Phantom inventory and how to combat it

Phantom inventory is a situation that every warehouse must face and that can cause great economic losses. In this article we explain what phantom inventory is, its main causes and how to combat it.

Phantom inventory, called “phantom inventory” in English, refers to when there is stock registered in the warehouse management system that is not actually available on the shelves for sale, which may be due to data entry errors. , damage to the merchandise, expired products, theft, etc.

A warehouse with phantom inventory implies that there will be orders that will be accepted but cannot be satisfied, since at the time the order is received the inventory control system will indicate that there is stock, but during order preparation the situation will occur. that the merchandise is not actually available. This is even more serious in the case of electronic commerce, where customers would have been informed through the online store that there was stock and with an estimate of the delivery time.

In addition to out-of-stock situations at order fulfillment, phantom inventory will also affect replenishment. In automated inventory control systems where purchase orders are generated when merchandise drops to a certain stock level, phantom inventory indicating that there is more stock than is actually available will cause purchase orders not to be generated and, therefore, not only will the merchandise not be available for sale, but the orders to suppliers for replacement will be frozen.

Some business sectors are more prone to phantom inventory than others, for example, the retail sector or when dealing with perishable products. Phantom inventory can become one of the main causes of economic losses.

One of the typical causes that can lead to a phantom inventory situation is an error in data entry, so that the inventory control computer system will not reflect the actual stock information. This may be due to manual data entry errors or failure to register or update merchandise movements. But data entry is not the only point where errors can occur. There are numerous causes that can trigger a phantom inventory and every warehouse at some point will be in this situation with one of its references.

Another of the usual causes is that the merchandise has suffered some damage during transport or in maintenance tasks. The management system will reflect the stock but said damages, which make the merchandise unfit for sale, may not be detected, or may be detected but not recorded. Along the same lines, when working with perishable products, the warehouse could contain expired merchandise, which would appear as stock available for sale in inventory control, but could not be detected as invalid merchandise until the moment an order is filled.

Thefts, especially in the retail sector, where the shelves are available to the public at the points of sale, are other reasons why some merchandise is no longer available without being detected by the inventory control computer system. At self-serve outlets, merchandise relocations also occur when a consumer removes a product from the shelves and then changes their mind and places it on the wrong shelf. Some of these products may end up being forgotten and, even if they are accounted for, would not actually be available for sale in the place that customers expect to find it. Until new technologies evolve sufficiently, for the moment the most effective measure in these situations continues to be manual counting and reordering.

Errors are sometimes caused by wrong barcode labels. This can be due to manufacturer errors, or errors when applying your own labels. But this situation can also occur if an exhaustive monitoring of reverse logistics is not carried out. For example, in recent years, the electronic commerce of clothing and footwear has gained prominence, thanks to the proliferation of online stores with free shipping and returns. In this sector, reverse logistics is a critical component of the business model, since, unlike other types of consumer items, it will be common for customers to purchase similar products that differ only in colors or sizes to try them on and return them if necessary. they don’t fit well. Here, it may happen that if the barcodes come on the packaging of the garments, consumers could exchange them by mistake when preparing them for return. If a thorough check is not carried out during reverse logistics, the inbound and outbound scans will no longer correspond to the actual merchandise. Anyone who makes purchases online on a regular basis may have encountered this situation, where they have received clothes that did not correspond to the color or size. This alteration causes inventory control to erroneously record the receipts of the returns and the subsequent issues and, therefore, giving rise to phantom inventory.

In the consumer apparel industry, it is not uncommon for small manufacturers, producing product models that only last one season, to end up reusing barcodes for different models in subsequent seasons. This can lead to problems further down the supply chain, as such codes could have been reflected in computer systems with old products and not with new ones, leading to stock control errors and phantom inventory.

Another mistake can occur with almost identical items, which are only differentiated by some promotion, and which are mistakenly mixed up in the store. Stock control could be reflecting false merchandise levels when consumers could be demanding the version with the promotion.

Although every warehouse will be seen to a greater or lesser extent in a phantom inventory situation with some of its references, ATOX Storage Systems designs and adapts its metal racking systems and automation systems tailored to the needs of each warehouse, making maintenance tasks more efficient and helping to reduce phantom inventory levels.

Wrong data entry is one of the common causes of phantom inventory. Automatic warehouses allow drastically reducing error levels. Merchandise movements, both stocking and removal, are carried out using stacker cranes, achieving greater speed in operations and reaching higher storage densities, while minimizing errors.

Usually, more than fifty percent of the operating costs of a warehouse correspond to the preparation of orders. Manual order picking not only slows down warehouse operations, it is more prone to human error which can lead to increased phantom inventory levels.

Traditionally, slotting was used to optimize manual order preparation. For example, placing very similar products on clearly separated shelves, to avoid confusion on the part of picking operators. But the demands placed on modern warehouses require much greater optimization. ATOX Soluciones Tecnológicas automatic systems are designed to streamline order preparation while minimizing errors, reaching the highest levels of performance.

Miniload systems use stacker cranes for medium and light loads, thus making the warehouses work automatically.

ATOX automatic dispensers are another alternative to automatic order picking, which allow for high speeds. Their robustness makes them ideal for warehouses with work peaks, such as pharmaceutical logistics and distribution in general, where order preparation is concentrated in time windows.

When the handling of merchandise has to be manual, the light-guided system designed by ATOX provides a highly efficient semi-automatic picking system. Thanks to its versatility, it streamlines both order preparation and replenishment tasks through pick-to-light and put-to-light operations.

Both the light-guided system and the automatic dispensing work in coordination with the intelligent roller transport system designed by ATOX, thus being able to implement different picking strategies.

Roller conveyors integrate sensors and incorporate diverters that act as sorters. This allows the automatic movement of the merchandise without the picking operators having to leave their area. In addition to streamlining intralogistics and reducing errors, it also reduces the risk of damage to merchandise during handling. Together, ATOX manufactures a wide range of storage systems that adapt to the specific needs of each warehouse according to the type of merchandise, turnover levels, etc., achieving more efficient intralogistics that is less prone to errors and, with it, helping to reduce phantom inventory.

When working with perishable merchandise, it is necessary to prevent stored products from expiring or, failing that, detect it as soon as possible. Otherwise, inventory control would reflect stock that is no longer suitable for sale, becoming phantom inventory.

Live pallet racking allows a FIFO flow, that is, first in, first out. Live picking racks provide FIFO flow for medium and light loads.

The Sherpa radio shuttle system designed and manufactured by ATOX makes it possible to convert compact racking into high-density racking. Thanks to its versatility, it can function as a LIFO system or as a FIFO system.

Traditionally, no matter how hard you try to avoid it, sooner or later every warehouse will end up having to deal with phantom inventory to a greater or lesser extent. Ultimately, the only solution to correct it is to carry out a merchandise count. At present, statistical models, artificial intelligence and machine learning are already being applied to, although not being able to completely avoid phantom inventory, at least limit it or detect it more easily.

In the future, as various technologies mature enough to apply internet of things efficiently throughout the entire supply chain, the merchandise will have precise traceability in real time, with expiration monitoring, with detection of possible damages through artificial vision systems, etc.

At this time, one of the main e-commerce companies has launched a physical store facing the public where the most modern technologies are applied, including sensors in each slot of the shelves in combination with an artificial vision system, which detects when a consumer removes and replaces products on the shelves and if they do so in the correct place.

We will still have to wait, probably several decades, until we see the Internet of Things widely adopted in all links of supply chains, especially until the technologies that are needed are mature and cheap enough to be adopted as well. by small manufacturers and outlets. But in that future, which will come sooner or later, the phantom inventory may become a phantom of the past.