Don’t Get Spooked by Phantom Inventory: Definition, Causes, and Solutions

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In ecommerce, how inventory flow in managed and accounted plays a vital role in warehouse efficiency and your bottom line.

Inaccurate inventory reporting is inevitable, but when you’re continuously seeing more inventory reported than what you physically have, then it can raise concern.

This phenomena is known as “phantom inventory,” and every growing business has seen a case of it. But how can a business get better at preventing an inventory discrepancy?

In this article, we’ll discuss what causes phantom inventory and what to do about it.

What is phantom inventory?

Phantom inventory refers to the inventory that’s available in your records but doesn’t physically exist. It’s a discrepancy in your physical stock levels and your inventory records, usually due to factors such as theft, spoilage, breakage, data entry errors, or misplacement.

For example, if your records show that you still have 10 units of a certain SKU left so a customer places an order for 5 units. But when your picking team goes to pick those items from storage, they notice that there are actually only 3 units left.

In this case, the 7 remaining units are considered phantom inventory.

The negative impact of phantom inventory on ecommerce

Regardless of what caused phantom inventory to exist, one thing is for certain — it can have a serious negative impact on your business.

Here are some of the main ways in which phantom inventory can harm your ecommerce business.

Forecasting inaccuracies

Accurate inventory forecasting provides the data and clarity necessary to make inventory decisions and helps you plan your inventory replenishment accordingly to meet demands.

But when phantom inventory exists, it skews your forecasting numbers, since you don’t have an accurate sense of your inventory needs.

Forecasting inventory is never accurate, but when you’re dealing with inaccurate numbers, it’s hard to make the best decisions in terms of how much inventory to order. And, it can increase your risk of backorders.

Risk of stockouts

As a direct result of the above, you’re likely to experience stockouts, since there’s a discrepancy between the number of physical units left in stock and the number of units in your records.

You’re essentially recording more inventory than you actually have, which means you won’t be aware of stock levels dipping below your usual reorder point. So you won’t be placing replenishment orders on time, which puts you at risk of running out of physical stock.

Businesses that use manual inventory recording or outdated systems are prone to experiencing this type of issue as they lack visibility into their inventory.

For example, ecommerce brand, FlutterHabit, had been relying on spreadsheets to manually count inventory from multiple locations before coming to ShipBob. This was a highly complex and time-consuming process and was extremely prone to errors.

“Once we could see the pitfalls in our old manual system of fulfilling orders, we just realized we need something else to scale with. To get where we were going, we would need more structure to support all of our growth — so we switched to ShipBob.”

Bethany Peterson, COO of FlutterHabit

Poor customer experience

Imagine buying something that the website clearly shows as “in stock” only to find out later that it’s unavailable to ship. This can cause frustration for customers who expected to receive the item before a certain date.

Even if a refund was issued, it means that the customer is mostly like going to search for similar product someplace else. Since a sale can’t be made, there is also stockout costs associated to this.

This issue often arises when the inventory system being used is incapable of communicating in real time with your online store.

For example, before partnering with ShipBob, online brand Ocean & Co. were using a fulfillment network that appeared to have a solution that would automatically sync with the product page and update the inventory count in the backend. 

However, this was far from reality as they often experienced issues with out-of-sync inventory counts between the store view and the fulfillment software. It turned out that the former 3PL’s network’s technology had trouble communicating amongst itself, resulting in inaccurate inventory records.

“We had 10 orders on an address hold with the new fulfillment network over one weekend. All we were able to see is the orders were ‘on hold’—not why they were on hold.

By the time we were able to finally identify the cause and correct the addresses, we were out of stock of the items ordered. The SKUs weren’t placed on hold. We oversold by 10 items and had to email those 10 customers to let them know that we didn’t actually have stock.”

Gerard Ecker, Founder & CEO of Ocean & Co.

Lost revenue

Phantom inventory also translates to a loss of revenue for your ecommerce business. If an item isn’t physically available for you to sell, it’s obviously not going to generate revenue.

Moreover, you lose the opportunity to generate revenue when you lose customers to other retailers —customers who definitely would’ve made a purchase if the item had been available right away to pack and ship.

You can always write this loss off at the end of a fiscal or accounting year. But since beginning inventory is a business asset, it’s still lost revenue if some inventory is lost and can’t be sold.

False sense of profitability

Sometimes when you have more inventory in your records than what’s physically available, it has the potential to inflate the value of your assets.

This creates a false sense of profitability for your business, which could result in poor decisions that eventually impact actual profit made. 

For example, if your records show that you still have sufficient stock of a high-demand SKU, you might feel comfortable with current sales forecasts and inventory levels.

But if you end up selling out and later realize you didn’t have as much inventory as you thought, you’ll end up with less-than-ideal sales numbers and not enough inventory to sell more on time to meet demand.

4 common causes of phantom inventory

The key to preventing phantom inventory is by getting to the root of the problem, which would involve understanding what causes it.

Here are some of the main causes of phantom inventory that you should be aware of.

Overstocking

While it may seem contradictory, overstocking could potentially result in phantom inventory. When you order more inventory than you actually need, a significant portion of the inventory goes unsold.

It sits in the warehouse where it’s at risk of expiring, going obsolete, getting damaged, or even getting stolen by unscrupulous staff.

Eventually, you end up losing some of the inventory while your records still show that you have the same level of stock left.

Poor inventory management practices

Lack of proper inventory management is another leading cause of phantom inventory. When you’re not managing your inventory as you should, you might not be performing regular inventory audits.

As such, you might be failing to account for inventory that has been damaged, lost, stolen, misplaced, or have become obsolete (outdated technology, out-of-style apparel trends, etc).

Unless this is done on a regular basis, there’s a high chance that your inventory records will no longer match the actual physical inventory levels. This can lead to a discrepancy in your inventory data, with a significant portion turning into phantom inventory.

Data inaccuracies

Inaccuracies in your inventory data can also result in phantom inventory.

These inaccuracies are often a result of human error. For example, your receiving team may have accidentally recorded a higher number of units than they actually received, or they may have failed to account for the goods that arrived damaged 

Similarly, there can also be inaccuracies if sales weren’t recorded correctly or if your inventory management software isn’t providing real-time insights.

Lack of inventory visibility

When you don’t have real-time visibility into your inventory, there’s a greater risk of phantom inventory. Implementing real-time inventory management is key to understanding exactly how much inventory you have in the given moment.

Real-time inventory tracking becomes even more important when more than one sales channel is involved, including other retailers in a B2B commerce case. Along with multichannel retailing, storing inventory in one or more warehouses also calls for real-time inventory data.

Without this information, you could miss accounting for certain items that have already been sold or even those items that have been misplaced, damaged, or stolen.

How to prevent phantom inventory

Now that we understand the causes, it’s time to look at the preventative steps.

Here are some of the best ways you can prevent phantom inventory from occurring.

Implement proper inventory management practices

Implementing inventory management best practices is one of the most critical steps to ensuring that your inventory levels are accurate and updated according to your physical stock count. 

Start with an inventory tracking system that will keep an accurate count of your physical inventory levels while factoring in things like unsellable items and returns.

Accurate inventory tracking identifies:

  • Current inventory levels
  • When you need to reorder
  • And how much you need to reorder

It’s also necessary to minimize the risk of misplacements as it helps you track exactly where certain SKUs are stored in or more warehouses.

Moreover, good inventory management allows you to better organize inventory using lot tracking, so items can be located and accounted for easily.

Audit your inventory regularly

A regular inventory audit that are done at the same time every year is essential.

By doing regular inventory audits, you can quickly identify any discrepancies between what you have recorded and what’s physically in stock.

This can be done faster and accurately when implementing automated inventory tools that automatically track inventory flow. This way, you have access to inventory analytics and other data to easily pull reports whenever you need them.

Improve inventory visibility

Having clear visibility into your physical inventory is a necessary step to prevent any mismatches between physical stock count and inventory records.

This will help you keep a close eye on where your inventory is at all times while providing you with the latest information about changes in physical inventory levels. 

That way, you know when and how many units are leaving the warehouse, or if certain items have undergone some type of damage. This means you have the visibility you need to keep your inventory records updated with the most accurate information.

On the supply chain side, I just throw in what we placed at the factory into a WRO in the ShipBob dashboard, and I can see how many units we have on-hand, what’s incoming, what’s at docks, and so on. I can see all of those numbers in a few seconds, and it makes life so much easier.”

Harley Abrams, Operations Manager of SuperSpeed Golf, LLC

Leverage technology and automation

Making use of the right technology can help you improve efficiency and accuracy across all aspects of your ecommerce business.

Inventory automation systems is the best way to manage inventory flow and keep track of ever-moving inventory, from receiving to fulfillment.

At the most basic level, inventory tracking technology offers built-in inventory management tools that provide:

  • Real-time visibility into your inventory levels
  • Historical data for more accurate inventory forecasting
  • The ability to manage inventory on the SKU level

Inventory management technology, even at the basic level, automates tedious tasks, such as physical inventory cycle counts and pulling together inventory reports.

Many inventory tracking systems integrate and sync with sales platforms, so that new orders are automatically accounted for and inventory levels are updated.

“We realized that this time, we had to find a global fulfillment provider with expertise in US fulfillment — which led us back to ShipBob. ShipBob’s software was much easier to use than our previous local provider’s, and gave us a better picture of what was going on with our orders.

Even from overseas, it gave us the visibility and control we would expect from a provider in our backyard.”

John Greenhalgh, Co-Founder of A Year of Dates

Partner with a 3PL

From continuously tracking inventory levels to maintaining accurate inventory records — it can be a challenge to keep up with without the right technology in place.

Sometimes, it’s best to leave it to the professionals who can help you reduce the risk that comes with poor inventory management, When you partner with 3PL, you’re able to implement inventory management tools that automate time-consuming processes that are prone to human error.

Above all, a 3PL can support your fulfillment needs, so you can focus on building your business.

For example, ShipBob offers two ways to partner with us: you can either implement our cloud-based warehouse management system (WMS) to track inventory in house, or store inventory in one or more of fulfillment locations and track inventory from the ShipBob dashboard.

ShipBob is trying something that other 3PLs haven’t done, offering the tools they’ve built and actually use in their fulfillment centers — to us, their customer. It feels like a really honest and fruitful relationship.

ShipBob is always introducing new products and listening to our feedback. That’s an important consideration when you’re a customer.”

Adam LaGesse, Global Warehousing Director at Spikeball

How ShipBob can help businesses tackle phantom inventory

ShipBob’s WMS offers built-in inventory management tools that help you tackle inventory management challenges, such as phantom inventory. ShipBob’s technology comes with real-time inventory management capabilities, so you have better visibility and control over your inventory. 

ShipBob makes it easy track of your inventory movement at the operations level, so you always know where your inventory is and how much is available across different warehouse locations.

ShipBob’s technology also provides powerful analytics that closely tracks inventory performance for each item, allowing for better SKU management. With ShipBob’s technology, you can:

  • Collect historical data on inventory sales
  • Identify your average inventory turnover rate
  • Prioritize stocking fast-moving SKUs
  • Forecast demand more accurately

“One of the things that set ShipBob apart from other companies we were considering was the scale at which they’re operating.

There were very few providers that could support even one customer that is doing hundreds of thousands of packages in a month, and a lot of the systems would fall apart once you started to scale to any kind of degree. ShipBob’s system is built to handle millions of orders per month, so businesses can scale with peace of mind.”

Ben Tietje, Co-Founder and CEO of Earthley

With this level of visibility into your inventory, your records are always updated with your physical stock levels, so if there is a discrepancy, you have the information on hand to pinpoint what it causing it.

ShipBob offers a global fulfillment network powered by it’s cloud-based WMS. You can store inventory close to your customers and track it all from the ShipBob dashboard.

But if you decide to stick with in-house fulfillment, you can get more information on how to implement ShipBob’s WMS for in-house warehouse management. Click below for more info.

Phantom inventory FAQs

Below are answers to the most common questions about phantom inventory.

Can phantom inventory lead to overstocking?

Phantom inventory is a common cause of stockouts, but it can also lead to overstocking, especially if returns are mismanaged.

How can partnering with ShipBob help prevent phantom inventory?

When you partner with ShipBob, you get access to built-in inventory management tools within ShipBob’s cloud-based WMS system. These tools provide real-time visibility into stock levels across your supply chain. That way, you always know how many units of each SKU is available in each warehouse or fulfillment center location.

Can phantom inventory occur even with accurate inventory tracking?

Even with accurate inventory tracking, phantom inventory can still occur but only for a short period of time until the mismatch is identified and resolved. For instance, technical glitches may result in failure to properly account for sales, which may cause phantom inventory. However, if regular inventory tracking is done, the issue will be quickly identified and fixed.

What is phantom shipping and receiving?

Phantom shipping and receiving is when there’s no product being moved, although there are false invoices and documents recording the shipment.

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Written By:

Kristina is the Sr. Director of Marketing Communications at ShipBob, where she writes various articles, case studies, and other resources to help ecommerce brands grow their business.

Read all posts written by Kristina Lopienski