Phantom Inventory may sound like the latest Ghostbuster or Batman flick, but the truth is this is a real thing that is causing hundreds of retailers to lose profits every day over misplaced merchandise.
Phantom Inventory is a common retail industry expression for goods that inventory accounting systems consider to be on hand but are not actually available. These are items that should be selling but they’re not. For example, think a pumpkin spice scented candle in the Fall. These are normally a no-brainer sale, but if for some reason they’re not selling like hot cakes then that usually means there is a problem. Inventory distortion (which includes out-of-stocks and overstocks) is costing retailers more than $1 trillion annually, including more than $252 billion in North America alone, according to IHL Retail’s $1.1 Trillion Inventory Distortion Problem. This Phantom Inventory can create issues with demand forecasts, operating costs, replenishment and most importantly- your customer! If a retailer’s pumpkin spice scented candle isn’t easily found, then those hard-earned customers are going to take their business elsewhere.
What causes Phantom Inventory? I compare Phantom Inventory to doing laundry when you never get as many socks out of the dryer as you put in. Where do they all go? Just like the mysterious washing machine sock debacle, no one is really 100% sure what happens to this oddly disappearing inventory. There are several common explanations such as theft, paperwork errors, incorrect recording of sales or just placement error. Perhaps the product is in the backroom or was maybe moved by accident behind another item? But whatever the case may be, there is a way to help keep this issue controlled.
So how do we here at 4R identify Phantom Inventory?
4R uses Machine Learning to “read” the retail environment and make more accurate predictions. We look over designated periods of time to identify SKUs and Stores with available inventory and no sales. We look at the SKUs that should have sold in that store over the designated period and then consider could that product be Phantom Inventory? We then apply math: what is the probability that SKU SHOULD have been sold? (time and probability are parameters that are used to provide actionable data). Machine Learning is not necessarily used to make decisions on what is or isn’t Phantom Inventory, it is used to gather better information that will feed into a decision engine that makes the best decisions. So once 4R identifies that Phantom Inventory has occurred, we continue to partner with store operations and monitor inventory on a regular basis to increase sales, as well as collaborate with suppliers to assist in reducing the incidences of these “lost sales”.
What do our clients get out of this?
(Besides the obvious answer of increased sales) Our clients can see that a product should have sold and then they can look for that product and if it’s not found, an inventory adjustment can be made. If it is found it can be moved back to its proper space on the store shelf and happily sold. We’re able to provide our customers with markets and stores with the highest percentage of Phantom Inventory, which puts them on the right path to identifying the root causes for the Phantom Inventory and adjusting for that.
Phantom Inventory can be a hazardous problem because it often goes unnoticed unless pointed out by a customer that your Pumpkin Spice candles are missing. So, while this ‘ghost’ can be a pest, it is easily taken care of with the right tools and the right team.