Shoppers are experiencing availability issues when buying online, a problem that frequently arises from phantom inventory. This discrepancy between stock listed items on retailers’ systems and items actually available in store are harming brand image and impacting annual ecommerce revenue. In fact, phantom inventory is responsible for up to 80% of out-of-stocks, and is clearly a major driver of missed sales that ecommerce owners cannot afford to ignore. But what is this “phantom inventory” haunting retailers?
Phantom inventory, also known as ghost inventory, is a huge problem for ecommerce. It occurs when products are shown as available in the point of sale but are not actually physically present in the warehouse or fulfillment centre. Common causes of phantom inventory are data entry errors, spoilage, or misplacement that lead to stock count inaccuracies that impact the availability of products for customers.
Moreover, these discrepancies hinder sales because, especially in the case of affordable or commoditized items, customers are very quick to abandon their shopping decision and switch to a competitor. Especially in ecommerce, losing a single sale impacts both the transaction and the customer’s repeat business.
2 negative business repercussions of phantom inventory
Inaccurate forecasting
Dealing with forecasting inaccuracies can be a real damage for a business. If inventory data is wrong, you make wrong inventory decisions and predictions, planning inventory replenishments on an error, consequently ordering too much or too little. As a result, you will fail to meet demand or invest too much in inventory that will end up unsold. Inaccurate forecasting is like working with a faulty map. It will get in the way of your desired sales objectives.
Misleading perception of financial success
When your records show more inventory than what is physically available, it can inflate the perceived value of your products and give you wrong revenue forecasts.
This creates a false sense of profitability, resulting in decisions that can negatively impact business profit.
For example, if inventory records show that you have enough popular products in stock, you might feel reassured by certain sales forecasts and inventory levels – but what if these are wrong?
Discovering that your actual inventory levels are much lower than initially expected can result in less-than-ideal sales figures and an inadequate stock supply to meet demand timely.
Common causes of phantom inventory
Inaccurate inventory tracking and lack of visibility
Inaccurate inventory tracking is one of the main causes of phantom inventory for ecommerce and, simply said, it makes customers see more inventory than what online stores actually have available. Very often, unsellable items (like products with defects) are listed as available in store. This happens because of human error or the lack of adequate tracking technology. One of the most common scenarios of phantom inventory messing things up is the following. Sometimes, the website lists the item as available, customers buy it, but then they are stuck waiting forever. Turns out, the warehouse operators are unable to pick and pack the product because it was never available in the first place. This can be extremely frustrating and causes significant damage on various fronts!
Identifying any issue with inventory promptly is essential to keep an accurate stock count and be able to complete every order fulfillment for customers in the time frame that is promised to them. Furthermore, many inaccuracies can arise due to unrecorded sales, or if the inventory management software fails to provide real-time information.
It is therefore extremely important to work with a real-time inventory management system that tracks the quantity of goods available and moving in real-time. This becomes even more critical when working with multiple sales channels, or when managing inventory across various warehouses in a multichannel retail setup.
Overstocking
Phantom inventory can paradoxically be caused by overstocking. When businesses order more stock than needed, a large portion is likely to remain unsold and become obsolete, or get damaged, especially in large warehouse environments. Inventory records may not reflect the actual decrease, leading to discrepancies between physical stock levels and those recorded.
Inadequate inventory management practices
Poor inventory management is also a common cause of phantom inventory. A lack of consistent monitoring can result in inventory records that don’t align with the actual physical stock, leading to a significant portion of the inventory being inexistent.
Preventing phantom inventory
Work with advanced inventory tracking systems
Advanced inventory tracking allows retailers to store accurate inventory data, thus avoiding that a significant portion of it becomes phantom inventory. Without real-time accurate data, the risk of missing items that have been sold, lost, or broken elevates the probability of incurring in phantom inventory issues. Therefore, implementing systems that provide real-time visibility and accurate data across multiple channels, as well as warehouses is one of the most important aspects of effective inventory management.
Conduct physical audits and cycle counts
Physical counts of your stock and comparing results to records is one of the most popular methods to avoid phantom inventory. Regular physical stock counts help to identify damaged goods or shrinkage. Annual physical counts can be conducted once or twice a year. Otherwise, cycle counts that break down the inventory audit into smaller, manageable parts, can be conducted every 4 months, to cover the entire inventory over a year.
Implement inventory tagging
Tagging inventory simplifies the locating process of stock and reduces the chances of misplaced items. QR codes and RFID (radio-frequency identification) are effective for inventory tracking. This approach streamlines the inventory management process and allows retailers to keep more accurate stock level data.
Addressing phantom inventory effectively, however, involves leveraging technology and thorough analytics software. Businesses who ignore this approach are not able to effectively manage their inventory, ensuring accuracy and efficiency in their operations in the long-term, and are likely to lose customers.
Automation is the most immediate and efficient solution to avoid errors in stock management, thereby enhancing accuracy and efficiency needed in competitive online retailing.
Automated systems store unique identifying numbers, updating inventory levels in real time as products are sold, moved or returned. Of course, this system should be always combined with regular physical checks but it is an extremely powerful resource to avoid discrepancies and minimise human error. Managing multiple sales across different channels, as well as stock located in different warehouses, is almost impossible without automation and real-time management systems. Automated systems track inventory purchases, sales, refunds, exchanges, SKU quantities, and storage location, allowing for a more transparent and reliable inventory management process.
eLogy offers comprehensive control over your ecommerce, providing real-time insights on stock movement and complete visibility over all fulfillment operations.
Our management tools help you tackle all inventory management challenges, like phantom inventory. You will always track and control where your inventory is and how much is available across different warehouses. Our powerful features include:
- Real-time sync with sales platforms and warehouses
- Data collection on inventory and sales
- Inventory performance tracking for more efficient decision making
- Identify relevant KPIs
- Prompt re-stocking with automated notifications
- Accurate demand forecast
