One of the perpetual challenges facing retail brands is knowing whether inventory is actually on the shelf, or if it just looks like it’s there. If there are discrepancies and items are actually missing when they’re reported as “in stock,” the costs to suppliers and retailers can be devastating.
Is Phantom Inventory Impacting Your Sales?
Phantom inventory is exactly what it sounds like – inventory that appears to be in stock at a retail location but actually is not. Only the ghost of it remains. Just kidding. But that doesn’t make the consequences of missing or out-of-stock inventory any less scary.
Phantom inventory exists two ways:
- Misplaced and is not where it should be: on the shelf, display, or properly accounted for in the backroom
- Or it’s out-of-stock at that retail location entirely
Now, these are normal challenges that any retail supplier faces. But it becomes “phantom inventory” when those missing items appear as “in-stock” within the retailer’s inventory system.
When this happens, brands think everything is fine at the store level. You check your store-level counts, perform your analyses, and create your reports. Everything looks good and you sleep easy that night.
A few report cycles later and you start noticing a few inconsistencies like:
- Your inventory turnover rate is decreasing
- You see inventory is available but there are no corresponding sales
- Unusual spikes and dips after manual inventory allocations
All of these signs should cause the hair on the back of your neck to stand up.
The Cost of Phantom Inventory
Already, your head may be spinning with the implications of phantom inventory. Complications to supply chain? Check. Inaccurate sales forecasting? Absolutely. And it all leads back to one big problem: missed sales, which means lower profits.
But as with any business decision, you need to decide if the cost to fix the problem is less than the cost of the problem itself. So, let’s take a look at the financial consequences facing both suppliers and retailers when phantom inventory occurs.
The Cost to Suppliers
One missed sale is a bummer. But it’s a drop in the bucket. Maybe $7 are lost? If that was all we’re talking about, it wouldn’t be a problem. Unfortunately, one lost sale almost always leads to others.
When items are out of stock, you’re missing out on maximizing the sales as it is affecting replenishment, resulting in inherent ongoing missed sales.
Not only that, but when customers can’t find the item they’re looking for, the problem spirals, fast. Check out these scary consumer stats on out-of-stock (OOS) costs:
- 91% of consumers will not engage with a business after they’ve had one bad experience, like an out-of-stock item.
- 70% of customers will switch to a competitor product if their desired item isn’t on the shelf.
- If it happens a second time, they’ll skip that item or go to another store entirely.
The risk of phantom inventory isn’t a missed sale or two. It’s losing that customer’s brand loyalty forever.
The Cost to Retailers
Retailers need to be worried about phantom inventory, too. While it falls on suppliers to work with retailers to conduct inventory counts, helping them realize the true cost of OOS can highlight the severity of the issue.
According to Harvard Business Review, when consumers are faced with an “out of stock” instance:
- 24 – 43% of consumers will leave the store altogether and take their business elsewhere
- Retailers can lose up to 50% of intended purchases when customers can’t find their desired product
- These losses can add up to 4% of total revenue for retailer, so for a billion-dollar retailer, that could mean more than $40 million in lost sales
In other words, it’s financially worth it for retailers to pay attention to phantom inventory too. With the rapid increase of eCommerce, this is especially pressing because online retailers are never truly out of stock, making the shopping experience more enjoyable for consumers.
But before you get too nervous, there are easy solutions when your inventory has ghosted you.
Reasons for Incorrect Inventory Counts
One of the first things to do is to identify why your inventory keeps slipping away. The leading culprit of phantom inventory is incorrect inventory counts. This can be caused by a handful of reasons:
- Receiving Errors
- Backstocking Errors
- Incorrect Recording of a Sale
- Inaccurate or Infrequent Inventory Audits (this is the big one)
- Misplaced Inventory
If you’re experiencing phantom inventory, it’s likely there are a few of these happening at the store level.
Solving Phantom Inventory
So how do you go about solving a phantom inventory problem? Call the ghostbuster crew? Of course not. Though, that would be awesome.
Instead, you need to tighten up your store-level inventory counting systems. There are a few ways you can do this. It’s up to you to decide which would work best for your brand, given your available time and team members.
- Work Directly with the Retailer – do this regardless of the other steps you take. Check in with them to understand their inventory counts. How often do they perform them? Are they aware of the problems you’re experiencing? Know that different retailers have different policies and your experience may vary even between locations within the same retail brand.
- Perform Your Own Inventory Counts – if you have the time and labor available, you can physically go into stores and perform your own inventory counts. This is a great option if you have one challenging location and want to do your own check.
- Partner with a Retail Merchandiser – you can engage a 3rd party expert service, like RMS, who can go in and perform inventory audits on your behalf and give you the level of insight you need. Be sure to check to see what authorizations your retail merchandiser has, such as backroom access, to make sure you get the full picture.
Even if you’re confident that phantom inventory isn’t happening to your items, be sure to keep an eye on your reports and constantly be on the lookout for any of the red flags we talked about. Once the problem starts, the sooner you solve it, the less damage there will be to your bottom line.
Schedule a free 15-minute consultation to discuss how RMS can help you increase sales and get rid of phantom inventory.