Phantom stock: what to do when the book stock says the product is there?

What phantom stock is

Book stock is what the inventory system believes it holds: receipts minus sales minus recorded exits. Real stock is what is on the shelf and in the back room. When book stock exceeds real stock, the difference is phantom stock: units that exist only in the database.

The problem is not an accounting one, it is commercial: the automatic order fires when book stock falls below a threshold. If the system believes four units remain while the shelf is empty, the order does not go out, and the out-of-stock lasts until someone notices. These are the out-of-stocks that inventory tools do not see, and part of the 72% of store-caused out-of-stocks measured by Corsten and Gruen.

Where it comes from

The causes are mundane and cumulative:

• breakage and expired products thrown away without recording, especially in fresh;
• theft, only visible at stocktake;
• receiving errors: one case counted as two, a reference confused with its neighbour;
• misplaced products, in the back room or in another aisle: they exist, but not where the shopper looks;
• returns and exchanges not processed;
• substitutions at the till: the product sold is not the one scanned.

Each cause weighs little; their sum is large. The study by DeHoratius and Raman on a US retailer with 37 stores found 65% of inventory records inaccurate, with gaps all the larger when the reference sells fast and the aisle is dense.

Why it costs more than an ordinary out-of-stock

An out-of-stock with correct book stock fixes itself: the order goes out, the product comes back. An out-of-stock with phantom stock does not fix itself: nothing triggers it. It lasts days, sometimes until the next stocktake. On a fast mover, that is dozens of lost sales a day, which you can calculate with the method in how to measure sales lost to out-of-stocks.

How to detect it

Three methods, from the slowest to the fastest:

1. Targeted cycle counts: count every week the fifty fastest-moving references of the store, where phantom stock costs the most. Twenty minutes a day is enough.
2. Abnormally low sales: a reference whose sales drop to zero or near zero for two days while book stock is positive is almost always phantom stock. A weekly report crossing the two puts the list in front of you.
3. Immediate reporting of the gap: the person who sees the empty shelf, employee or shopper, reports it on the spot; book stock is then corrected and the order triggered the same day.

How to prevent it

• Record breakage the moment it is found, with a simple tool on the floor, not at the end of the day.
• Receive by reference, not by case, in categories with many similar references (beauty, hair colour, stationery).
• Organise the back room by aisle and by reference: a product that cannot be found in the back room is phantom stock for the shelf.
• Check the book stock of every promoted reference before the promotion starts.

What shopper reporting changes

Phantom stock shows on the shelf before it shows in the system. With ShelfAlert, the shopper who finds the shelf empty scans the product; the manager receives the reference and can check its book stock the same day, instead of waiting for the stocktake. Products reported while book stock is positive are, by construction, the list of the store’s phantom stocks. 14-day trial, no payment card: see the plan for store managers.

Sources

• DeHoratius, Raman, “Inventory Record Inaccuracy: An Empirical Analysis”, Management Science, 2008: abstract.
• Corsten, Gruen, “On Shelf Availability”, 2004: summary.
• Gruen, Corsten, Bharadwaj, “Retail Out-of-Stocks: A Worldwide Examination”, GMA, 2002: full study (PDF).