Implementing Process Reviews to Eliminate Phantom Inventory

Out-of-stocks (OOS) is an issue that has been prominent in the retail industry for decades. Although there have been extensive advancements in technology and data availability, OOS is still plaguing the industry. But how can it be managed?

A proactive on-shelf-availability (OSA) model helps identify the root causes of OOS and helps answer vital questions like the lack of availability of a specific item. In order to scale inventory through this model, manufacturers need to change necessary processes to ensure retailers will have their products available on the shelf.

One of the most common root causes of OOS is phantom inventory. Phantom Inventory occurs when the internal system of the retailer shows the availability of inventory of a particular item when in reality it is not. The cause of phantom inventory could be due to an error in the product registration process and, as a result, the system will show that the inventory is available. According to SupplyChainDive, phantom inventory often occurs due to the misplacement of products, unfulfilled marketing campaigns, product theft or misplacement and inaccurate scanning. When this issue occurs in numerous stores, it can have lasting effects on the supply chain.

Manufacturers can help resolve the issue of phantom inventory through the intervention of their sales personnel or brokers during store visits. By having a promoter enter each store to check the display of their items and informing store or department managers of inaccuracies retailers can “true-up” their inventory levels by making corrections to their perpetual inventory system. While these interventions can be effective, they are expensive and are not a systematic approach to resolving the issue.

Inaccurate Scanning
Imagine a customer is buying two different flavors of yogurts- blueberry and strawberry. The customer goes to the checkout aisle and the cashier scans the strawberry container of yogurt twice and proceeds to bag both flavors. In the system, the register will say that it sold two containers of strawberry yogurt, but in reality, it was only one. As a result, the system will understate the level of inventory, for strawberry and will overstate inventory levels (phantom inventory) of the blueberry yogurt.

This miscalculation means that in the system, it will register that one container of blueberry yogurt is available in the system when it’s not. Training is necessary for retailers to ensure each employee is scanning individual items and recording accurate data in the point-of-sale (POS) systems. Changing this internal process as a retailer can significantly help not only manage phantom inventory but can also decrease lost sales.

Product Misplacement
Misplaced inventory often leads to added expenditures. In order to avoid losing inventory and money, it is fundamental to have operative management systems in place. To do this, it is crucial as a retailer to focus efforts on knowing where inventory is at all time, whether it is already in the store or in transit.

When a shipment arrives from the suppliers, it is a best practice to have a designated employee count and organize all materials so that it can be recorded in their perpetual inventory system. For more sophisticated methods of tracking inventory, it is recommended that retailers use handheld devices that have the ability to scan barcodes or RFID tags that register items in a cloud-based supply chain management system. This helps determine whether an item is located in the store or was misplaced by the supplier or shipping company before it reached the store.

To proactively manage phantom inventory, it is essential to first identify and understand the root cause. While inventory management systems and point-of-sales inaccuracy are often the causes, store execution issues account for the majority of phantom inventory. In order to eliminate phantom inventory, it is essential to review store execution in order to change internal processes and manage product misplacement—ultimately improving efficiency and sales.