Phantom Inventory Definition

Phantom inventory refers to goods that are recorded as available on-hand at a storage location within an inventory management software, but that are not actually present. At the store level, phantom inventory is one of the major root cause behind out-of-shelf availability problems.

Impact on inventory availability

Phantom inventory can delay automated reordering, hence leading to stockouts. Indeed, when no ordering constraints are present, the reorder quantity is computed as the difference between the reorder point and the sum of the stock on hand plus the stock on order.

The graph below illustrates the impact of phantom inventory on service level. In particular, a discrepancy in the stock on hand value can result in a much lower service level.

The term inventory freezing has been coined by Kang and Gershwin (2005) to describe a situation where the stock on hand is actually depleted, but where no further reorders are made because of an erroneous stock on hand record. When an automated replenishment system is in place, the only way to get the system out of an inventory freeze is a manual recount of the stock on hand.

Then, outside the strict inventory optimization viewpoint, phantom inventory can also result in broader accounting issues and restatements.

Root causes

While retail technology has been steadily improved over the last decades, many factors still contribute to generate inventory record inaccuracies including:

• replenishment errors,
• employee theft,
• customer shoplifting,
• improper handling of damaged merchandise,
• imperfect inventory audits,
• incorrect recording of sales.

The most widespread technique used to correct phantom inventory problems is physical cycle count. For a more details about the extent of the problem, see the page about inventory accuracy.

Lokad’s gotcha

Phantom inventory is one of the major problem in retail that is too frequently ignored; and when the problem gets addressed it’s only by simply throwing more manpower on counting operations. We believe that statistical data analysis can help to predict the existence of phantom inventory, in order to prioritize counting where it is needed the most.

References

Kang, Y. and S. B. Gershwin (2005). Information Inaccuracy in Inventory Systems: Stock Loss and Stockout. IIE Transactions 37: 843-859.