By Prakash Tilwani, IRI
Phantom inventory is one of the biggest challenges that retailers face when managing proper inventory levels and availability on the shelf. It occurs either when the system shows there is inventory on the shelf, but there really is nothing there, or when the system reflects that the store is out of inventory, but it isn’t. Studies estimate that this could be happening for up to 25%-30% of inventory across CPG retailers today.
These kinds of inventory errors can cause real and lasting damage to customer relationships, hurting retailers and, by extension, CPG manufacturers. Research shows that when customers don’t find what they’re looking for on the shelf, 44% of them switch brands (which hurts manufacturers), 21% go to a different store (which hurts retailers) and 35% choose not to buy at all (which hurts both). The resulting losses can be staggering. Between 2017 and 2018, the Consumer Brands Association (formerly known as the Grocery Manufacturers Association) estimates that the industry lost more than $50 billion because of out-of-stock challenges in North America alone.
Keep in mind, these numbers are reflective of a pre-COVID-19 world. In the midst of the current pandemic, with intense stockpiling and unprecedented demand as lockdown measures spread, the problem of phantom inventory has been exacerbated, to say the least. Shifts in shopping behaviors related to the pandemic also make it difficult to get a clear understanding of true availability, which is critical at times like this.
So how can retailers best manage phantom inventory? And how can they reduce its prevalence?
Over the long term, the best way to deal with the problem is to have a data-driven solution, leveraging the right data science and artificial intelligence methodologies, to deal with it for you. Algorithms are trained to look for trends in data across sales rates, inventory and shipments and flag items that seem to have phantom inventory–like behavior. They do this at quite high accuracy levels, allowing issues to be quickly, even automatically, removed from a retailer’s projections.
Unfortunately, the reality today is that most systems are not set up to capture phantom inventory behavior in such a systematic way – legacy and disparate systems that don’t fully talk to each other can exacerbate the problem. However, there are simple methods that can be employed for critical fast-moving items, allowing retailers to more effectively navigate the ongoing coronavirus crisis. With a simple business intelligence tool, data analysts can analyze sales and inventory data daily on any in-demand products to look for patterns. The key thing is to identify divergence between sales trends and inventory numbers.
For example, if a store shows that it has 20 units of hand sanitizer on hand but hasn’t sold any in 48 hours, there’s a reasonably high chance that this is phantom inventory, given everyone is looking for this product. Likewise, if inventory data shows that dried beans are out of stock, but sales of beans are still ongoing, that would suggest a phantom inventory problem.
Of course, it can be challenging to catch all, or even most, of the phantom inventory cases given the vast amount of data. But at this stage in a crisis like what we are going through today, this approach could help better manage on-shelf availability in high-demand categories.
Doing so will not only improve sales for retailers and manufacturers but will help ensure that customers can get what they need when they need it. In a time of such upheaval, that kind of peace of mind can go a long way with consumers, resulting in longer-term loyalty.
To learn more about supply chain solutions that can help you manage through the current coronavirus crisis, email me at Prakash.Tilwani@IRIworldwide.com or visit IRI’s COVID-19 Solutions page here.