Guide to spot and solve phantom inventory

In this helpful guide, we will go over the definition of phantom inventory (also known as ghost inventory), the best ways for suppliers to identify phantom inventory, and the methods available to make sure that products stay stocked and on shelves. 

Staying on top of phantom inventory issues helps consumer packaged goods brands reduce out of stocks, maintain smooth relationships with retailers and maximize sales to increase revenue.

What is phantom inventory?

The term “phantom inventory” refers to inventory at a retail store or distribution center that would seem to be missing, due to a discrepancy between inventory shown in a system and actual inventory on-hand. With phantom inventory, the system will indicate that there are greater quantities of a product available than are actually in-stock. 

Dealing with phantom inventory means that a supplier may have out of stocks that need to be addressed, but could require extra steps to identify.

All CPG brands are susceptible to experiencing phantom inventory, but brands with many varying SKUs, brands with products in high theft categories, and brands with products that are prone to damage may have an increased risk of phantom inventory. 

In most cases, it will be the supplier’s responsibility to address phantom inventory issues, and not the retailer so it is important for brands to have solutions and processes in place. 

Common causes

Phantom inventory — also known as ghost inventory — occurs for many reasons; ranging from technical to human error. Common causes of phantom inventory include:

• Receiving errors: Issues with phantom inventory can begin with improper scanning at the time stock is received by the retailer. The retail team may incorrectly scan the amount of product that comes in. Or it can result from human error on the supplier side, with the shipment being labeled incorrectly, resulting in stock levels being recorded incorrectly.

• Improper sales recording: If an item is not accounted for correctly at the register, or point-of-sale (POS), then it will not be properly deducted from the inventory in the system. 

For example, this often occurs when a cashier enters the incorrect quantity of an item, or for instance, scans one can of beverage multiple times, to account for different flavors — therefore recording sales for the wrong UPC. 

• Inventory Management Errors: Inventory management errors can occur when there is mis-recorded or misplaced stock, or while there are errors moving and recording stock from the distribution center, to a back room and onto a retail floor. 

• Shrinkage: In retail, shrinkage is a blanket term for unrecorded loss of inventory, which include shoplifting, employee theft, damage, and expiration. Some categories incur these losses more than others, and can be more susceptible to phantom inventory issues.

Combined, these causes can amount to an average 10%-40% variance in inventory accuracy by retailer! How then, can a supplier identify their own discrepancies and maintain stock levels?

All CPG brands are susceptible to experiencing phantom inventory, but brands with many varying SKUs, brands with products in high theft categories, and brands with products that are prone to damage may have an increased risk of phantom inventory. 

How to identify, or calculate phantom inventory

In order to identify and solve phantom inventory, it will be necessary to cross-reference different sets of data, considering that the inventory data itself is off. 

For starters, a supplier can pull a velocity report, showing how many units per week they are selling at a given retail location. If velocity slows down to a halt, even though there is a record of units on-hand, you may be able to identify these remaining quantities as phantom inventory. From this, you can seek to replenish the stock.

CPG brands can access both inventory and sales velocity reports — down to individual retail locations — using the Crisp data platform. 

Still, when it comes to calculating phantom inventory across hundreds, or thousands of store locations, the Crisp voids dashboard provides the best data to be proactive with retail partners. The Crisp voids dashboard uses proprietary machine learning technology to reference multiple data points, across current and historical data to predict and identify out of stocks. 

The impact of Phantom Inventory, and why it’s important

It’s important to address issues pertaining to phantom inventory as soon as possible, as there are consequences that can add up in the time it takes to solve them. The main and obvious consequence is that a supplier will lose sales on their product that is missing. This can mean falling behind on projections, both internally and with the retailer.

Different from dealing with the usual out of stocks, it can take extra time to coordinate the shipment of product to replenish phantom inventory. This extended window of time can affect relationships with retailers, and allow a competing brand to gain greater shelf space and market share in the meantime. 

Due to the compounding, negative impact of phantom inventory issues, and especially in the competitive retail landscape, it’s important for packaged goods brands to identify and solve them as soon as possible. Preferably using data technology that can expedite the process. 

How to prevent phantom inventory, and solutions

To best stay on top of phantom inventory, suppliers will want to designate time each week to identify and address voids by accessing and comparing the latest point-of-sale (POS) data. Furthermore, it will be helpful to utilize this data in such a way, that members of the team can receive alerts when sales drop and a location may be dealing with out of stocks.

These internal systems can be built using Crisp, and can provide a long-term, automated solution for staying on top of ghost inventory issues.

Another solution to maintain inventory levels in-stores, is to work with a merchandising team. Merchandisers own the presentation and upkeep of products on-shelves, and can be instrumental in making sure your items are in the right place and accessible, and that quantities align with those in the system. It can be exciting for brands to grow into hundreds, or thousands of retail locations, and merchandisers are able to provide peace of mind that your valuable inventory is being tended to, even after it leaves the warehouse.

Finally, consumer packaged goods brands may want to assess the value of shrinkage solutions, including theft deterrent devices, and alternate packaging to prevent damage. Reducing shrinkage is sure to help reduce phantom inventory issues across retail locations.

Due to the compounding, negative impact of phantom inventory issues, and especially in the competitive retail landscape, it’s important for packaged goods brands to identify and solve them as soon as possible. Preferably using data technology that can expedite the process.

Conclusion

In an ideal world, every unit that is manufactured would be perfectly tracked throughout the supply chain, through to its successful sale with a retailer. For the reasons listed above, we know that there are factors that can get in the way, and present challenges that will need to be addressed. Phantom inventory is a complex issue that CPG brands will need to tackle across many, varying retailers as they scale. Luckily, there are technology solutions available to stay on top of these discrepancies, maintain inventory levels and relationships with buyers, and maximize revenue at every opportunity.

If you are a Crisp customer, and dealing with phantom inventory, be sure to reach out to your Customer Success representative for the best solutions.

Or, for a look at how Crisp can help your organization identify and address phantom inventory issues, feel free to book a demo here.