Efficient inventory management is the key to running a successful retail business. Yet, when operational hiccups arise, they can disrupt your business goals.
A very common yet overlooked phenomenon in bulk candy retail is phantom inventory. As the name suggests, this refers to inventory that doesn’t actually exist.
Phantom inventory occurs when your recorded inventory doesn’t match the products you have on hand. With this discrepancy, it’s tough to make the right decisions for your store.
If not dealt with promptly, phantom inventory can affect your business’s efficiency. Keep reading to learn about phantom inventory, its reasons, and how to prevent it.
What is Phantom Inventory & What Causes it
Simply put, phantom inventory is the mismatch between the inventory levels in your records and the products you have on hand.
Phantom inventory can’t be traced back to any of your business operations, thus making it difficult to rely on inventory reports. Not to mention the risk of making misleading decisions on account of discrepancies.
For example, your inventory records show that a product is available for sale. But in reality, those products have become lost, damaged, or are not physically present.
Phantom inventory can arise for a variety of reasons. These include data entry errors, software bugs, theft, shrinkage, and improper inventory management.
Consequences of Phantom Inventory
Here are the potential risks posed by phantom inventory in your business.
1. Increased Financial Errors
Phantom inventory can manipulate your financial statements and lead to false financial reporting. How? When you have overstated inventory value, it can inflate assets on the balance sheet. This will impact financial ratios, loan agreements, and lead to tax overpayments.
2. Inaccurate decisions
Wholesale confectionery businesses rely on accurate inventory data to make informed decisions. These are related to procurement, production, and distribution of inventory.
Phantom inventory can lead to misjudgments in resource allocation, causing overstocking or stockouts. Overproduction ties up capital and storage space, while stock outs disrupt customer service and sales.
3. Customer Dissatisfaction
Sometimes, the inventory can show as available even if you don’t actually have any stock. Such a mismatch can disrupt order processing and deliveries.
This further gives way to customer dissatisfaction, lost sales, and a tarnished reputation.
Thus, if you’re not able to cater to your customers, you’ll eventually drive them to your competitors. This could impact the long-term relationships that you’ve painstakingly built and nurtured over time.
4. Interfering with Your Logistics
Phantom inventory means ineffective warehouse management, order fulfilment, and supply chain logistics.
To make up for the damage phantom inventory has caused to your business, you may instruct your staff to investigate thoroughly.
This will only result in lost time and resources spent searching for missing items, adjusting inventory records, and reconciling discrepancies.
5. Inaccurate Demand Forecasting
Accurate inventory data is crucial for forecasting demand and planning future production. Phantom inventory can lead to inaccurate demand forecasts, resulting in overstocking or stockouts. This can ripple through the supply chain and lead to costly adjustments.
6. Overstocking/Understocking
Phantom inventory can lead to misguided purchasing decisions. If the inventory records show more stock than what is available, you’re more likely to delay purchasing decisions. This will lead to missed opportunities for favourable pricing or suppliers’ availability.
7. Increased Audit and Compliance Risks
Inaccurate inventory records may trigger a cascade of regulatory concerns, especially for industries with strict reporting requirements. If phantom inventory goes undetected, you may also bear the brunt of meeting accounting standards and tax regulations.
8. Lost Resources
Phantom inventory calls for undivided attention so you can limit further damage. However, the time and effort spent detecting and rectifying phantom inventory should be better allocated to other activities. Repeatedly investigating discrepancies diverts attention from improving processes and customer satisfaction.
Vital Signs That Indicate You’ve Got Phantom Inventory
Here are some of the tell-tale signs that raise an alarm for phantom inventory in your stock.
1. Rising Holding Costs
Holding costs include the cost of products damaged or spoiled, as well as storage space, labour, and insurance. Increasing holding costs without a matching rise in sales or revenue may signal highly incorrect inventory levels, thus revealing phantom inventory.
2. Excessive Write-Offs or Write-Downs of Inventory
If you’re noticing inventory written off or marked down without clear explanations, it could be a hint of phantom inventory. Taking a closer look can help make sure everything is on track and accurate.
3. Unexplained Inventory Trends
Sudden changes in inventory turnover ratios that don’t align with your business operations could signal the presence of phantom inventory
4. Mismatched Sales and Inventory Data
This is the most obvious sign of phantom inventory. For example, consistently low sales of items that show high inventory levels are a strong indicator of phantom inventory.
5. Excessive Reordering
Frequent and unnecessary reordering of items due to perceived low stock is quite common. Despite no corresponding increase in sales, you may still continue to reorder, leading to mismatch in inventory records.
How to Avoid Phantom Inventory: Simple Tips for Prevention
For what it’s worth, identifying and resolving phantom inventory should happen sooner than later. Keep an eye out for potential phantom inventory at all times with these tips.
Ensure Regular Physical Counts
Regularly reconciling your inventory offers a range of advantages. It ensures data accuracy, precise demand forecasting, and maintains updated safety stock levels.
Additionally, it allows you to detect phantom inventory within days or weeks of occurrence, rather than discovering discrepancies months later.
Conducting your inventory counts involves four straightforward steps:
- Physically count your inventory.
- Compare the physical count with your digital records.
- Identify items with a lower physical count than those recorded digitally.
- Take special note of SKUs exhibiting phantom inventory and reconcile them.
Considering the potential complexity of your product range, inventory counts can become time-consuming. This is where cycle counting comes into play. Cycle counting involves an ongoing auditing process that focuses on one category at a time.
Consider Investing in an Automated Inventory Management Software
The retail business is advancing, and so should you. With inventory management software, you can have an all-in-one system that integrates your sales, purchasing, and warehouse systems.
This software can provide real-time access to your inventory levels, reduce manual data entry errors, and facilitate accurate record-keeping.
Improve Inventory Related Operations
This is more important to keep a check on phantom inventory, especially for bulk confectionery stock.
When it comes to accurate reporting and management, a lot of teams tend to micro-manage. This approach can often lead to the unfulfillment of targets and put unnecessary burden on your staff.
To avoid that from happening, make sure to assign different responsibilities to different employees. This will help prevent errors or intentional manipulations. For instance, having separate employees responsible for ordering, receiving, and recording inventory will streamline your operations.
Regular Reconciliation
Keep your inventory in check by regularly matching up your sales records, purchase orders, and other important documents. When you spot any differences, don’t hesitate to dig in; it’s a solid way to stop phantom inventory from building up.
To stay on top of things, set up data validation and reconciliation steps right in your inventory management system. This way, you’ll catch any inconsistencies as they happen and can fix them on the spot. It’s all about maintaining accuracy while keeping things smooth and efficient. This also includes:
Returns Management
Implement a returns management process to ensure that returned products are accurately and properly updated in inventory records.
Supplier Collaboration
Collaborate with bulk confectionery suppliers to update inventory data on hand. Implement electronic data interchange (EDI) to streamline communication and reduce manual errors. With a reliable wholesale confectionery distributor in NZ, you can stock up on products that you actually need.
Conclusion
Phantom inventory is a common yet avoidable occurrence. Despite your careful stock monitoring, it can slip through the cracks and cause unexpected problems.
With these tips, you can detect and manage phantom inventory before it causes further damage to your business processes.
Likewise, having a reliable bulk candy distributor is as important as anything else. At Stock4Shops, we’re here to fulfil your product needs in a few clicks. Explore our wide range of bulk confectionery and let us take care of your stock requirements with ease.
