How to identify and resolve phantom inventory

Phantom inventory is a silent killer that saps revenue from consumer brands and retailers in the order of billions of dollars per year. Phantom inventory occurs because items that don’t exist in reality still appear in the digital legers of stores and DCs in your retail network, blocking replenishment and masking the problem. It can occur because of theft, unreported shrink and other random loss of inventory.

For example, RetailLink may show that there are two units of your top selling SKU in several Walmart locations, but in reality, the shelves have been empty for months. This means that you’re chronically out-of-stock, losing sales day after day because replenishment isn’t triggered by inventory levels reaching zero.

How to calculate likely instances of phantom inventory using SKU-store level data

Stores that have phantom inventory will register some inventory but will have no sales for a set period of time, which may vary depending on the sales velocity of the product.

For example, you could filter store-SKU combinations that register inventory but have had no sales for the past eight weeks. Those locations are likely suspects for phantom inventory and should be investigated further.

The optimal fix: manual inventory resets

In an ideal world, you could simply flag instances of likely phantom inventory to your retail buyer and they would manually reset inventory levels to zero for those stores, triggering replenishment. However, most replenishment managers and retail buyers are incentivized to run lean on inventory so this is a tough ask.

The best way to get around these objections is to suggest a test group of stores. If you think there are one thousand SKU-store combinations that have phantom inventory, suggest a test group of one hundred to reset. Wait until the stores are replenished, and if sales start flowing again, that’s a clear sign that you were right. Now you can go back to your buyer and ask them to reset inventory for the other nine hundred stores.

The ol’ reliable: calling individual stores

If the price point of your products justifies it and you can find someone to do the work, your team can also pick up the phone and methodically call individual store locations to check if they have product on the shelf. If the store manager can validate that you have phantom inventory, it will be hard for your replenishment manager to say no to replenishing that store.

The expensive: store visits

You can also send your reps to individual stores or contract with retail execution companies like Field Agent to physically validate on-shelf availability (as well as price compliance, end-cap set up and more). If you can prove in-person that you have phantom inventory, your buyer will have no choice but to reset inventory for that location.

Measuring and reporting on the impact

No matter how you decide to resolve phantom inventory, you should always run a pre/post analysis of the sales at the SKU-store combinations you’ve addressed so that you have something to show for your efforts. If you have fixed the problem, you should see sales restarting once those chronically out-of-stock locations have been replenished.

This is important for showing your internal stakeholders that the time and effort invested in resolving phantom inventory is worth it. It’s equally important to share this type of analysis with your buyers so that you can build trust that will make it easier to suggest a manual override in the future. Resolving phantom inventory can be uniquely challenging, especially if you’re lean on analyst headcount or don’t have an analytics solution in place.


Want to learn more? Watch this video demo to see how customers resolve phantom inventory in Alloy:

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