The retail industry is constantly evolving, with advancements in technology shaping the way businesses operate. Most of retail chains have implemented automatic replenishment solutions. However, despite the many improvements, certain challenges persist. One such challenge is phantom inventory. It significantly impacts a retailer's ordering accuracy.
Understanding phantom inventory
Phantom inventory refers to the discrepancy between a retailer's recorded inventory levels and the actual physical inventory available in stores or warehouses. This discrepancy can occur due to various reasons, including inaccurate POS transactions, theft, damaged or misplaced items, or errors in supply chain management. Essentially, phantom inventory creates an illusion that products are available for sale when, in reality, they are not.
The impact on ordering accuracy
Overstocking or understocking: Phantom inventory can mislead retailers into overestimating the availability of products, leading to overstocking. This results in increased carrying costs, such as storage expenses, potential spoilage, and markdowns. On the other hand, a much worse situation is underestimating inventory levels due to phantom inventory which lead to store Out of Stock, resulting in missed sales opportunities and dissatisfied customers.
Inaccurate demand forecasting: Accurate inventory data is crucial for demand forecasting, as it helps retailers anticipate customer demand and make informed ordering decisions. Phantom inventory can distort this data, leading to inaccurate demand forecasts. Retailers may end up ordering excessive quantities of certain products, while others remain underordered. This imbalance can result in lost sales or excess stock, negatively affecting profitability.
Various studies show that about 47% of shelf OOS events are caused by inaccurate demand planning and ordering. Studies also show that actual and accounting inventory records match only 35-45% of the cases. The presence of phantom inventory is a major contributor to the 47% store ordering root cause.
Inefficiencies in Supply Chain: Phantom inventory can disrupt the entire supply chain process. Suppliers may receive inaccurate information regarding product demand, leading to delayed or incorrect shipments. Retailers may face stockouts, affecting customer satisfaction and potentially damaging relationships with suppliers. Additionally, the lack of visibility into accurate inventory levels can hinder supply chain optimization efforts, leading to inefficient operations and increased costs.
Increased operational costs: Dealing with phantom inventory can be a drain on a retailer's resources. The time and effort required to identify and rectify inventory discrepancies can divert personnel from other critical tasks.
Addressing phantom inventory
To mitigate the impact of phantom inventory on ordering accuracy, retailers can adopt several strategies:
Traditional methods: until now, most retailers relied on number crunching and regular physical inventory audits. Analyst crunching thousands of SKUs using simple spreadsheets of BI tools trying to identify problematic items, anomalies of sales and stock turnover at each store. Later these reports are sent down the chain, either to store or department managers, sales, or stock associates. Finally store staff had to scan the shelves hoping to uncover stock presentation flaws. Regular cycle counts, spot checks, and reconciliation processes can help identify and address phantom inventory issues, however it is very complicated, time and human resource demanding, and not effective.
Implement robust On-Shelf Availability management systems: advanced inventory management systems with real-time tracking capabilities can help maintain accurate inventory records. This technology enables businesses to monitor stock levels, track sales, and identify discrepancies promptly. They are perfect add-on systems to existing demand planning and automatic replenishment tools.
SUMATUS on-shelf availability, a Machine Learning powered tool specifically developed for brick & mortar retailers to track stock movement in stores to identify False inventory and other store operational issues and provide timely prioritized alerts to store staff or directly to inventory accounting systems for auto-correction of stock balances.
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Phantom inventory poses significant challenges to retailers, particularly in maintaining ordering accuracy. Its impact can result in overstocking or understocking, inaccurate demand forecasting, supply chain disruptions, and increased operational costs. By implementing advanced OSA management systems, retailers can minimize the adverse effects of phantom inventory, improve ordering accuracy and restore sales.