Any business owner would know the importance of staying updated on inventory and assets in order for the company to be successful. After all, not knowing what one has on hand or the amount of inventory coming in and out, will prevent consistent stocking of inventory at the retail front with the products that are currently in demand.
But despite being meticulous with tracking physical inventory, there is still the risk of phantom inventory causing problems for an organisation. Below, we go over phantom inventory, its potential causes, and how an RFID system keeps it from creeping into the company’s inventory record.
What is phantom inventory?
Phantom inventory is the discrepancy between an organisation’s records and its physical stock. It is inventory accounting that is reflected in the books as being on-hand yet physically absent or not available for sale in certain store locations. In essence, phantom inventory only exists on paper and not physically present in the store or warehouse or office premises.
Furthermore, phantom inventory may also be due to outdated or damaged merchandise. If products are damaged, they are no longer fit for sale; if they are outdated, there may no longer be a demand for them. Either way, phantom inventory can consume valuable resources and space without providing any returns. This have far-reaching consequences for the company.
One potential problem it can cause is inventory turnover issues, wherein organisations order more inventory than is deem necessary when demand is low. In addition, it could affect the reorder point and lead to periods where there is too little or too much inventory at the store level. Lastly, phantom inventory can make tracking items extremely difficult causing operation disruption, as their location in storage may need to be updated or reconciled.
If left unnoticed, phantom inventory can cause costly yet avoidable problems. Despite being a seemingly minor issue, phantom inventory can significantly affect a company’s operations should it be accumulated over a period of time.
Causes of phantom inventory
Phantom inventory can develop due to poor inventory management, lack of supply chain visibility, human error, theft and mixed-up of products.
Poor inventory management and lack of supply chain visibility are the two most prominent root causes of phantom inventory. When businesses do not have a bird’s eye view of their stocks, it becomes easy for products to get misplaced or lost. Similarly, in the context of the supply chain, tracking of inventory, monitoring its movement in the system, and knowing whether it is in good condition makes it more challenging.
The lack of total visibility in these key areas can lead to overstocking or understocking, errors in forecasting, and ultimately it leads to a build-up of phantom inventory that wastes space, loses sales, frustrates customers and cause management errors.
Meanwhile, human error is inevitable where there is manual intervention. Human errors can be simply misplacing items, neglecting to update records, and even improperly data entry. In any case, they all lead to phantom inventory.
Lastly, theft is bound to occur should there be insufficient security protocols in place that discourages the act. If items get regularly stolen, the business may only notice some missing items after an inventory count exercise. The phantom inventory is discovered at that point, and they are left to reconcile or account for the missing product.
How RFID demystifies phantom inventory
Inventories on the business’s balance sheet are carried as assets, and phantom inventory can cause its value to be artificially inflated or deflated and give a false sense of profitability or loss. Furthermore, the problem can cause disruptions within the supply chain, resulting in costly write-downs and affecting the business’s relationship with its customers.
To prevent this, having an RFID asset tracking system can help business owners to always account for their inventory, so they know what they have and where their stocks are at all times, even in real time if required. As a mature technology with many improvements since its inception, RFID has become the mainstay technology in asset and inventory management in retail and many other industries as it is a proven solution to their asset-tracking potential and resolution.
By using RFID tags on stocks and readers to monitor where the movement, organisations will have a more automated process of tracking inventory assets. In addition, gathering inventory information is made simpler, which helps businesses to make better decisions about their stocking process and how to make the most of available space. This eliminates main part of the human aspect that causes errors, at the same time this replaces the manual tracking process with a digitised and real-time alternative. With RFID, business owners can constantly maintain the right stock levels to keep up with demand, allowing for a greatly improved inventory management system that prevents phantom inventory and many other costly issues.
Phantom inventory can occur even in the most well-run and organised companies. Therefore, on top of boosting inventory management, implementing an RFID asset management solution along with other proactive measures such as regular inventory audits and adopting a cycle count system can prevent it from hampering business operations and its profitability.