Phantom Inventory: Everything You Need to Know in 2023

3.5 Minutes

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.

phantom inventory

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.

what is phantom inventory

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Outdated or malfunctioning inventory management systems can lead to incorrect tracking.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.

a 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.

the phantom inventory

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.

what is the phantom inventory

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.

Step 1. Implement Automated Inventory Management

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.

Step 2. Regular Physical Audits

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.

Step 3. Employee Training

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.

Step 4. Strengthen Security Measures

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.

Step 5. Supplier Collaboration

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.

Step 6. Efficient Return Handling

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.

Step 7. Use of RFID Tags

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.

Step 8. Accurate Demand Forecasting

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.

Step 9. Implement Efficient Data Management

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.

Step 10. Improve Communication Channels

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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