Counting to 10: How to tackle phantom inventory

What is Phantom Inventory

In the modern retail era where high product availability and strong same-store sales are expected, you would assume that having accurate data is a given.

Yet, when it comes to the inventory record this is very far from the reality. 

An inventory record is the master file, sometimes referred to as perpetual inventory (PI), which contains the assumed quantity of all products in-store.

The accuracy of a retailer’s inventory record is no trivial detail; it is a foundational driver of operational performance that can significantly impact a store’s success. Any inaccuracy in this record is known as phantom inventory – this is when a retailer’s system shows a different quantity of stock than what is actually in-store.  

The challenge is that phantom inventory feels like an inevitability in modern-day retail. From the moment stock enters the back door to the moment it is sold, there is a black hole in data visibility. 

Factors like theft, incorrect replenishment, mispicks, miscans, and miscounts all combine to cause inventory drift, creating an inaccuracy of up to 60% in some retailers. Simply put, the store box is too chaotic to mitigate these issues effectively, and it means that at any one time, over half the items in the store are not accounted for correctly.  

 But why is this such an issue? 

The impact of an inaccurate inventory record

When inventory records are inaccurate, a domino effect of negative outcomes begins. Product availability starts to degrade, which can begin to force increasingly disappointed customers to switch to the competition, resulting in lost sales.

Meanwhile, demand forecasting becomes unreliable as systems build predictions based on corrupted data, leading to under or overstocking issues that further drive lost sales or excess wastage. 

Yet, the repercussions of inaccurate PI extend beyond availability, sales, and replenishment.  

Shrinkage, the unknown loss of product due to theft, damage, or inventory drift, is also a big concern for retailers. Inaccurate PI records not only mask the extent of shrinkage but also hinder efforts to identify and mitigate the root causes – leading to financial loss and a further erosion of customer trust and store reputation.

Phantom inventory also affects other core capital and labor metrics. This includes inefficient labor allocation, as store associates spend valuable time manually searching for inventory issues, diverting resources away from more productive tasks. This inefficiency becomes increasingly problematic as wages rise, reducing the ROI of store labor – compounding the already razor-thin margins that retailers operate on. 

Retailers also need to consider the impact to their online operations. Online grocery retail – a crucial aspect of retail success – can be heavily influenced by the accuracy of the inventory file. The most frustrating example of this for customers occurs when placing an online order, only to find out that key items weren’t included as they were out-of-stock. This inaccuracy of the online catalog and lack of adequate substitutions increases the chance of customer churn. 

How to improve inventory accuracy

The issues discussed are all significant on their own, but combined, they create a perennial challenge for retail to solve – how do you consistently maintain an accurate inventory record?

The industry recognizes the significance of this challenge, both from a financial and regulatory perspective, and there is a concerted effort to maintain an accurate inventory record.

Many have adopted manual audits, these being semi-occasional counts of every product in the store. But whether it is a major supermarket with over 100,000 active lines, or a local gas station with just one category – counting a product one by one requires a huge investment in time. Worst of all, the data is only valid at the time the audit is carried out. 

There must be a better way. 

The time is gone for manual audits. Retailers need to start leveraging the wealth of data they have at their disposal. Whilst inventory data can be inaccurate, it’s not the only source of truth to measure the volume of items left on the shelf (or not).

This is why we developed our new product: InventoryInsight.  

This revolutionary software tool tackles phantom inventory in retail, providing you with reliable inventory data that will fuel your in-store operations.

Simply put, InventoryInsight is an inventory correction tool. It uses sophisticated machine learning to enable retailers to reduce and control their phantom inventory in an easy, quick, and efficient way.

We can deploy the solution in two ways, allowing retailers maximum flexibility to solve the problem in a way that suits their existing processes.

First, is an automated correction system whereby it automatically corrects the central inventory file without the need for any manual intervention. This unlocks store associates from the mundanity of counting stock, giving them the chance to focus on the tasks that really matter. 

The second deployment option is detection and alert. Whilst the process remains the same, the alert is sent to the store to manually validate at the shelf-edge, at which point the inventory file will be updated by the store associate. This gives stores the opportunity to review high-impact alerts to help drive on total store performance.

InventoryInsight also goes beyond just identifying PI inaccuracies; it also highlights related issues such as merchandising and compliance challenges. All of this can be delivered at over 90% accuracy in just 2 weeks, giving stores unprecedented inventory management control and governance.   

Unlock the dormant value in your data  

 As a business, we wholeheartedly believe in the power of data analytics within grocery retail to tackle challenges like phantom inventory, and for good reason. McKinsey estimates that implementing advanced analytics would add 2% to grocers’ earnings — a potential windfall for a tough, low-margin business. 

This financial opportunity is especially beneficial when you consider that a lot of the emerging technological innovations require a high capex expenditure to get up and running for poorer data accuracy.

There are of course, challenges to unlocking the dormant value in your data and these vary from having the right processes to ensuring your analytics teams understand retail. 

Whilst these are challenges in their own right, they are surmountable and where the expertise of a third party can benefit. 

If you want to understand how your business can maximize the opportunity from your data to tackle phantom inventory or more generally, schedule a demo with us today.