Imagine this: the warehouse is all stocked up, the stock levels for each item are perfectly in line with what's needed, and everything is under control. It sounds like a dream, and unfortunately, it is one.
In reality, most retailers face inconsistencies, from small to those that throw processes into chaos. According to Retail Insight, 78% of shoppers experienced an out-of-stock situation. However, consider a scenario where your accounting system shows the product as in stock, but customers report it missing. Or a popular item suddenly stops selling, even though it's marked as consistently available.
The problem has a name: phantom inventory, and it's on the rise. Let's review the ways you can keep everything under control and avoid most of the problems.
Key Takeaways
Fixing phantom inventory protects stock accuracy and sales.
Do regular cycle counts.
Integrate POS and inventory systems.
Investigate discrepancies quickly.
Use tech to track shrinkage.
Train staff on scanning best practices.
Phantom Inventory: Meaning in Supply Chain
Retailers often face phantom inventory when inventory records do not match the actual quantity of goods at the point of sale or in the warehouse. The more SKUs in the assortment, the more global the problem can be, therefore making it harder to detect and prevent.
Phantom inventory is basically a discrepancy between physical stock and inventory records. In simple terms, phantom inventory happens when inventory systems show the product availability in the store, but it is not actually available.
This leads to one of two problems for inventory management:
- Based on records only, you will order new products too early – and this will lead to overstocking and spoilage.
- Relying on inaccurate inventory records, you may place orders too late, which risks losing sales due to actual out-of-stocks.
To prevent phantom inventory is to also prevent creating poor experience for customers. The typical modern customer is used to seeing the product they want in the usual place and in the right quantity. If it's not there, they might go for a substitute but also even start shopping elsewhere, leaving you puzzled as to why the sales have dropped even though the product is in stock.
Phantom Inventory Causes
There are several common factors that can create a difference between the data in the inventory system and the actual availability of goods. Let's take a closer look.
Excess inventory
Paradoxically, incorrect inventory levels can generate phantom inventory. If you have more inventory than you need, it is obvious that a significant amount will remain unsold. This can cause several additional problems: spoilage due to expiration, obsolescence, and damage. Excess stocks are often stolen by staff guided by the dictum: "If there is a lot of it, and I steal a little, no one will notice." As time passes, the stock continues to gradually disappear, but your system remains convinced that you still have goods in the warehouse.
Poor inventory management
Next, we should consider the problems with inventory levels that lead to phantom inventory. This time, we're talking about inadequate inventory audits. Fewer audits mean more problems with lost, outdated, damaged, and stolen goods because the likelihood that the amount of inventory recorded in the system does not correspond to the actual inventory increases.
On the other hand, each audit (especially in stores with tens of thousands of SKUs) is a huge additional strain on staff resources. What is the right audit frequency to avoid phantom inventory? Continuous monitoring and risk management provided by modern systems is the right alternative to losing sales due to inaccurate inventory counts.
Inaccurate data
The problem of phantom inventory often arises due to inaccuracies in the inventory systems. These, in turn, are usually caused by data entry errors. For example, when the receiving team accidentally scans fewer items than are actually delivered or fails to account for damaged goods.
The movement of goods is not tracked in real time
Phantom inventory occurs when inventory management software is not synchronized with POS terminals, ERP, and CRM and does not record sales, nor is it able to provide real-time statistics. Without this, your team will not have an understanding of how many products are actually in stock and what the discrepancy between the declared quantity and the actual quantity is. This is especially important if you use multiple sales channels at the same time but share a single warehouse. Synchronizing data here and now is to do or die, or else, you will drown in chaos.
Phantom inventory examples and effects
Any problems with inventory data are a serious challenge and risk for business. The cases below are the most obvious consequences of phantom inventory (especially if it takes a long time to address the problem).
Loss of income
Missing goods will not increase your sales or generate revenue. While you are monitoring your inventory levels and are sure that everything is in order, all customers see are empty shelves in front of them.
Failure to replenish stocks on time
If you only look at inventory records but don't carry out any checks, the problem can last for several weeks until you discover that the product is actually out of stock and needs to be ordered.
And sometimes it takes even longer to identify the problem. For example, if you rely on your modern inventory system to independently monitor inventory levels and automatically order a new batch when the stock hits a certain level. By trusting the established process, you may not notice the depletion of stocks. Why does the system make mistakes? The answer is simple: bad data.
Problems with inventory data
The phantom inventory problem makes accounting and planning processes more complicated. You have to spend more and more resources on additional checks, root cause analysis, inventory counts, and error management.
Poor customer experience
Let's model the situation: you have organized a promotion. Inventory records show that you have enough promotional goods in stock. However, in fact, after three days, the goods run out and your shelves are empty. Now, put yourself in the shoes of a customer. An advert promises a discount on a coveted product, they giddily go to the shelf and don't find the desired product. The disappointment can be so strong that the customer will switch to competitors. Or they may simply lose confidence in your brand, which is also a serious risk (especially if the phenomenon is widespread or permanent).
Phantom Inventory: How to Identify?
When does the prevention of phantom inventory start? First comes the realization that the problem exists. In general, there are several red flags that indicate that there are discrepancies between the data in the system and the actual availability of goods:
- Your staff is increasingly noticing that customers are complaining that they can't find the item they want that should be in stock. This could be a sign of phantom inventory.
- You often notice that the product is available according to the system, but in fact, it is not on the shelves and in the warehouse (or the quantity doesn't match).
- The sales of the product fall significantly below the projected level of demand. At the same time, it is listed as in stock in the accounting records.
- A routine check shows a difference between the inventory data and the actual figures.
- The automated inventory system does not send a new replenishment request for an unusually long time because the data shows that there is enough stock.
- The accounting system shows surplus goods that are not moving.
- The inventory turnover has become uneven, and there are no obvious reasons to explain the problem.
Any of these factors potentially indicate phantom inventory and point to the need to start additional checking and take action. Even if everything is in order, it never hurts to be proactive. We'll talk about this in the next section.
Phantom Inventory Prevention Practices
A well-organized systematic approach helps to reduce phantom inventory. These are some of the possible steps you can take to establish order in which you manage inventory.
Make inventory checks a regular thing
If you check your inventory on a regular basis, improve data quality, increase the accuracy of demand forecasts, and bring order to your stock. Plus, you can find phantom inventory before it becomes a systemic problem that threatens your store's reputation and business performance. Is it better to find the problem in a few weeks or six months? The answer is obvious.
How to conduct inventory audits if you have thousands of SKUs? Full audits are too tedious a process. Cyclic inventory helps – you need to break the process into stages (cycles) and create a calendar for each of them. For example, this week you check food products, household chemicals next week, and so on.
Analyze system data
Your POS system provides you with a complete picture of phantom inventory cases: which products it concerns, on what day or week it happened, where the problematic goods were supposed to be stored, etc. Information is the most effective tool one can use to track inventory and proactively resolve phantom inventory issues.
The system tracks the inventory levels that have been received at the warehouse, sold, returned, and exchanged. It also indicates how many units of each product are available and where they should be: in the warehouse, on the sales floor, or elsewhere. Analyzing this data will help you find discrepancies. For example, go back to a specific day and:
- check what was delivered
- review the surveillance footage to see if there were any thefts during that period
- analyze documents if the goods were moved between warehouses or stores of the chain
Phantom Inventory: Can It Be Reduced?
As you can see, most of the tips focus on organizing regular manual checks. This process can be optimized, but it still requires time and staff to do this routine work. And most importantly, it does not guarantee 100% protection against phantom inventory.
However, there is another way. Let's talk about predictive inventory management. This is a technology based on machine learning algorithms. It is used to predict inventory movements and find inaccuracies in inventory levels. It works perfectly with automatic replenishment systems: the technology creates an inventory model, assesses the factors of influence, and raises the alarm in a timely manner if there are signs of phantom inventory. These include unrecorded damaged goods, scanning errors, theft, misplaced inventory, spoilage, and much more.
How predictive inventory management works: 4 insights
Insight #1
The machine learning-based system analyzes inventory data and historical fluctuations. This helps it to predict possible differences in inventory levels and notify you immediately. The factors taken into account include product category, product type, location, etc.
Insight #2
The model is also capable of comparing recent sales data with likely figures. If a store sells one blender per day and suddenly there are no sales for several days, the system warns of a possible problem in the inventory. This helps to identify deviations before the problem becomes critical and prevents phantom inventory.
Insight #3
Obviously, the system cannot protect against 100% of risks. No algorithm can take into account, for example, situations when a store employee drops a product and damages it while moving it. However, machine learning can take into account trends: for example, if a store employs mostly unskilled temporary workers, the rate of product damage will be higher.
Insight #4
Predictive inventory management is a model that can not only predict the optimal level of stocks but also give advice on when to take inventory. Literally, the system can calculate the optimal number of checks required: enough to avoid unnecessary resource expenditure but also enough to maintain control.
Phantom Inventory in Retail Is Easy to Tackle with the Right Tools
Realistically speaking, store managers can't possibly check every SKU on every shelf for inaccuracies daily, leading most stores to rely on infrequent physical inventory counts (typically once or twice a year), which are too rare to catch phantom inventory quickly.
The LEAFIO AI Retail Platform is a comprehensive solution for inventory management, from the supply chain to the actual operations on the sales floor. The integrated principle of predictive inventory management based on artificial intelligence and machine learning helps to reduce phantom inventory.
Phantom Inventory Report
Phantom Inventory Report helps retailers identify items with potential phantom inventory by tracking SKUs that show no sales activity or balance changes over a specified period. Here's how it works:
- Regular Updates and Categorization: The report is refreshed weekly and organizes items into five categories based on the number of days without sales activity. For each SKU, the Average Daily Usage (ADU) is displayed as of the last recorded sale date.
- Tracking Supplier Receipts: The last receipt date for each item is noted as the most recent date within the last year when the item received stock from a supplier (where receipt > 0). This provides a clear reference for when the item was last replenished.
- Visual Representation: The report includes both a linear and a circular chart for easy analysis. The linear chart shows product categories according to the number of days without sales, while the circular chart displays the percentage of unsold items, organized by the responsible managers within the company.
- Quick Product Access: The report offers quick access to product details for each SKU directly from the report, enabling managers to take swift action on potential phantom inventory issues.
LEAFIO AI identifies phantom inventory at the SKU-store level without needing complex software integrations or costly scanning hardware. Our AI tools integrate smoothly with existing IT infrastructure, analyzing sales and inventory data to detect discrepancies.
Baltic Petroleum effectively utilizes the Phantom Inventory report to promptly identify items with no movement, enabling quick issue resolution. Combined with other system-driven process improvements, this has resulted in an 8% increase in product availability, customer satisfaction, and overall operational efficiency.
How does LEAFIO AI help to track stocks accurately?
The LEAFIO AI Super App enables rapid analysis of product availability in stores and helps identify causes of lost sales and overstocks through a built-in product barcode scanner. Timely, accurate checks prevent phantom inventory, ensure accurate inventory records, enhance the precision of automatic orders, and support optimal stock levels. The app also enables central office managers to assign tasks to store managers on operational issues and receive prompt feedback. Additionally, the Super App provides quick insights into trends for key performance indicators and timely alerts on potential issues.
Conclusions
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Kristi Miller
Retail optimization expert
