

Ghost/Phantom Inventory: The Concept

Ghost inventory pertains to assets that are either missing, stolen, lost, obsolete, or damaged yet have not been properly recorded in your asset register. Even though these items are not physically located in your storage space or warehouse, the digital records erroneously indicate that they are “in stock” or on hand. Hence, the inability to sell damaged or non-existent stock leads to lost sales and leaves you with dissatisfied customers. After all, all it needs is one single negative experience for 33% of customers to switch to a different retailer.

You must swiftly attend to and proactively mitigate this issue in your supply chain and inventory management. Failure to do so may result in operational disruptions, diminished warehouse and inventory efficiency, unnecessary tax expenditures, increased insurance premiums, and unforeseen stockouts.

Ghost/Phantom Inventory: The Causes

Multiple factors can lead to phantom inventory; detection can become difficult if your inventory is large. You should have accurate SKU counts, without which your accounting, projections, and fulfillment operations are prone to disruption. The first step in overcoming the challenge of the Ghost Inventory and preventing prolonged losses is pinpointing the root cause. Common origins of phantom inventory include inadequate inventory audits, inaccurate sales recordings, receiving errors, and shrinkage.

Let’s look at the causes in a little more detail here:

• Inadequate Inventory Audits. Inadequate monitoring of your inventory can result in the emergence of phantom inventory. Neglecting routine inventory audits allows minor discrepancies to accumulate into significant variations.

• Subpar Sales Record-keeping. Incorrect sales recordings happen when a product is not accurately tallied during checkout. For instance, selling two variations of the same product to a single customer might lead to a cashier scanning one item twice due to identical prices, messing up the inventory for both variations.

• Human Error. The likelihood of human error is heightened in situations involving manual data recording. For instance, an employee might inaccurately document a higher or lower quantity of units or overlook accounting for damaged goods upon receipt or accepting delivery from the distribution center, which may not include all the expected SKUs.

• Inventory Shrink. Inventory shrinkage refers to when you have fewer items in stock than what is recorded in your inventory. Several factors can contribute to shrinkage, such as employee theft, shoplifting, administrative errors, vendor fraud, product damage, and various unidentified reasons.

Ghost Inventory: The Impact

Undetected and unaddressed ghost inventory poses a significant threat to business operations and the financial health of eCommerce. Retailers experience revenue losses from 1% to 3% due to ghost inventory. If phantom inventory continues over an extended period, it can give rise to more substantial issues.

Let’s take a look into the consequences of overlooking and not addressing ghost inventory:

• Loss of Revenue. If you believe your products are readily available when they are not, you are missing out on immediate revenue from customers who attempt to make a purchase and end up buying from a competing retailer. The longer your phantom inventory remains undetected, the higher the potential loss.

• Data Error. Phantom inventory can be equated to unreliable or incorrect data. It will likely take much time for you to realize the phantom inventory issue, thus affecting your decision-making process. While you are busy planning a change in your marketing strategy or investing in market research, all the time, in reality, your customers were not finding the products in your store.

• Unreliable Forecasting. Accurate forecasting is critical for long-term success. Unfortunately, however, achieving precise forecasts becomes challenging when dealing with inaccurate data. Accurate budgeting, sustaining positive cash flow, staffing adequately, and promoting products to the right audience at the right time become difficult without correct inventory data.

• Unpleasant Customer Experience. Consider being an enthusiastic customer eagerly anticipating purchasing a product from your store. Finally, it’s available, and they journey to your storefront, only to be disappointed. The item they were informed was in stock is, in reality, sold out, prompting them to take their business elsewhere. It results in an immediate loss of sales and might lead to losing a potential lifelong customer.

Ghost/Phantom Inventory: Ways To Reduce It

As you know, ghost/phantom inventory poses a real challenge, and its hidden costs ultimately lead to revenue loss and poor customer experience. Phantom inventory poses a significant and potentially costly threat to the enduring success of your business. Effectively addressing phantom inventory involves implementing preventive measures to detect and resolve issues before they result in substantial financial losses for your business.

Retailers increasingly adopt innovative approaches to mitigate these risks, particularly by incorporating artificial intelligence (AI) and machine learning (ML). AI and ML can significantly decrease the probability of inventory anomalies, including phantom inventory, by offering predictive inventory management, enhanced inventory tracking, optimization opportunities, and fraud detection capabilities.

Apart from implementing these advanced technologies, you can hire an efficient 3PL provider to implement some of the following effective strategies to minimize ghost inventory:

• Reduced overall transportation costs
• Cost-effective service
• Expedited delivery service with a typical transit time window of 2-5 days
• Swifter delivery compared to using USPS exclusively
• Enhanced delivery reliability and tracking quality

Conclusion:

As we have seen, phantom inventory has a significant impact on on-shelf availability and can make or break your brand if you have inaccurate inventory records. Optimizing inventory management is the most effective solution. However, you can also partner with an experienced 3PL with professional expertise to fight such a challenge.

If you are wondering about an ideal 3PL partner, contact XPDEL to take your business to the next level and help you stay ahead of the curve.

About XPDEL:

Not just another 3PL provider, XPDEL is a growth enabler. We are a leading hi-tech Fulfillment and Logistics company supporting direct-to-consumer (D2C) and business-to-business (B2B) supply chains. Our widespread network of Fulfillment centers enables us to handle nationwide delivery in India efficiently.