CONCEPT

• Inventory that shows to be on-hand in the company’s accounting system, but in reality are not available, is categorized as phantom inventory.

• This can occur due to a variety of reasons like items being moved without appropriate changes recorded in the system, breakage, theft, deliberate fraud or data entry errors.

• Phantom inventory results in a discrepancy between the actual physical inventory and the inventory records, thus resulting in out-of-stock incidents.

• Phantom Inventory, if left unnoticed and not addressed timely, it can lead to bigger issues like accounting restatements and adjustments.

• There are certain solutions and technologies that can help companies with inventory accuracy, like frequent physical inventory cycle counts, RFID technology, statistical modelling, etc.

CONCEPT

Spotting Phantom Inventory

• Look for instances where the company is trying to obtain finances based on its inventory, as they might get tempted to inflate their inventory balance.

• Look for instances of inventory theft.

• Look of overstated or understated ending inventory.

• Look for stagnant inventory balances in financial statements over several consecutive financial years, and inventory levels raising more than the sales figures

• Look for unusual outcomes or trends in the inventory related financial ratios calculated.

• Look for incorrect or falsified purchase orders, bogus reporting, inflated inventory, etc.

Spotting Phantom Inventory

Effect on Manufacturing & Retail

• Phantom inventory instances due to information inaccuracy hamper the system’s ability to perform, leading to stock-outs, loss of sales and customers, and eventually monumental revenue losses.

• System’s performance sensitivity to inventory information accuracy becomes much more heightened in manufacturing facilities and retail outlets following lean systems.

• With every 1% increase in product visibility, the sales can go up by 0.5%. Hence, the occurrence of phantom inventory instances can cause humongous potential sales losses.

• Phantom inventory leads to no sales of a particular item from the retail shelves, which might lead to the delisting of the item, which might be in demand.

• If the system studies availability from the records for new orders, phantom inventory will show the product available in inventory data, even when not on shelves, leading to no further orders for it, yet again resulting in lost sales.

• International industry average out of stock level is around 8%, but in India, it is an alarming 25-30%.

Effect on Manufacturing & Retail

• Vigilant staff and accurate information recording can help you timely identify and correct the errors, and thus improve your sales many folds.

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