Phantom inventory refers to imbalances between the stock recorded in the WMS and actual stock on hand

Phantom inventory: definition and how to ghost it

26 May 2021

Phantom inventory is a serious logistics issue. The disparity between the number of goods physically present in a store or warehouse and that recorded in the computer system can lead to major losses for a company.

In this post, we analyze the concept of phantom inventory, emphasizing how to detect it in time to ensure that it doesn’t affect order preparation and dispatch.

What is phantom inventory?

The term phantom inventory refers to imbalances between the products on hand in an establishment or facility and the stock recorded in the system. In other words, it’s inventory that appears available in the database but — due to human error — can’t be found in its intended location.

This discrepancy between the recorded and real stock means that, for example, a business might accept orders that can’t be delivered to customers because of a lack of product. By going to pick the items, the operator realizes there isn’t enough merchandise and raises the alarm. There could also be problems with the supply of raw materials for the production lines, which could eventually halt the manufacture of a product.

An imbalance between the two types of stock means that purchase orders, to be sent at the reorder point, are not issued at the right time. This results in stockouts (when sent too late) or overstock (when sent too soon, because the number of units accounted for is lower than the actual number).

Phantom inventory usually stems from errors arising from manual handling of the goods. It normally occurs in warehouses with a wide range of SKUs, for instance, those of e-commerce and retail businesses. In fact, phantom inventory affects facilities as well as companies.

Phantom inventory is derived from human errors in processes such as goods receipt and order picking
Phantom inventory is derived from human errors in processes such as goods receipt and order picking

Ultimately, phantom inventory has become a major logistics risk, as it results directly in stockouts, which prevent the order from being delivered on time and under the conditions previously agreed upon with the customer. It could also make it difficult to execute the manufacturing order according to the bill of materials (BOM) for the established production.

How to reduce phantom inventory

More often than not, phantom inventory can be traced back to human errors of various kinds: moving goods from their location without recording the change, unintentionally hiding a product, confusion when picking similar-looking SKUs, working from memory and making a mistake in the number of units or even the product, making errors when entering the data into the system, theft, etc. If inventory is kept with Excel, pen and paper, or basic software, these actions that cause phantom inventory are more likely to occur.

The implementation of an advanced goods management software program, such as a warehouse management system (WMS), makes it easier for companies to steer clear of these types of mistakes.

A warehouse management system significantly reduces the risk of phantom inventory
A warehouse management system significantly reduces the risk of phantom inventory

A WMS organizes operator tasks and ensures that they are performed correctly. For example, in goods receipts, the software sends step-by-step instructions to accurately record the units received, their handling, and, finally, their storage locations. It also stops employees from skipping steps, which could lead to mistakes. For instance, by means of barcode reading and confirmations on the scanner, the operator must validate that he/she has taken the correct product and placed it in the assigned location.

Another stage that tends to produce errors is order picking. Again, the goal is to minimize human intervention, automating decision-making and streamlining operator movements. Guided picking technology such as pick-to-light and voice picking are essential for minimizing the risk of phantom inventory, helping operators to carry out each task in a simple, intuitive way. By means of lights, these systems indicate where a product should be picked and in what quantity.

A more sophisticated option would be high-performance pick stations. The goods are stored in boxes, and the miniload system’s stacker crane automatically removes the box from the rack, depositing it at the operator’s workstation. The operator, without having to move at any time, merely has to pick the indicated number of units from the box in front of him/her and deposit them in a box below that one.

The aim in all cases is to make the operations as simple as possible to lower the risk of human error.

Automation: the definitive solution for eliminating human error

The WMS and picking assistance systems notably minimize the likelihood of mistakes. However, only automated storage and retrieval systems (AS/RS) can guarantee that no human errors will be made, as all operations are automated, while human presence is restricted to administration and supervision. This is especially evident in AS/RS for pallets.

In these systems, when a pallet enters the facility, it must go through a mandatory pallet checkpoint, the function of which is to verify the proper condition of the goods and confirm that the product matches the information entered in the system. Then, the conveyors are charged with automatically moving the load to the designated point in the warehouse. Finally, the stacker cranes for pallets automate the retrieval and storage of products on the racks. To dispatch the goods, the process is repeated in reverse order.

All these actions are performed without human intervention and are controlled by the WMS, which checks that the merchandise is handled appropriately and manages movements in the facility. This way, it’s practically impossible for phantom inventory to appear.

Moreover, AS/RS don’t just prevent inventory errors; they also considerably raise warehouse throughput and maximize storage capacity (they make it possible to work at a greater height and leave less space between the racks).

Warehouse management systems (WMS) drastically reduce the risk of phantom inventory
Warehouse management systems (WMS) drastically reduce the risk of phantom inventory

Phantom inventory can be prevented

Phantom inventory is a serious disadvantage for companies. Therefore, manual operations are being replaced with automated elements that ensure the reliability and safety of all processes.

Implementing a WMS is the first step towards getting rid of phantom inventory. This system monitors all product movements and guides employees when replenishing stock, preventing human errors. To limit these mistakes even more, AS/RS coordinated by a WMS are the way to go. They carry out tight control of warehouse stock to guarantee that goods are no longer lost or damaged. When it comes to eliminating the margin of error in stock counts, process automation plays a fundamental role.

Interlake Mecalux’s automated storage solutions are combined with Easy WMS, our warehouse management system, to ensure maximum reliability in inventory records. Automated operations nip phantom inventory in the bud. Be sure to get in touch. One of our expert consultants will offer you the best solution for eradicating this type of inventory from your facility.